So much for conservative business ideology

[Randall]

Remember when Wall Street complained about too much regulation? Businesses that wanted to get rid of regulation had their chance to prove it wasn't necessary but once again were proven wrong by their own kind.

 

Government isn't the problem. Bureaurocracies that people hated in government are also found in corporations and any large entitities. Government was just a convenient target.

 

Personally I would like to see business and government as partners rather than adversaries, but is that possible?

 

 

 

Its Wild West era over, Wall Street puts down the gun

By David Weidner, MarketWatch

Last update: 12:01 a.m. EDT March 18, 2008

 

NEW YORK (MarketWatch) -- Remember the good old days when Wall Street's biggest "problem" was too much regulation?

Those federal watchdogs Wall Street told us were doing everything possible to drive away business are now nursing an industry in critical condition.

Without the Federal Reserve's blank check backing the big investment banks, the financial wheels would be grinding to a halt today, and Bear Stearns Cos. (BS) would be the first in a long line of brokerages at bankruptcy court.

 

Who knows? It still could happen, even with the Fed's help.

Don't be fooled into thinking rival firms could withstand a run on the bank any better than Bear did. All brokers are built on margin, loans and complicated agreements that require two or more parties.

 

'We allowed the commercial banks into investment banking and vice versa to a slight extent, and this is what we're getting.'

— Charles Geisst, Wall St. historian

 

"This is the new post-regulatory environment," said Wall Street historian Charles Geisst. "We allowed the commercial banks into investment banking and vice versa to a slight extent, and this is what we're getting.

"It shouldn't be a surprise to anybody."

 

Wall Street brought its collapse upon itself. Sanford Weill's assault on Depression-era laws with the merger of Travelers Group and Citicorp in 1998 ushered in a decade in which once-stodgy but safe financial institutions took on more risk to compete with each other and satisfy investors' increasingly outrageous expectations.

 

Enter gun-slinging hedge funds full of fees and unregulated abandon. Investment banks built up prime brokerage operations to suit them. Revenue from that business rose to a combined $10 billion in 2005, but it was also a breeding ground for insider information and the focus of multiple Securities and Exchange Commission investigations.

Together, the traders began ramping up their use of complicated financial instruments including credit default swaps index options, a kind of hedge against risk. In 2006 alone, volume in CDS index options doubled to $400 billion from the prior year, according to a Northwestern University study.

 

Warren Buffett warned us that derivatives and other complicated financial instruments were "weapons of mass destruction." After years of a regulatory policy of appeasement, those weapons have claimed their first significant casualty.

 

The damage

 

If you aren't sickened or worried by the ease and speed in which the nation's fifth-biggest brokerage became worthless, then you aren't considering the fallout. Thousands of Bear Stearns employees will lose their jobs. They will fall back on nest eggs full of Bear stock that has plummeted from $159.36 a share to $2, in the broker's deal with J.P. Morgan.

Bear is taking the rest of brokerages with them. Fears about Lehman Brothers Holdings Inc. (LEH) and Citigroup Inc. © are weighing on investors who have sent shares lower, wiping out the personal fortunes of both top executives and rank and file employees.

 

Even before Bear's fall, compensation consultants predicted a 30% decline in incentives and a 15% reduction in jobs from the 849,600 employed at its height last year, according to Johnson Associates Inc. and data from the U.S. Bureau of Labor Statistics.

 

That means in 2008 alone more people will lose their jobs than in the industry's steepest decline between 2001 and 2003 when 89,000 lost their jobs. Among the few divisions Johnson expected to do well was prime brokerage -- exactly the unit at the core of Bear's meltdown.

 

If schadenfreude is your thing, remember that also means trouble for the rest of us. Without liquid capital markets there will be no buyers for mortgages and credit card debt. As Wall Street sorts out its dead, there will be no loans for Main Street.

 

A new Wall Street

 

Bear Stearns is history, but there's no time for mourning. A new Wall Street will rise, though it won't be the one envisioned by John Thain, Mayor Michael Bloomberg, Sen. Charles Schumer and former Gov. Eliot Spitzer a year ago.

 

Together, they championed a McKinsey & Co. report that said U.S. firms could lose as many as 60,000 jobs and $30 billion in revenue to foreign competitors by 2011. News flash: They got it right, though it's happening just a year later and foreigners aren't the culprit.

Wall Street, with the Fed's help, must save its own through buyouts and cash infusions. Today, Lehman and Goldman Sachs Group Inc. (GS) must provide transparent earnings reports without surprises. Morgan Stanley (MS) , which brings up the rear on Wednesday, must do the same.

In the long term, a new Wall Street will emerge. Healthy banks will buy weaker ones on the cheap to form a new breed of firms. It will, according to Geisst, resemble the industry in the 1920s.

 

"You're going to have these very large, heavily capitalized financial institutions that perform all functions," Geisst said.

The transformation will go hand-in-hand with new regulations that will ratchet up capital, margin and reserve requirements, along with other rules, designed to lure investors back into the market and who are willing to do business with the new breed of Wall Street firm.

 

It will be a regulated financial system. And it will be long overdue.

David Weidner covers Wall Street for MarketWatch.