Cringely on the Financial Crisis

I enjoy Robert X. Cringely. I started reading his columns a quarter of a century ago when he wrote for InfoWorld. He's gone on to many things but basically writes on technical stuff. His latest incarnation is on the web site Adam Smith's Money World:

According to a new report from the National Bureau of Economic Research, the Great Recession wasn’t the result of a bursting housing bubble at all but rather a bank panic in the long tradition of American bank panics. Yes, subprime mortgage securitization was a mess -- a house of cards probably doomed to fall -- but subprime by itself simply wasn’t big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had quietly come to backstop global finance.

As usual, he is discussing a provocative viewpoint with interesting technical details. Great!

And here's Cringely's view of Wall Street:

It’s funny how ethics and regulation vary from industry to industry. If Goldman Sachs CEO Lloyd Blankfein were the boss of a Las Vegas casino instead of a New York investment bank, his firm’s front-running and derivative trading against customers would have been a class B felony. Instead of $9 million in Goldman shares, his bonus this year would have been 1-6 years in prison and a minimum $10,000 fine on each count, of which there were presumably thousands.

Who would have thought Vegas was more ethical than Wall Street?

Testifying last month before Congress, Blankfein explained this behavior as just giving the customers what they want. “These are the professional investors who want this exposure, ” he said.

And Blankfein is correct, after a fashion. The Securities Act of 1934 specifically defines a class of “qualified” investors who are supposed to have enough assets and enough savvy to make their own mistakes, God bless ‘em. Yet in Vegas, where there is a sucker born every minute and capitalism is at least as popular as it is in New York, section 465.070 of the Nevada Gaming Law makes it a felony “to place, increase or decrease a bet or to determine the course of play after acquiring knowledge, not available to all players, of the outcome of the game or any event that affects the outcome of the game or which is the subject of the bet or to aid anyone in acquiring such knowledge for the purpose of placing, increasing or decreasing a bet or determining the course of play contingent upon that event or outcome. ”

That pretty much covers both front-running and trading against customers for the firm’s account.

In Vegas the house has an advantage, which is the only way they can call gambling a business. On Wall Street, too, investment banks and brokers traditionally lived on fees and commissions, respectively, whether the trade goes good or bad for the customer. But for Goldman and its competitors that wasn’t enough profit. So now they make most of their profits from trading securities, not by issuing or making markets in them.

Yep... that's the Wall Street we all know and love... the monster that devoured Cleveland... then the whole US of A... then the world.