[William D. Cohan] Ending the moral rot on Wall Street (Part 2)

The following is the second installment of a three-part article on Wall Street corruption and remedies for it. ― Ed.

Was all of this immoral, unethical and illegal behavior a mere aberration, brought on in the years leading up to the financial crisis by an atypical combination of greed and hubris?

Sadly, no. Rather, it was of a piece with a continuous line of dubious behavior that has characterized parts of Wall Street for generations. In 1929, Goldman’s partners ― including the revered Sidney Weinberg, who led the firm for almost 40 years ― manipulated the stock of the Goldman Sachs Trading Corp., its publicly traded investment trust, to drive its price higher to win shareholder approval for a merger with another publicly traded investment trust. When the crash hit in October 1929, investors in the trading corporation lost almost everything and Goldman Sachs itself was nearly bankrupted.

Then there was Goldman’s self-serving behavior during the months leading up to the bankruptcy of the Penn Central Corp., in 1970 ― the largest failure to that date. Once again, Goldman almost went bankrupt as a result of defrauding its clients.

The most recent incidents weren’t even the first time in the first decade of the 21st century that Wall Street got collectively strung up. In April 2003, New York Attorney General Eliot Spitzer orchestrated a $1.4 billion “global settlement” between his state, the SEC and the New York Stock Exchange and 10 of the then-largest Wall Street firms, to penalize the banks for creating blatant conflicts of interest between their equity- research departments and their investment-banking divisions.

Spitzer’s investigation showed that Wall Street was willing to craft its research to its clients’ liking in exchange for investment-banking business, primarily in the form of assignments to underwrite lucrative IPOs of hot, technology companies.

One of the more painful facts about the recent financial crisis ― the consequences of which we are still suffering ― is that it was entirely avoidable. Doing so, however, would have required Wall Street’s bankers, traders and executives to show a certain self-enlightened prudence about the mountain of risk they were scaling rather than be driven by collective greed.

In other words, there might well have been a very different outcome to the events of 2007 and 2008 had Wall Street behaved as if it had genuine accountability for its actions, as it did when firms were private partnerships where stakeholders had their net worth on the line. Instead, the financial industry figured it would get bailed out by its friends in Washington because it was too interconnected to be allowed to fail.

That Wall Street executives have been able to avoid any shred of responsibility for their actions in the years leading up to the crisis speaks volumes not only about an abject ethical deterioration but also about the unhealthy alliance that exists between the powerful in Washington and their patrons in New York. Our collective failure to demand redress against a Wall Street culture that remains out of control is one of the more troubling facts of life in America today.

You would think that in the wake of the trillions of dollars spent bailing out Wall Street, a measure of contrition would be forthcoming. You would be wrong. While the rest of the country continued to suffer genuine economic hardship in 2010, bankers and traders and executives received about $150 billion in compensation. Is it any wonder then that we are repulsed when we come across the gloating of a banker at JPMorgan Chase, who upon being congratulated by a colleague for being hired to restructure the debt of one of the worst deals of the past decade ― the $8.5 billion leverage-larded acquisition of the Tribune Co. by the Chicago investor Sam Zell in December 2007 ― replied: “Tnx dude. Can you say ka-ching?”

This decay of Wall Street mores hasn’t gone unnoticed ― at least not by Bharara, the U.S. attorney for the Southern District of New York. In a speech in June to a group of financial journalists, a few weeks after his office won the high-profile conviction of the hedge-fund manager Raj Rajaratnam on 14 charges of insider trading, he wondered about the implications of widespread illegal behavior.

“The bigger and better question may not be whether insider trading is rampant, but whether corporate corruption in general is rampant, whether ethical bankruptcy is on the rise, whether corrupt business models are becoming more common?”

“Some of the most egregious securities frauds,” he added, have occurred “in some of the most prominent and powerful, publicly traded companies, consulting firms, accounting firms, and even law firms.”

These crimes are being committed, he said, by people who “have already made more money than could ever be spent in one lifetime and achieved more impressive success than could ever be chronicled in one obituary. And it begs the question, is corporate culture becoming increasingly corrupt?”

Yes, it certainly does raise that question.

Can it be true that the trillions of dollars we spent bailing out Wall Street only restored the deeply flawed status quo, instead of bringing about the fundamental system overhaul we needed?

One of the unintended consequences of the rescue of the banks in 2008 was to restore many of the most heinous aspects of Wall Street’s culture, thus exponentially increasing the inherent risks in the system. Indeed, while Main Street continues to suffer from high unemployment and plunging home prices, the financial industry is dancing a jig after paying itself about $150 billion in compensation in 2010.

In September and October 2008, as the fear of financial and economic collapse was at its most acute, there was a brief moment when it seemed there was a real chance that Wall Street would be reformed. That didn’t happen. 

By William D. Cohan, Bloomberg

William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.