Annual Reports, Compensation policies and Bonus payments.
Shortly the video called Wall St on LSD will reveal why - any interested party could have and should have been on notice of a changed Wall St.
It's not simply about a breakdown of Glass Steagall - separating commercial from investment banks - it's that certain Wall St / FSI - added a third NEW and very profitable layer - THE ICING ON THE CAKE - PROPRIETARY TRADING.
The Cake's three layers:
- Commercial bank - obtain a bank charter, accept customers' deposits, loan out, earn a spread, avoid large losses by diversifying among same.
- Investment bank - underwrite and sell securities, earn fees from mergers and acquisitions, earn fees and commissions for services provided to public customers.
- Proprietary bank - typically form off balance sheet, special purpose entities officially known as QSPE's or VIE's, leverage assets (from layers one and/or two above) into OTC securities or derivatives, issue short term asset backed commercial paper ABCP, (money market funds buy this stuff), earn a spread. Add more "assets", requiring MORE leverage, use proprietary valuations (so called mark to model), earn greater sums, pay out greater CASH bonus compensation.
"Too big to fail" otherwise known as the legal oligopolization, permanent enshrinement of certain Wall St firms - is an invention of K St. lobbyists. TBTF is what is known as treating the weeds instead of the roots of the problem analysis and solutions. It's a shame and a missed opportunity since if the insolvent were ALLOWED to fail it would likely have revealed the roots of the crisis - leverage, swaps, derivatives oft hidden in the proprietary (for the house ONLY) trading book.
TBTF is a barrier to entry - a barrier which protects the TBTF club members; some more than others; some have outperformed (mythically and magically) for years; can't be smarter people; can't be transparent markets (as in some cases they constitute the market of information about that so-called "market"); can't be hard work - but likely to be information advantages and access thereto. Who, what and where are the sources and signals of information? Let's just say it's a network effect. Nodes of which may appear as in the Galleon matter - where executives alleged $250M was paid to Goldman Sachs and/or Morgan Stanley (where Galleon was purported to be among the top five hedge fund customers) for what's been termed valuable "market color." Was this ALL the information - winks, nods, silent answers, "information" shared? Who will ask probing questions and connect the dots?
Read story here http://www.ft.com/cms/s/0/9b7b329e-c400-11de-8de6-00144feab49a.html?nclick_check=1
Other "Inventors" include Mr Paulson and Mr Bernanke as in the "Emergency" stabilization acts forced upon Congress last fall; tell me something - HP and BB had NO idea what was happening BEFORE the "crisis" occurred?
There is no need to waste US Taxpayers money on such a commission.
NO one put a gun to the head of ANY banker and forced them to lend money to a borrower.
- NO one put a gun to the head of ANY Wall St firm to BUY ANY mortgages let alone Sub Prime mortgages then create Sub Prime Mortgage backed securities.
- NO one put a gun to the head of ANY Wall St firm to HOLD for PROPRIETARY PROFIT ANY MORTGAGE BACKED SECURITY AND ADD LEVERAGE AND VALUE THESE "ASSETS" with supposedly better, legal, PROPRIETARY VALUATION AND RISK MODELS.
- NO one put a gun to the head of ANY Wall St firm and told them they could not independently seek other opinions of credit worthiness / credit ratings / credit default.
AND SHOULD HAVE, COULD HAVE ASKED and modeled "WHAT COULD GO WRONG HERE" - BUT APPARENTLY DIDN'T. One would think that somewhere along the journey (at the rate of over $350B a year the FSI spends on "systems") that would have come up no?
It's very important to point out one thing: NOT all banks are on the FDIC watch list for a reason; they practiced, (by resisting the temptations, oft ridiculed) not just talked safety and soundness of unsustainable asset / collateral valuations during the hockey stick era.
Want more information about the long term ANNUAL returns from real estate? Try mid to high SINGLE DIGITS - during the hockey stick era 40%, 50%, 60% over 100% ANNUAL PRICE APPRECIATION IS EVIDENCE OF ONE THING:
Go look at pages 16 to 18 in this link from Ibbotson (Morningstar) http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/TamingOptimizer.pdf
Or witness that investor-owned properties made up about 5% of the mortgages issued for years, then doubled then doubled again such that investor-owned properties became 20%.
So why do investors own anything? Primarily, in hoped for price appreciation coddled along with IRS Code section 1031 higher-priced properties required in exchange - Congress didn't know or foresee or those at the NY Fed did not know or foresee? It's a built in escalator for an asset bubble, same dog different color as in asset - based / mark to model compensation for prop traders.
The cause of this crisis is NOT (as Mr Wallison, AEI and member of the Financial Crisis Inquiry Commission) 25 million mortgages (and as Mr Bernanke would have the Morehouse College audience believe last April) - although erudite, glib and plain spoken; it's about the profit-driven bankers who made the loan approvals AND every single out stretched hand / investor in mortgage backed securities RMBS, CMBS and related derivatives CDO's, CPDO's and CDS down the line; ALL OF WHOM COULD HAVE SAID "no" - BUT THEY DIDN'T.
Barry Minkow, Fraud Discovery Institute, a speaker in 2004 at the California CPA Corporate Governance Conference held out the form - taxpayers use Form 4506 (Request for Copy or Transcript of Tax Form pdf request link here http://www.irs.gov/pub/irs-pdf/f4506tez.pdf) where mortgage applicants authorized the IRS to send the borrower's tax returns directly to the lender for what purpose? INCOME (can you spell) V-E-R-I-F-I-C-A-T-I-O-N?
Hmmm...what a novel idea, then something BASIC clearly changed at only certain financial institutions from the safety and soundness embodied in that practice BUT not by all.
And apparently, it was undeserving of recognition; a Hallmark card or Kodak moment; but it could have - FOR SEVERAL YEARS RUNNING IN THE FULL LIGHT OF DAY including personal certifications as required by Sarbanes Oxley - BOARDS, AUDIT COMMITTEES, EXECUTIVES, MANAGERS, INDEPENDENT AUDITORS, REGULATORS, INSTITUTIONAL SHAREHOLDERS AND THE FINANCIAL MEDIA; and in reverse the very proprietary traders whose compensation derived 100% from certain not safe, not sound, not prudent proprietary leveraged speculative investments.
I have a modest suggestion - make the TBTF Club members - NOT the US Taxpayers - pay the full costs of funding this new commission; and allocate such costs among the TBTF club members based upon any / all emergency aid or support as in the FDIC's TLGP and resultant compensation the TBTF member expects to pay out in 2009 compensation; after all the bailout was "Emergency" - so too now the US Taxpayer asks the FSI to make a modest gesture in return.