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These Three Men Represent Everything That’s Wrong with Wall Street

9 | By Shah Gilani

I’ve already expressed my desire to embrace the Occupy Wall Street movement.

I said last week that I would join in wholeheartedly if I knew exactly what the protesters were trying to achieve.

But I don’t know – and I’m not convinced they do, either.

Still, that doesn’t mean we should dismiss them entirely. After all, there are millions of Americans who sense there’s something terribly wrong with our capitalist system, but they can’t pinpoint exactly what it is either.

But I can.

Bad actors have done bad things to good institutions and our capitalist system. Today, I’m going to let you in on who three of those bad actors are.

You see, part of the problem is that when we think of the “bad guys” on Wall Street, or in Washington for that matter, we don’t often think of specific people. We talk about “them” as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.

I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they’re using to get away with it.

So, I’m going to start today with three of the biggest perpetrators of the mess we’re in.

The Three Bears

There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are:

  • Robert Rubin, who spent 26 years at Goldman Sachs Group Inc. (NYSE: GS), before becoming Treasury Secretary in the Clinton administration.
  • Lawrence Summers, who came out of the World Bank and was Deputy Secretary of the Treasury under his pal Rubin before becoming Treasury Secretary himself in 1999.
  • And Phil Gramm, once a practicing economist who served as a Republican Senator for Texas from 1985 to 2002.

These are the men who – with help of then-Federal Reserve Chairman Alan Greenspan – interfered with the Commodities and Futures Trading Commission (CFTC), an important regulatory body, to squash any regulation of derivatives.

And now the notoriously murky derivatives market, which was hugely responsible for the 2008 financial crisis, has grown into a $600 trillion trouble spot for the economy.

This group of very influential and powerful men made sure there was no oversight of derivatives products and markets. None.

While that was an incredible gift to Wall Street’s biggest banks and hedge funds, the Three Bears (I call them that because their actions drove us into the systemic economic bear market from which we’re still struggling to emerge) weren’t nearly done.

The Beginning of the End

On April 6, 1998 Citicorp and Travelers Group announced that they would merge into a single company.

But there was a problem.

At the time, such a merger would have violated the Glass Steagall Act. If you’re not familiar with it, the Glass Steagall Act is – or rather was – a piece of Depression-era legislation that established the Federal Deposit Insurance Corp. (FDIC) and mandated the separation of commercial banks, investment banks, and insurance companies. It incorporated other practical and prudent regulations enacted to safeguard investors and the public , as well.

But , lessons learned from the Depression were eventually forgotten – or maybe more precisely, steamrolled by a sweeping deregulatory movement that took root in 1980.

On the day of the announced combination, Traveler’s chairman, Sandy Weill, addressed impediments to the merger in the New York Times, noting that current law would allow the new Citigroup Inc. (NYSE: C) time to divest itself of assets in order to comply with Glass-Steagall.

However, ominously he added: “We are hopeful that over time the legislation will change.”

Just one year later, it did.

The same powerful group of influence-peddling government insiders overturned Glass-Steagall in November 1999, so the illegal merger didn’t have to be reversed. The law that obliterated the prudent separation of FDIC-backed commercial banks and swing-for-the-fences investment banks became known as the Gramm-Leach-Bliley Act.

This act is what paved the way for giant, financial super firms that are so intertwined in the financial markets they’re now all considered “too-big-to-fail.”

An Eerie Epilogue

So what happened to our three players? Were they penalized or held accountable for the undermining of our economy and the implosion of markets? No. They were rewarded.

Robert Rubin went to work for the new Citigroup as a senior adviser of the firm. Rubin made $126 million in cash and stock during his eight years of service, while the bank leveraged itself up by using depositor money. It had to be bailed out in 2008.

Lawrence Summers reportedly took some $20 million from D.E. Shaw & Co., a giant hedge fund that dabbles in derivatives, for a two-year stint doing something nobody at the firm could confirm.

And Phil Gramm, the venerable Texas senator, upon retiring from that powerful position, immediately became vice chairman of the investment bank division of UBS AG (NYSE: UBS).

