“IT’S TIME TO PUT YOUR CHIPS BACK ON THE TABLE,” the experts are saying. “The recession is over,” they console. “Without great risk, there cannot be great reward…opportunity abounds…things are looking up, get out there, do something…” But what? It’s no secret we are coming into the start of a new economic cycle. And this time, they say, things will be different. Oh really? What assurance do you have? What’s the trend? What will be the most productive, and safest, way to invest those hard-earned dollars?
I decided to test for myself the theory that the worst disaster in decades has at least left us a little safer, if not smarter. The universe of banks and non-banks, and the minions serving within being too impossible to capture, I went to the heart. The trading room floor.
The first time I walked down Wall Street I was twenty. It was a different time then, different me, different Wall Street. Gordon Gekko was still echoing in the hallowed ways that were once “The Towers.” And his real-life cutout boys, still slicked back from their commute in on the trains, swaggered in his shadow hoping for a taste of the Daryl Hannah dream. A lot’s been written about the return of the Gekko to box offices last year, so I won’t bother with the life imitating art imitating life continuum, but it’s safe to say that some things really don’t change, though you see fewer cigarettes and less paper these days.
I make my way past the bull, ever the symbol of strength and virility (read: machismo) and join the stampede of adrenaline junkies headed for the floor. Past security (twice), past the edgy secretary, past the non-descript guy with the ear buds.
I step into the periphery. The scene thick with anxiety and querulous, over-wrought, receding hairlines. Demented Goldilocks, every one. Instantly, a lightening of mouths shouting numbers I know to be orders though I could hardly recognize the words. One man whipped out a chicken in pride, no one looked, and he raised it and his numbers above the fray. Oranges began to roll across the floor, one woman (yes, there was one) took a dive and shuffled out in only one of her two ugly shoes. A red beard whipped out a tobacco tin, simultaneously smoking and sprinkling the crowd and crying as he stood ignored. Everyone was talking at once, gesturing, clapping, snapping, blinking. One guy faked a sneeze between F-bombs and squeezes on his hula girl tension ball. My eyes opened wider, watching the volley across computer monitors, heart racing, heel starting to tap…
Before I knew it, I was shouting orders, running right along in this tawdry marathon of transient fortunes. “Fifty-five.” “Thirty-two at fifty-fifty,” stomped the veteran quarterback, “Gimme eighteen. Eighteen four-fiver-sixes. Thirty-two at fifty five…” I wanted to yell, “hike,” and kick their toy meter maid pads through the windows. This is how we’re trading the anonymous fates of our country’s retirees? This is where the schoolteacher is making her two percent? This is where a plumber is getting the seed money for his moon-powered air purifier? Here, among the chortles of cattle passing chits of paper back to runners who pass it to the order takers. Here, where 2011 has not occurred to anyone, where 2009 haunts them and drives them down a no-holds-barred reckless exertion of “oh, f*ck it.” Here, where they made their own dreams, and lost them, laying down others in their wakes along the way. Despite all the rhetoric of controls and checks and balances, here, on the trading room floor, it comes down to a bunch of guys (that’s right, guys), the archaic contest of their larynx and the hieroglyphics they scrawl onto the scraps they send out in ticker tape parade flurries. Here is the grease on the wheels of our free market. Tim Geithner is not here. Ben Bernanke is not here. And neither are you or I. It’s the pit. It is punk rock. A cockfight to the core. Roosters boasting their chests out, strutting around, pecking each other’s eyes for another grain. Cockadoodle doo to the casual online traders. Cockadoodle doo to the penny stock pimps. And cockadoodle doo to the falsely omnipotent media analysis. It’s the rooster who claims the day. And we all wake in his shadow to begrudgingly agree.
The air of reform and rehabilitation? Cosmetic at best. Wall Street is a compulsive eater getting lipo but neither joining a gym nor seeking council from a nutritionist. These boys will be the boys they always were because it’s all they ever wanted to be. Let’s be honest, it’s all we ever want them to be. They are dripping with the stuff of the American Dream. They are not there for you or me or some greater good. They are there for themselves, their individual drives and ambitions are licks of the flame that keep all of us warm, but our warmth is neither their drive nor ambition…
If you consider “the decade theory,” which illustrates the economy’s cycle in ten-year rotations, we’re at the beginning of a new moon. The most recent bubble to burst was anchored in subprime mortgages, in the 90s it was the tech boom, the 80s hosted the savings and loan boom, the 70’s bust was footed in oil and so on. Theoretically, if you can figure out what the next boom will be, you can takes steps to bulletproof yourself against the next bust.
But trouble in the forthcoming boom is not a what, it’s a how.
Although the storm clouds over Wall Street are starting to clear, most consumers are still feeling the sting on their hands all too closely to reach back over the flame. There is cause for hope—tighter regulation, spending is up, unemployment statistics have ceased out-of-control spiraling and, the ultimate bittersweet, 2010 Wall Street bonuses are poised to be higher this year (The Wall Street Journal has reported compensation and benefits at the top 25 publicly traded banks and securities firms are up almost 6% from 2009 thanks to a revenue rebound last year). But what does it take to put your chips back on the table? More importantly, why should you? And if you do, what’s your next hot ticket to another vacation home, six-figure supercar and cushy retirement?
