WHILE the Securities and Exchange Commission’s allegations that Goldman Sachs defrauded clients is certainly big news, the case also raises a far broader issue that goes to the heart of how Wall Street has strayed from its intended mission.
Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet — like those in a casino — that allowed speculators to increase society’s mortgage wager without financing a single house.
via nytimes.com
Gambling is legal in a few states. Most gamblers know that in the end, the House Wins. The House wins because it rigs that game so that they have to win. You can have a good day, week, month, year. But in the end the House will win.
Wall Street is Las Vegas on Steroids.
The big houses like Goldman sit in the centre of the "Flow" - they see things we can never see. They can shape the game.
And it has been a game since the 1980's The key has been capital. Prior to the 1980's, true investment banks had limited access to capital. They truly had to live on their wits. Goldman had a traditional partner structure that made the long term key and prudence essential. You only got paid out in your last 5 years from all the accumulated increase in value for the firm.
But when the status of investment banking changed and they were allowed to access outside capital, they could control the game. The temptation was too great not too.
So quickly it was the trading rooms - that had been the "barrow" boys that made the money by trading for their own account. Power shifted from the "Bankers" who used a lifetime of relationships and intelligence to do business to the people in the trading rooms who were street smart and who used the firm's capital to give them leverage.
The Bankers lost to the Brokers. The focus on the real economy shifted to the Casino.
I was in the business for 15 years - just as this transition took place and was both a broker and a banker. Regretfully I was a major proponent of the shift. Back then, I did not have the knowledge as to how this would play out. Who did?
This last week has given me some hope that the reality of what Wall Street has become is emerging into the public domain.
Time to shed even more light about the distortion and danger of the "Broker" Casino.
All power corrupts. Total power corrupts completely!
