Anthony Malakian: Has Wall Street Learned Its Lesson?

“The year 2008 created a huge amount of pain across the globe, in terms of people losing their houses and their savings. Lives were wrecked because this industry went over the edge. We created an immense amount of pain.”

These were the words of a senior executive from a major Wall Street firm, speaking recently during a closed-door panel discussion on the changing face of over-the-counter (OTC) derivatives. He went on to express his concern that the industry hadn’t learned anything and that it would only be a matter of time until the trading firms themselves—and not the regulators or politicians—torpedoed the global economy once more.

“The people give the airwaves to the broadcasters; well the people have given us the ability to run the financial system for the benefit of the whole economy,” he said. “My worry is that we’re so inclined to get that last bit of margin that we’re going to drive right back to the edge of the precipice again.”

Taken Aback
At the executive’s insinuation, the other 14 panelists seemed to be taken aback. Was this man blaming them for the financial crisis? Some said that while trading firms had to take their fair share of the responsibility, regulatory policy—repealing the Glass–Steagall Act, for example—and political ineptitude led us down this road. The conversation almost descended into a shouting match about whether trading firms have a civic duty to provide a fair marketplace for one and all.

Panelist one: “We have a responsibility.”

Wall Street, as it always does, has done an outstanding job of filing down Dodd–Frank’s teeth—it’s now largely a tolerable and just piece of legislation.

Panelist two: “We also have 2,000 pages of Dodd–Frank, which we didn’t have in 2007.”

Panelist three: “Does that make us better?”

Dodd–Frank at Three
In my feature on page 30, Dodd-Frank Turns Three, I surveyed a wide swath of industry participants, asking whether the markets are better off with Dodd–Frank in place. The consensus was that it was too soon to tell, but it was a much-needed diversion to industry issues like transparency and market structure.

Before stepping off from his soap box, the original source had a number of choice parting shots: “What did we learn from 1994, 1998, 2001 and 2008? Are you going to do it again? As an old guy, I can see the exit off the stage. To the young people, learn from the mistakes we made because you’re going to see it again. When that bubble bursts, you’re going to be a lot higher up and there’s a lot further to fall. The splat will be resounding.”

Nonsense
While I respect the individual and appreciate what he has to say about the industry he’s covered for a number of decades, his final line is nonsense. One of the things we most definitely learned post-2008 is that the higher up you get, the safer you will be financially as you walk off into your retirement, thanks to those lovely golden parachutes. Sure, you may leave disgraced, with your reputation and legacy in tatters, but in all likelihood, there won’t be any jail time for you and there won’t be any need to apply for unemployment benefits.

The introduction of Dodd–Frank represents a necessary overhaul of the capital markets framework, even though it has created significant confusion for market participants. But Wall Street, as it always does, has done an outstanding job of filing down Dodd–Frank’s teeth—it’s now largely a tolerable and just piece of legislation, even if its numerous kinks still need to be worked out.

But make no mistake, there’s another reckoning around the corner. There always is. And the structure is still in place where the more power you gain, the softer your fall will be compared to mid-level employees trying to make a living as traders or as technology and operations workers. The supporting cast always fall the hardest.