Legal War on Wall Street Chicanery Isn’t Finished

May 23, 2011

Three years after Congress promised answers in the big banks’ roles in the financial scandal, there are none – only questions.

However, New York Attorney General Eric Schneiderman is investigating Wall Street’s role in the mortgage quagmire and housing bubble, according to published reports. Mr. Schneiderman wants documents from Bank of America, Goldman Sachs and Morgan Stanley.

Even as a free-market advocate, I remain troubled by several unanswered questions:

• The banks’ roles in the role that led to the housing bubble?
• Regarding securitization details, the merging of countless bad home loans into securities, which were sold to investors – insurance companies, mutual funds and pension funds?
• Were the banks really that incompetent or was it a case of ethics?
• What will be done to prevent the future devastation of investors?
• What will be done to stop all the illegalities, including the robo-signing in the foreclosures of homeowners?
• What about a moral compass to halt the practice of giving multi-million dollars to employees at firms bailed out by taxpayers?

Ineffective Feds

“These days the Justice Dept. and the Securities and Exchange Commission are investigating Wall Street with tactics, such as wire taps, usually reserved for professional criminals and terrorists,” blogged Dr. Peter Morici, a business professor at the University of Maryland, and a former Chief Economist at the U.S. International Trade Commission.

“Apparently, those agencies recognize what Treasury and the Federal Reserve simply won’t admit – insider trading, robo foreclosures and peddling dodgy securities to unsuspecting investors are good old fashioned fraud,” he wrote. “Like the corruption tolerated by Third World autocrats, those practices handicap American capitalism in global competition and undermine prosperity.”

He cited the subpoenas for executives at Goldman Sachs and SAC Capital advisors.

“Punitive settlements and convictions-resulting from investigations into insider trading at Galleon and SAC, shoddy mortgage foreclosure practices at Bank of America, and shady marketing of mortgage backed securities at Goldman Sachs-ultimately, would curb cynical behavior and ever bigger paydays on Wall Street, and improve returns for stock investors,” he asserted. “As importantly, it would redirect American capital and talent toward more productive, jobs-creating purposes.”

Stocks as investment

Dr. Morici indicated stocks aren’t an optimized investment.

“In February 1998, the S&P 500 first closed above 1000-since corporate profits are up about 210 percent but equities less than 35 percent,” he recalled. “Corporate profits rose 6 percent annually but investing in stocks paid a disappointing 2.3 percent a year.”

Why else?

“Buying stocks doesn’t seem to pay, because too much of the profits created by innovators with ordinary investors capital is captured by hedge funds, Wall Street trading desks, private equity houses, aggressive M&A shops, and then paid to Wall Street executives and traders,” he wrote.

Dr. Morici suggested an eye-opening thesis.

“In the drive for ever bigger compensation packages, Wall Street’s best and brightest violate boundaries of ethical behavior and the law,” he explained. “Not all of our problems can be laid on Wall Street’s steps, but its culture of entitlement and sharp practices impose enormous burdens.

“The carnival culture on Wall Street is attracting too many young people to business schools to study economics and finance, instead of pursuing physics and engineering,” he added. “That’s why the best business schools are overwhelmed with applicants from Connecticut and California, while engineering colleges depend on students from China and Asia, who will then return home to compete with American businesses.

Wall Street paychecks

He believes that the obscene Wall Street paychecks hurt individual shareholders and pension funds, alike.

“The absence of significant appreciation in equities for more than a decade means that many retirees dependent on IRAs and other defined contributions vehicles can no longer live comfortably, and many baby boomers who have been pushed into such pension vehicles can’t retire,” he wrote. “Their money may be working hard, but only for Wall Street titans and not for them.”

He maintains the financial chicanery costs jobs.

“These days, too much money and talent are directed to financial engineering-efforts to design the next complex derivative-and not enough is going into physics and real engineering-designing electric cars, new materials, and products and services that will define U.S. global competitive success and prosperity for the next 25 years,” he maintained.

“Increasingly, venture capital and stock investors look abroad for the best returns, and this deprives small and moderate sized U.S. companies of capital needed to expand and invest in new ideas and create jobs,” he added.

Conclusion

So, what can Mr. Schneiderman, the Justice Department, and the Securities and Exchange Commission accomplish – while the Treasury Dept. and Federal Reserve appear incoherent?

“Prosecuting Wall Street will do a lot to curb abusive practices and excessive compensation, make stocks and IRAs sensible investments, redirect capital and talent into productive purposes, and get the American growth machine back on track for our children and grandchildren,” concluded Dr. Morici.

Agreed. At one time, my free-market philosophy would have differed on this scandal. But not now. The economic liberty of countless people is at stake.

From the Coach’s Corner, Dr. Morici’s analyses are regularly published in this portal’s Economic Analysis Op Ed section.

Here are links on the background of the financial scandal:

• Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
• Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner
• Is it Time to Police Pay at Wall Street Banks?

“There is two things that can disrupt business in this country. One is war and the other is a meeting of the Federal Reserve.”

-Will Rogers

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.