A Year After a Cataclysm, Little Change on Wall St.
http://www.nytimes.com/2009/09/12/business/12change.html?_r=1&hp
raders on the floor of the New York Stock Exchange before the closing bell on Friday.
By ALEX BERENSON
Published: September 11, 2009
Wall Street lives on.
One year after the collapse of Lehman Brothers, the surprise is not how much has changed in the financial industry, but how little.
Backstopped by huge federal guarantees, the biggest banks have restructured only around the edges. Employment in the industry has fallen just 8 percent since last September. Only a handful of big hedge funds have closed. Pay is already returning to precrash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year. Nor are major pay cuts likely, according to a report last week from J.P. Morgan Securities. Executives at most big banks have kept their jobs. Financial stocks have soared since their winter lows.
The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fallâs chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.
Coming on the same weekend as the 11th-hour bailout of the giant insurer American International Group, and the sale of Merrill Lynch, Lehmanâs failure was the climax of a cataclysmic weekend in the financial industry. In the days that followed, nearly everyone seemed to agree that Wall Street was due for fundamental change. Its âheads I win, tails Iâm bailed outâ model could not continue. Its eight-figure paydays would end.
In fact, though, regulators and lawmakers have spent most of the last year trying to save the financial industry, rather than transform it. In the short run, their efforts have succeeded. Citigroup and other wounded banks have avoided bankruptcy, and the economy has sidestepped a depression. But the same investors and economists who predicted, and in some cases profited from, the collapse last fall say the rescue has come at an extraordinary cost. They warn that if the industryâs systemic risks are not addressed, they could cause an even bigger crisis â in years, not decades. Next time, they say, the credit of the United States government may be at risk.
Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said.
âThey will run up big risks, they will fail again, they will hit us for a big check,â he predicted.
The doomsday view is far from universal.
Wall Street executives say the Lehman bankruptcy opened their eyes to the fragility of their institutions. They note that they have pulled back on risk and reduced leverage, creating a bigger cushion against losses. And they say that regulators were right to support the financial industry over the last year, rather than imposing new rules or allowing weak banks to collapse.
âThere is less leverage in the entire financial system,â said David A. Viniar, Goldmanâs chief financial officer. At Goldman, $1 in capital now supports about $14 in loans and investments, compared with $24 a year ago.
But even some senior Wall Street executives acknowledge the lack of change surprises them, given how poorly the industry performed last fall and the degree of government support necessary to keep it from collapsing.
âThere was a general feeling that an enormous amount of additional regulation should be put in place to prevent what happened that weekend from happening again,â said Byron Wien, vice chairman of Blackstone Advisory Services and the former chief investment strategist for Morgan Stanley and Pequot Capital. âSo far, we havenât seen a lot of action.â
Robert J. Shiller, the Yale University economics professor who predicted the dot-com crash and the housing bust, said the window for change may be closing. âPeople will accept change at a time of crisis, but we havenât managed to do much, and maybe complacency is coming back,â Professor Shiller said. âWe seem to be losing momentum.â
Kenneth C. Griffin, founder and chief executive of the Citadel Investment Group, a Chicago-based hedge fund that manages $13 billion, said that regulators and lawmakers needed to impose rules so failing banks could be shut, rather than allowed to operate indefinitely with taxpayer support.
âWeâve taken a lot of steps for the worse, and not for the better, in terms of the structural underpinnings of our capital markets,â Mr. Griffin said. âWe have to change the rules and correct the fundamental flaws in the financial system.â
CONTINUED
http://www.nytimes.com/2009/09/12/business/12change.html?_r=1&hp
raders on the floor of the New York Stock Exchange before the closing bell on Friday.
By ALEX BERENSON
Published: September 11, 2009
Wall Street lives on.
One year after the collapse of Lehman Brothers, the surprise is not how much has changed in the financial industry, but how little.
Backstopped by huge federal guarantees, the biggest banks have restructured only around the edges. Employment in the industry has fallen just 8 percent since last September. Only a handful of big hedge funds have closed. Pay is already returning to precrash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year. Nor are major pay cuts likely, according to a report last week from J.P. Morgan Securities. Executives at most big banks have kept their jobs. Financial stocks have soared since their winter lows.
The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fallâs chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.
Coming on the same weekend as the 11th-hour bailout of the giant insurer American International Group, and the sale of Merrill Lynch, Lehmanâs failure was the climax of a cataclysmic weekend in the financial industry. In the days that followed, nearly everyone seemed to agree that Wall Street was due for fundamental change. Its âheads I win, tails Iâm bailed outâ model could not continue. Its eight-figure paydays would end.
In fact, though, regulators and lawmakers have spent most of the last year trying to save the financial industry, rather than transform it. In the short run, their efforts have succeeded. Citigroup and other wounded banks have avoided bankruptcy, and the economy has sidestepped a depression. But the same investors and economists who predicted, and in some cases profited from, the collapse last fall say the rescue has come at an extraordinary cost. They warn that if the industryâs systemic risks are not addressed, they could cause an even bigger crisis â in years, not decades. Next time, they say, the credit of the United States government may be at risk.
Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said.
âThey will run up big risks, they will fail again, they will hit us for a big check,â he predicted.
The doomsday view is far from universal.
Wall Street executives say the Lehman bankruptcy opened their eyes to the fragility of their institutions. They note that they have pulled back on risk and reduced leverage, creating a bigger cushion against losses. And they say that regulators were right to support the financial industry over the last year, rather than imposing new rules or allowing weak banks to collapse.
âThere is less leverage in the entire financial system,â said David A. Viniar, Goldmanâs chief financial officer. At Goldman, $1 in capital now supports about $14 in loans and investments, compared with $24 a year ago.
But even some senior Wall Street executives acknowledge the lack of change surprises them, given how poorly the industry performed last fall and the degree of government support necessary to keep it from collapsing.
âThere was a general feeling that an enormous amount of additional regulation should be put in place to prevent what happened that weekend from happening again,â said Byron Wien, vice chairman of Blackstone Advisory Services and the former chief investment strategist for Morgan Stanley and Pequot Capital. âSo far, we havenât seen a lot of action.â
Robert J. Shiller, the Yale University economics professor who predicted the dot-com crash and the housing bust, said the window for change may be closing. âPeople will accept change at a time of crisis, but we havenât managed to do much, and maybe complacency is coming back,â Professor Shiller said. âWe seem to be losing momentum.â
Kenneth C. Griffin, founder and chief executive of the Citadel Investment Group, a Chicago-based hedge fund that manages $13 billion, said that regulators and lawmakers needed to impose rules so failing banks could be shut, rather than allowed to operate indefinitely with taxpayer support.
âWeâve taken a lot of steps for the worse, and not for the better, in terms of the structural underpinnings of our capital markets,â Mr. Griffin said. âWe have to change the rules and correct the fundamental flaws in the financial system.â
CONTINUED