Questions abound, as do opinions, which means the old rules apply: The one thing that’s for sure is nothing is for sure.
The morass of the investment world is an organic beast, fueled by the instincts, speculation, emotion, hypotheses and regulation of a myriad of global influences (not to mention the arbitrary unforeseeable wind changes). No secrets there. And then there’s you. And you might be the only thing you can control, but do you really want to (be in control, that is)?
There are two types of investors, both equally culpable in the proliferation of the greed and worst practices driving the financial sector. The first, the “I have to do something” type doesn’t really understand the financial industry and doesn’t want to. He puts his faith in his advisor, hopes everything will be all right and curbs his curiosity to go no further than comparing this year to last. The second is the parent you see screaming at coaches on the soccer field, barking at waitresses and panning slimy innuendos at office mates of the opposite sex. S/he’s trying to assert influence—showing attention to details, exhibiting ownership, fostering accountability—but ultimately, it’s all just tilting at windmills. What they have in common, as they always have, is at the end of the day, they just want to make their money, never mind what it takes to do it. What they have in common, probably for the first time ever, is they’re both asking, “So now what?” An emotion that can actually stymie the system (legislators tend to overregulate as a result of public outcry) and force the glut at the same time—the more one realizes the impossibility of being master of his own fate, the more he chases it.
Ultimately, the problem is even the most savvy consumer is divorced from the system. We’re outsiders and we want in. The desire to control one’s financial dynamics that led consumers to online pioneers like datek.com and etrade.com in the 90s led those same individuals to stuff their mattresses in 2008. Any minute now, those stuffed mattresses are going to start looking silly, investors are going to start counting their missed opportunities and the race will begin (again). And we want answers, preferably in single-serving, one-hundred-and-forty-character, ADD-approved, quick-fix fashion. No explanations please. No long-winded analytics. Not another “thing” to think about. Just a good old-fashioned map to the buried treasure. Experts say what they’ve always said: The best you can do is hedge, diversify, adopt patient and long-term practices that will mitigate the shock of any abrupt volatility and rub your lucky rabbit’s foot. In other words, they don’t know either.
The big banks must know something though, because they’re ramping up their human resources. This past November, Job Expo International, a leader in producing professional recruiting events, held its first Financial Career Expo in two years and 23 of the big boys, including Citigroup, Charles Schwab and Prudential, showed up to gather resumes. And what areas are the top banks looking to fill? Well it’s not just Morgan Stanley that’s been aggressively hiring talent to stack their chips in emerging market equities and currency trading sectors. In other words, keen eyes are fixed on international platforms. The world is getting smaller, that’s a fact, and the interconnectedness of wealth, investments and the financial elite no longer stems from only a few cities hosting a few markets via a very tight little cadre of mega-banks. Case in point: Germany’s Deutsche Boerse recently announced its intention to buy the New York Stock Exchange (NYSE), the London and Toronto Stock Exchanges announced a merger this year, and the Shanghai and Tokyo exchanges have both been vying to become major Asian hubs. Truth be told, the SEC has a hard enough time keeping up with regulation of the exchanges within its borders. Who or what will have sufficient resources to adequately oversee a global behemoth like a 24-hour, transcontinental “Deutsche-NYSE”?
Along these lines, though different, The Bank for International Settlements (BIS) released Basel III. BIS is the world’s oldest financial organization, and is essentially a bank for the banks providing everything from economic and monetary research to acting as a trustee for international financial operations, and yes, developing policies for the financial community. The latest feather in the BIS cap, Basel III, is a framework for global banking regulation focused mainly on banks developing “shock-absorbers;” that is, forcing banks to maintain capital reserves correlative to their activity. The idea is to curb banks’ high-risk behavior as well as to ensure they have the ability to withstand downturns (and thus mitigate volatility to the ripples, too). Since most large international banks rely on its services, BIS can be a more effective regulator than any government, and it transcends borders. Unfortunately, there are loopholes. For one, Basel III focuses on banks, but hedge funds, private equity firms and energy companies will continue to engage in propriety trading, which is largely unregulated (more on that in a minute). Additionally, the reforms will take until 2019 to phase in.
Stateside, the Dodd-Frank legislation was passed last July to do things like monitor financial institutions on everything from communications to investment behaviors to the bonuses issued to employees. The same legislation that monitors the information on a credit card statement is now tasked with policing “too big to fail” practices. Regulators, regulated by members of the Fed, SEC, FDIC, and the Treasury, will oversee and root out systemic risk taking as well as monitor a bank’s reserves. Ostensibly, this will thwart institutions from creating super intricate, elaborate Byzantine architectures of interconnected risk akin to the subprime mortgage house of cards wherein the removal or stunting of one pillar will bring the whole market toppling over.
