The backlash is starting to get serious. It is one thing for the man on the street to fulminate about the excesses of financiers. And even those who try to harness that anger find themselves checked. John McCain, who has said that he is going to fix the economy by (among other things) going after “Wall Street corruption” is having difficulty filling his New York fundraisers.
But it’s when people in or close to the financial services start calling for reform that you know the tide is turning. In a Forbes interview, Jamie Dimon and Felix Rohatyn (storied top M&A banker for two generations, also led the restructuring of New York City’s finances in its fiscal crisis) do an able job of singing from the reform hymnal. But Charles Munger, long-standing partner of Warren Buffett, calls for root and branch reform. If other prominent Main Street executives fall in with Munger, we might see the banking industry restored to its proper role, that of a support function to commerce.
From Forbes (hat tip reader Steve):
Even more radical is Berkshire Hathaway’s vice chairman. Munger wants Wall Street balance sheets reduced by 70% and insists that the firms “be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become.” He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where “you’re dealing with the safest securities around.”
That 50% margin level, incidentally, is the maximum that ordinary investors can obtain from their broker when they purchase common stock. Before their respective demises, Bear Stearns and Lehman Brothers were leveraged to the tune of $30 of debt for every $1 of capital.
To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that’s true to his spirit. He’s also furious with the accountants, in particular for letting Wachovia report actual profits on accrued interest from risky mortgages when, in fact, the interest wasn’t paid but added to the principal amount due on the mortgages.
Derivatives are simply not going away, but there are ways to restrict OTC derivatives (for instance, forbidding any institution that has access to the Fed window from buying or selling them or lending to any entity that has non-exchange traded derivatives on its books) which pose the greatest danger.
The article concluded on this cheery note:
One thing is sure: The abhorrent excessive compensation on Wall Street is bound to be severely reduced. If Wall Street firms can only be leveraged 10 to 1 instead of 30 to 1, then the excessive gains made on borrowed funds will be reduced by two-thirds. So the path to $5 million to $10 million annual payoffs will be more reasonable but still in the millions. Hamptons summer homes will be reduced in price. Private jets will be out of range for many. Applications to law school should go up. The buyside will have their choice of the brightest business school graduates. And forever more we’ll all wonder what a meltdown would have been like with the attendant chaos.
There will be an international conference dealing with global finance that will place such restrictions in order to prevent such a close brush with Armageddon and systemic collapse ever again. It cannot be left to the free market.