I Got Mugged On Wall Street

The biggest leap of fiction in Wall Street
is that Gordon Gekko actually went to jail.

In 2007, the financial crisis produced a recession we haven't seen since the Great Depression. There isn't a single reason this happened. This was a system failure. Much like a classical engineering disaster, many things had to go wrong to produce such a huge problem. However, one of the most egregious failures was that of the greed by those working for large investment banks to take advantage of the situation.

The political environment is very strange. Not a single person has gone to jail for actions regarding the financial crisis. Not only that, when several large companies needed to get bailed out, no restrictive actions were tied to the money. Executives were still allowed to get ridiculous bonuses, the banks were never required to make new loans. At the same time, there was political pressure for government to get out of the way, as in, they shouldn't be in the business of business. We have a political environment where there is a significant push to protect people who essentially stole billions.

Even in cases where there is at least an attempt at prosecution, the rich are so insulated that it's almost impossible to punish them. In Norm's post on Asymmetric Reward System, he highlights the fact that when the SEC prosecuted the CEO of Countrywide for $100 million. However, he took home hundreds of millions of dollars and ultimately had to pay $26 million in fines.

In the Matt Taibbi's Rolling Stone article "Why isn't Wall Street in Jail?", he makes the case that SEC does more to protect those committing financial fraud far more than prosecuting them. There are clear examples of wrong-doing, with plenty of evidence to back it up. Yet, the SEC drags its feet.

You can't blame a shark for attacking a person, the shark is a predator and such attacks are in its nature. I see corporations the same way- they are designed to extract profit from the environment as efficiently as possible. And ultimately, there's no blame in that, it's in the nature of a corporation to act this way. However, a shark doesn't have direct control over its environment. It seems like (some) corporations are more interested in changing their environment so that they are the most efficient predator by definition. Corporations aren't the sharks of capitalism anymore. They're the sharks with freakin laser beams attached to their heads. (I could keep this going, with a great comparison of wall street banks with Dr. Evil, but I leave that as an exercise for the reader).

Regulation gets in the way of the banking system. It's in the banks' self-interest to act appropriately, and the government just gets in the way. The poor banks just needed for regulation to get out of the way because it was stifling their ability to be benevolent stewards of an efficient, well-oiled market economy. At least, that's how the now defunct Office of Thrift Supervision saw it.

OTS cutting red tape (their own regulatory code) with a chainsaw

These companies get to pick their preferred regulators. That's not the same as no regulation at all, but it's not far off. Imagine if in baseball the Yankees got to choose their own umps. Do you think they would go out of their way to ensure that these umps are going to hold a fair game? What if one group of umps wants the job and promises to look the other way or purposefully change the strike zone? In 2003, the Office of Thrift Supervision, one of the banks' choices for regulation, championed the position of cutting away as much regulation as possible. These are supposed to be the guys looking out for the health of the financial system. Instead, they're looking out for the health of these banks. The ability of banks to choose their regulator is essentially making the regulators compete against themselves. And, the competition is for who can be the worst at regulating. This is what I consider a slight conflict of interest.

But, can you blame them? The people involved in this whole scheme walked away with billions. And, when not a single person gets punished, when you can buy off the government to not enforce the rules what's the down side? I think that if it were common knowledge on what all went on here, you'd see a lot less sympathy for businesses and free market principles. And, Occupy Wall Street might not be considered a "fringe" group. We were all lied to. We are all affected by this. And yet, barely a thing was done to punish those involved or ensure this never happens again.