Has Wall Street Changed? – I think not.
Wall Street is playing with fire again and might even be taking bigger risks now than before the financial meltdown. One of the reasons is this: the same people that called the shots leading to the financial crisis are still calling the shots today.
Also, many sources indicate that banks have revived what are being referred to as “structured financial products” that pay out higher interest, but avoid the wrath of government regulations.
The New York Times reminds us that the losses in the prior financial burst caused damage to banks around the world, not just in the U.S., because banks and investors worldwide had investments rolled up in mortgage-backed securities. Some European banks, including Bayerische Landesbank in Munich, still haven’t recovered, and others reportedly perished. When playing with fire like this, everyone gets burned.
The report from The New York Times gives some startling statistics. For example it states that banks so far this year (by April 2013) have churned out some types of structured products “as fast or faster than they did before the bottom fell out.” That includes $33.5 billion in bonds backed by commercial mortgages, “slightly more than they did in early 2005, when the real estate market was flying high.”
Another article reminds us of the bonus structure which doesn’t exactly appear to promote solid business decisions as a basis. This article in Scientific American, actually outlines “why it’s smart to be reckless on Wall Street.” The article explains that the reward structure of Wall Street is what drives high risk; Wall Street rewards short-term gains, while consequences for “losing” are less dramatic. This incentive model “is the engine behind many of Wall Street’s mistakes,” notes the article.
Even regulations don’t help in this type of reward structure. “Regulation is largely toothless if banks and their employees have the financial incentive to be reckless,” said writer Chris Arnade in the Scientific American article.
Call it reckless or not, the bottom line is that Wall Street’s function is to push the boundaries as much as possible to generate as many gains as possible. Substantial gains are not made by taking low risks. Because of this, we’re not immune to another meltdown, since those responsible don’t seem to be as affected by their actions as one would expect.