Many of my readers and members of the press have sought out my opinions about the current decline of Wall Street. I have tried, and not always successfully, to find ways to explain some of the more complex issues that I see. There is no simple explanation and no single cause to point at. Nonetheless, there are some general themes that need to be brought to the public's attention, and I will try to explain my personal perspective, as follows:
Oh, They Built the Ship Titanic
About 100 years ago, the White Star Line built a line of cruise ships known as the Olympic-class. The first to be built was the Olympic, which was retired in 1935.
The second ship was the ill-famed Titanic. In 1912 it hit an iceberg and sunk, taking 1,517 lives. The lore of this vessel is well known and likely need not be repeated; however, let me set forth just a few salient points:
Consider the following well-documented facts:
Armed with all of the above findings, the third of the Olympic-class ships, the Britannic, was retrofitted.
Question: Would you book passage on the Britannic?
Full Speed Ahead?
I believe that powerful market forces aligned to propagate a myth that "household names" (i.e., brokerage firms and banks that advertised on national television) were somehow more honest and safer than those lousy little mom-and-pop institutions that helped build your community and gave your parents the dollars to open and expand their businesses. You were manipulated over recent years to associate smaller community banks and broker-dealers with pennystock hustlers and boiler-room fraudsters. Humongous financial institutions made massive campaign contributions to favored politicos, who did their bidding. Those large firms also used their influence throughout the regulatory structure to advance their goals at the expense of their smaller competitors. I can't be polite about this: the regulators were either willing lackeys or clueless stooges.
And, boy, did you lambs follow the Judas goats to slaughter. You bought in to the nonsense, whole hog.
Bigger-is-better was the mantra and you sat by as they shuttered the little shops downtown and built the massive shopping center that sucked your local economy dry. Minimum wages. No benefits. No competition. Traffic congestion. You got three t-shirts for $15, but the local mills closed and the hospital's emergency staff was overwhelmed with uninsured patients.
They told you it was progress. You understood, sort of--they said that we were evolving from a manufacturing economy to a service one. Sounded good to you. Sort of made sense. Then, oddly, the computer manufacturing jobs went overseas...but they also took the telecommunication service jobs.
The local bank shuttered and the larger commercial replacement was spanking new, but when you asked for a small business loan, they were too big to be bothered with you. You were thrilled when that financial superstore opened next door. Their television ads showed how they would show up at your kid's wedding and at your retirement party. They told you what you wanted to hear: double-digit returns, online investing, computerized portfolio modeling, and insured accounts. It's what they didn't tell you that came back to hurt you.
They didn't tell you that the financial products they sold to you were ticking time bombs. They didn't tell you that the firm itself would soon collapse under the weight of its own foolish speculation.
They didn't tell you that when you needed to raise $2 million to expand -- a sum that your former broker happily handled at his independent/regional firm -- that you were of no importance to them. You must have missed the commercial where they just said "sorry, not interested in servicing local yokels." Of course, they did raise the $30 million for your national competitor, who opened up a few blocks away and drove you out of business.
Who hit what?
Let's at least agree on one historic fact: The iceberg did not seek out and attack the Titanic. No, the ship sailed into the iceberg.
The failure to promptly process many warnings and the willingness to sacrifice safety for speed put the ship on a deadly collision course. Design flaws based upon false assumptions and deficient construction ultimately sunk the vessel. Inadequate safety standards--even if compliant with the letter of the law--prevented the saving of many lives.
Much the same could be said of the wreckage of Wall Street.
The world's markets sped full-speed ahead into the path of icebergs. But, not to worry, they chided us. Our state-of-the-art technology protects investors with layers of regulations and regulators. Our floors of computers monitor trading and we will pounce on any anomalies. For over three-quarters of a century, the post-Depression regulatory schema of the Federal Reserve, the SEC, the CFTC, the state regulators, and the Financial Industry Regulatory Authority (FINRA) prevented the ship of Wall Street from sinking--it might list to one side, but it would never sink. They told you that. They promised you that. You rested comfortably on that assurance.
Alas, Wall Street still ran smack dab into a killer iceberg.
No regulator sounded the alarm until it was too late -- and now we are hearing the bells for "abandon ship." None of the vaunted new market architecture worked: the hulls and bulkheads are now flooding, and we see too few lifeboats. And woe be we survivors in the icy waters if the Carpathia is the nearest boat.
As asked earlier, knowing what you do about the Titanic, knowing that its younger sister ship was retrofitted after the famed sinking, would you book passage on the RMS Britannic?
And as I now ask you, knowing all you do about the present market meltdown, knowing that the politicians and regulators who christened the flawed ship that is sinking are now trying to retrofit our markets, would you buy stock or bonds today?One Last Thing
Financial panics such as our current situation are fraught with ironies.
In 1916, the Britannic became a hospital ship during World War I and hit a mine--and sunk within 55 minutes! What's the point? I don't really know--perhaps there isn't one. Still, makes you wonder.