The fundamental difference between Dodd-Frank and Basel is the who, not the what. Whereas Basel focuses on the practices of banks, Dodd-Frank extends its reach to include hedge funds, mortgage lenders and others, as well as place any financial institution with more than $50 billion in assets under the supervision of the Financial Stability Oversight Council (the Dodd-Frank watchdog) if their operations stand to menace US financial stability. At least the legislation recognizes that risk transfer isn’t siloed into one category. One could also argue that if nothing else, the recession has brought about the first US regulatory policy focused on financial risk. Nonetheless, the question of enforcement is still in question—it’s not like the Fed has a very good track record. In many cases, there is evidence of freshmen field examiners going after the varsity players. One source indicated: It’s like when Joe Pesci’s character in Casino says, “If you had any heart, you’d be out stealing.” The implication being that the all-stars are quickly seduced by the higher pay, sophistication and excitement of those they are investigating.
So, girls and boys, this is where the shakedown really begins.
Proprietary trading. Chasing the dragon. Kissing the sky. Institutions practice this method when they use their reserves to engage in trading that is unrelated to their customers’ needs. Dodd-Frank means to phase it out over the next two years, but the definition of “prop-trading” has yet to be clearly defined by the Treasury, thus leaving a lot of grey areas, twenty-four months to do some damage and a whole lotta world for us to do it in (that’s right, us). For instance, banks may quickly and easily become prohibited from entering the field but hedge funds and private equity firms can continue the practices without the same scrutiny, in effect creating networks of shadow banks, like the one that played hot potato with the debt obligations of the subprime mortgage industry. To understand the danger, follow the money: Goldman Sachs, BNP Paribas and Deutsche Bank have all rolled out prop teams to manage their new hedge funds (though Goldman’s has recently dissolved). What’s next? The oil companies of course. BP, for one, has been leveraging its capital advantage over traditional institutions to operate as a shadow bank for the commodities industry. As it pushes the likes of Morgan Stanley out of its way, BP is wagering in “client services” like derivatives, swaps and managing price risks. Given BP’s scruples, it’s no wonder even the cowboys are tightening up their saddles.
Sorry, but this is not new. Enron anyone? The 2000 and 2001 energy crisis that crippled California was due to the market manipulation of America’s favorite corporation. Enron engaged in what came to be known as megawatt laundering. The company took advantage of natural conditions in the market to buy energy wholesale and sell it out of state at a premium (or back in state during times of crises) at rates of up to 20x normal. This little fiasco cost citizens severe rolling blackouts. Oh, and about $40-45 billion. And derivatives have been active since at least the 1700s when rice futures were being sold on the D?jima Rice Exchange.
So you can’t trust the banks, global financial Darwinism, regulators or even Big Oil to be fail safes for your long-term portfolios. And Wall Street sure don’t look all that different once you pull back her skirts. But you want to grow your money, right? And you want some aggressive, albeit legitimate, products that will make you rich without robbing your sleep at night? What? How?
Finance hath no fury like an investor scorned, for a minute. At the end of the day, we just want to educate our kids, pay our taxes, take our trips and live a little. A recent dissection of 2010 Fortunes from Finance, as forecast by Financial Times, shows that $189 billion of $280 billion in Global Banking Revenues derives from interest rates, investment banking and equities. In other words, these three sectors, which also operate in the darkest shadows of regulation and with the greatest risk, represent 67.5% of banks’ earnings. That’s where your earnings come from, too. So that part about scrutinized, responsible investing? Do you really care? The fact is we want change, just not in our own backyards.
Basel III calls for institutions to have more money in reserves, but that translates to less money for them to invest and make available for loans, and we don’t really like it when the banks aren’t freely working for us. Dodd-Frank is over 2,000 pages of 243 rules and regs, but a budget has yet to be assigned for its enforcement and it’s hard to imagine anyone is going to vote for increasing taxes to raise the money needed to get the job done. The SEC, whose mission is to oversee the markets and protect investors, has a budget of only $1.1 billion—paltry when compared to the legions of NYC traders who each trade $100 million or more everyday (hello, that’s a volume equivalent to 10% each). Imagine the international cooperation needed for oversight of global trading platforms—and I’m not just talking about the statesmen.
And there’s the rub. Money doesn’t make the world go around, capitalism does. And our American Brand is the high holy, which is why the international community is at our gates and banging to get in. It’s not the product of some mysterious man behind the curtain, either. It goes back to each and every one of us and our individual desires to keep up with our neighbors. The quagmire wasn’t made overnight and it can’t be fixed that way either. You want change? Are you settling for your 2% portfolio earnings or lusting after the 6% or even 10% of yore? I hate to bring up the “part of the solution or part of the problem” paradigm, but have you taken your money out of the markets and put it into socially responsible instruments like <1% micro-finance projects or have you been cautiously watching the pharma and cellular stocks? You want Wall Street to be “different now,” how different are you?