By Andrew Sheng, chief adviser to the China Banking Regulatory Commission BEIJING (Caixin Online) -- A 1987 Hollywood movie called "Wall Street" featured Michael Douglas as Gordon Gecko, a rich, powerful and ruthless broker who teaches a young disciple that "greed is good." Coming out this summer will be a new film, "Wall Street 2," also starring Michael Douglas. And we've been watching the real show recently from Washington. That's where Wall Street bankers defended themselves before the Senate Subcommittee on Investigations and the Financial Crisis Inquiry Committee. The more they protested their innocence, the more they proved Gordon Gecko is not fictitious but a real-life character. In investigating the role of investment banks in the financial crisis, the subcommittee looked at the 2004-2007 period. It found that bankers securitized high-risk mortgages, received fat fees, and pushed these mortgage packages to investors who thought they were buying good assets because they trusted Wall Street bankers and credit rating agencies. The investment bankers magnified risk by re-securitizing toxic mortgages securities into collateralized debt obligations (CDOs), sold them, and then used credit default swaps (CDS) and index trading to hedge their own risks. In emails among themselves, the traders flaunted the fact that their products were crap. Thank you, Wall Street, for such honesty after the fact. We Asians bought some of that crap, thinking you were selling safe products. Because they knew these mortgages were risky, the investment bankers shorted the mortgage market. That means they sold more than they bought. So when the CDO market collapsed, the banks profited through their large amounts of short positions. Moreover, a clear conflict developed between clients and proprietary traders. The subcommittee found investment banks did not disclose to clients that they themselves had traded billions of dollars in such mortgage-related assets for their own proprietary benefit. Some products were packaged to allow special clients to short the market. Then the products were sold to other investors without telling them that they were designed for being shorted. In other words, they sold what they were shorting or knew was bad, while telling clients they could profit from trading such assets. I think Asian financial regulators should look into how many of these products were sold in Asia. What was their defense? One senator asked investment bankers repeatedly whether they felt a duty to act in the best interests of clients. Only one in four affirmed such a duty. This means Wall Street's culture is all about treating clients as suckers, because adults are supposed to know what they're doing. But some of these adults are local government treasurers, or managers of corporate, pension and insurance funds, who did not fully understand that these well-dressed, highly educated and trusted Wall Street bankers were selling toxic products. Unfortunately, taxpayers and savers are now paying for this gross dereliction of fiduciary trust. The highly paid bankers just don't get it. Why should they? They have already laughed all the way to the bank with fat bonuses. The man in the street can expect such behavior from street gangs, but not from revered bankers. They are supposed to be the crème de la crème of society. Our children actually aspire to join them. God help them. One cynical newspaper commentator said the outcome of the Senate hearings was that both sides won. The investment bankers proved that what they were doing was not illegal, and the senators shamed the bankers enough to pass bank reform bills. One of the most astute comments came from a senator who said those in trusted positions should know the difference between what is legal and what is proper. This gets to the core of charges against Lehman Brothers. The firm's bankruptcy lawyer said that it reported $40 billion in September 2008, but that it did not reveal that a substantial portion of that amount was encumbered or otherwise illiquid. Furthermore, the firm used the infamous "Repo 105" to hide the fact that, if not for Repo 105, the net leverage would be higher than reported. In the currency wars of our modern age, we trust bankers as much as we trust our soldiers to defend national frontiers. In the 1980s, there was a famous book about corporate Wall Street raiders called "Barbarians at the Gate." It was later made into a movie. Wall Street raiders, aided by investment bankers, acted like Huns breaking down the Great Wall. In testifying to the financial crisis committee, U.S. Treasury Secretary Tim Geithner referred to an ample number of examples during the crisis during which "regulators did not use the authority they had early enough or strongly enough to contain risks in the system. But a principal cause of the crisis was the failure to provide legal authority to constrain risk in this parallel financial system." "When people look back at this crisis, when they look at the excessive risks taken by large financial institutions, the natural inclination is to move those risky activities elsewhere," Geithner said. "To create stability, some argue, we should just separate banks from 'risk.'" But he said that, in important ways, that is exactly what caused this crisis. Geithner said the lesson for us and the financial system "is that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation." Mr. Secretary, I agree with you at the conceptual level. But the best system in the world will not work if those who defend the system still think that greed at any cost is good. Without trust and integrity, no system will protect us from barbarians at the gate. See this commentary on Caixin Online. http://www.marketwatch.com/story/china-banking-advisor-wall-street-is-barbaric-2010-05-19
This is a silly and slanted piece designed for a gullible audience. The banks relied on the rating agencies for the triple A rating on the CDOs of mortages. That rating is a very important independent responsibility and liability of the rating agencies. Being their responsibility to rate the quality of the CDOs, it is specifically NOT the role of the bankers. While blame and accusations may be directed at the rating agencies, banks cannot be expected to assume their role. Also this is after the fact evalution. At the time most people (including most bankers) did not expect the housing price bust which followed.
This is a silly and slanted piece by Andrew Sheng designed for a gullible audience. The banks relied on the rating agencies for the triple A rating on the CDOs of mortgages. That rating is a very important independent responsibility and liability of the rating agencies. Being their responsibility to rate the quality of the CDOs, it is specifically NOT the role of the bankers. While blame and accusations may be directed at the rating agencies, banks cannot be expected to assume their role. Also this is after the fact evaluation. At the time most people (including most bankers) did not expect the housing price bust which followed.
errr go get an education. Not all chinese are communists and not all communists are chinese, whatsoever more not all chinese hail from China. Andrew sheng is a MALAYSIAN. He is merely advisor to the commission.
wall street is just back to its old evil ways, evil tricks and scams. before 1929 crash..no gov't regulations in the markets. 95% margins for stocks. options and derivatived banned from wall street for 50 years by the SEC. as for insider trading and frontrunning and trading against clients and market manipulation,,,how can it be illegal if everybody is doing it including the biggest market marker or market participant(goldman sachs).
One point that is being missed in all the fray is that corperations were put in a position to grow, be force out or be consumed by their competition. Akuma