We Need the Wall Street Risk Takers But….

The world needs the guys on Wall Street to take risks in order for us to make some money too.

How would you feel about signing a $1B deal for some investment? It would probably make you feel sick at the thought. That’s why we need the Wall Street guys to perform this open heart financial surgery for us and hopefully give us some of the profits.

They are the front line in the cut-throat world of high finance – the fighter pilots that go out there and take on big investment projects we’d run a mile from.

It’s hard work and take a lot of guts, make no mistake about that.

I have managed my own retirement funds and invested up to $400,000 of my own money in the markets and I can’t tell you how often I got that sinking feeling when the markets went down and I was in charge.

If the regulators get heavy handed and prevent Wall Street taking risks then we are all doomed to low returns and as Baby Boomers a bleak retirement.

What is needed is some method of tying Wall Street remuneration and bonuses to the “long term” that Wall Street tells us we have to do in order to make money. Manage greed, don’t stifle it.

The problems have really been exacerbated by paying high bonuses for excessive risk taking by Wall Street which created a lot of paper wealth for investor and real wealth for Wall Street risk takers because they got paid. The paper wealth has all but gone now though.

They got paid large bonuses every quarter and banked it if they were smart. So their whole aim was to sell sub prime mortgages and other debt packaged into CDO’s and once they got paid they moved on to the next sale.

The mortgagee’s were supposed to pay money regularly through to the final owner of those mortgages. But when more and more of them couldn’t pay their rising mortgages this house of cards began to fall. (No pun intended)

It seems the foxes (Congressmen) are still in the hen house acting out the pretence they are the policemen of the financial markets and holding Paulson and Bernanke to ransom for all the financial melt-down. They have some responsibility for wrecking the world but at least they have come up with a plan.

This hearing should have the tables reversed. It was Congress and elected officials that regulated Fannie and Freddie to ensure they continued to offer cheap loans to their constituents to help bolster their re-election chances.

A grateful home owner is sure to vote for a congressman that puts them in debt well beyond their means. Where’s the logic in that?

It’s not FREE Market Capitalism. Offering loans below market rates to people who cannot afford them is socialism. Then profiteering on the people they conned by slowly ramping up interest rates well above regular interest to claw back money foregone in the early years is just plan fraud.

Wall Street, Congress, Banks and house buyers all fed at the trough using  the theory that house prices will always go up. Then they didn’t, and the loser is the home owner with a mortgage to pay and the tax payer as the lender of last resort. Both are easy prey.

Paulson and Bernanke along with Greenspan should be asking why Congress refused to listen when Greenspan told them that Fannie and Freddie were out of control over two years ago. Back then the Republics all voted to stop supporting Fannie Mae and Freddie Mac but all the Democrats voted to keep the government backed mortgage scam going because it was a “good thing to help people buy homes they could not normally afford”.

China and Russia bought up CDO’s big time and want their money or else. In Australia Local Councils appear to have about $400M in CDO’s too. Who’s going to buy their CDO’s – Rudd?

Regulation has become the new mantra around the world, but it was the failure to fix a bad regulation  that allowed Fannie and Freddie to distort the markets, not free market capitalism gone wild.

The smart money flowed where it got the highest return for the least risk. That was through Fannie’s and Freddie’s implicit government-backed securitized mortgages. High returns for virtually no risk (implied government backing against mortgage defaulters).

Investors pay for and expect Wall Street to find the best returns for the least risk and that is just what they did. It was so good that they decided it was better to invest for themselves and take the profits rather than for a client and take a fee. It doesn’t make it right but money has no morality.

The US deregulated the market years ago because it was stifling investment and growth. They should have reformed the regulations on Fannie and Freddie too. Then Wall Street would have had to go somewhere else to make their millions.

We need to let Wall Street get back to what it does best – making money. But make sure Government doesn’t allow itself to favour one part of the community over another with lower cost of money and government guarantees.

We also must find some way to amortize the bonuses over the life of an investment to keep these high-flyers interested in the investment returns, not just the sale.

Here is a link to a transcript of President Bush’s Speech today. He gives a good explanation of the financial crisis facing the US and by default all of us too.

In order to protect our nest eggs we need to have a healthy Wall Street where risk taking is appropriately rewarded and government stops distorting the money markets.

One Response to “We Need the Wall Street Risk Takers But….”

  1. […] Many Financial Institutions’ Senior Executives and Boards are guilty of not doing something about the credit crisis well before it became one. They knew what was going on and did nothing to curb their “young Turks” from generating obscene profits at extremely high risk to their firms. But I have already discussed this in a prior post entitled,  “We Need the Wall Street Risk Takers But….” […]

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