Yes, UBS – the same Swiss bank that in 2008 had to be backstopped by the Swiss National Bank when its overleveraged and derivatives-laden balance sheet imploded. The same bank that later paid $780 million to settle criminal charges over its conspiracy to defraud the Internal Revenue Service (IRS) and federal government of legitimately owed taxes.

These are the kinds of things that are taking place every day thanks to Wall Street’s influence over our executive and legislative branches of government. And you better believe that average Americans and the Occupy Wall Street protestors can sense that, and they know they should be angry. They just can’t put their finger on why.

I can because I’m a Wall Street guy who spent 30 years working within the system. I studied economics and started my career as a trader on the floor of the Chicago Board of Options Exchange (CBOE). I ran the futures and options division of a giant international money-center bank.

I’ve done everything from trading bonds and mortgage-backed securities to running my own hedge funds. And I have hundreds of stories full of corruption and greed – just like this one.

Not everyone on Wall Street is a bad actor. Most of the professionals working in the capital markets across America are good and honest people. But, there are kingpins and kingmakers whose greed is so disgusting they will sink America for their own fistful of dollars.

It’s time we had better insights into what’s really going on and time to indict some of these bad actors.

Shah

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9 Responses to These Three Men Represent Everything That’s Wrong with Wall Street

  1. Tex says:

    Shah,

    Thank you for your insight. You are among a small group of Wall St. insiders that I still listen to. I lost a lot of money in 08 because I foolishly trusted the system. No longer! I took that experience and internalized it. I decided to do what I had wanted to do all my life and that was to learn how to use the markets rather than the other way around. As a result, I learned how to trade them all and I am determined to show as many people as will listen how to do the same. But to the larger problem of corruption and crime, only those who are paying attention can begin to grasp the sheer scale of it. $600 trillion utterly defies comprehension and can easily bring down the world economy when it unwinds. It will take many like you coming forth, naming names and shining light on the rats that infest the Street before we can begin moving in a new direction. However, the role of reformer is a lonely one and it won’t win you any friends among the elite progressives in both parties who’ve engineered this new feudalism. America is at another crossroads with some very dark days ahead. Aided by the enormous political corruption in D.C., the lords of Wall St. will do everything in their power to preserve their plunder, pull up the drawbridges and burn Main Street in the hopes that the peasants starve before they can really threaten the System. On top of that, it appears that the radical left will try to co-opt the Occupy movement to establish yet another hellish Marxist utopia in the ashes of the former world order. At least for now, I’m still willing to give the movement some benefit of the doubt but their time for confusion is closing. We need to know who they are. They would do well to establish links to you and others willing to take a stand. Please keep up the good work! We need more like you.

  2. Wayne Martin says:

    Dear Mr. Gilani, I would not place Alan Greenspan in the article as an afterthought. He should be considered the fourth bear.
    The man had done more damage to America than any Fed Chairman in memory. Paul Volker managed the economy through the FED under Ronald Reagan expertly and kept inflation very low (4.5%). But the “Deficits Don’t Matter” President didn’t like Volker’s conservatism. Reagan believed in NO government regulations of any kind, and making sure that the wealthy became wealthier. His defense spending was larger than at any time after WWll. His unemployment numbers were as low as where they were because of defense spending and hiring 50,000 federal employees every year he was in office.
    Reagan’s “no regulations” mantra played a major role in the financial dilemma America is presently in!

  3. Warren C Massey says:

    Sir:
    As a retired Navy man and with a small portfolio and a deep love of country I have been racking my brain as to how our country could have gotten into such a mess and by whom. I am not well educated and have been wandering just where all this money has gone. If these persons stand a chance to be indited I am all for it or hung as required please advise. Thank you.

  4. Bruce Rae says:

    Dear Shah Gilani

    Given the litigious nature of US society, I’m a little surprised that you’ve written so frankly about the three men who helped to change the financial legislation in the US for the worse. However, it does seem from a lay person’s point of view, that you’ve simply stated the facts, so why not write a book about the real issues, or have you already? The Occupy Wall Street protesters, and most of us in the rest of the world, lack the knowledge to pinpoint the practical issues, and this ignorance also seems to be shared by many of the world’s economists.

    Democracy and capitalism can work just fine with some controls limiting financial lotteries and promoting productive investment, but my impression is that recent US financial legislation just created a new VIP lounge in the stock-market casino. In New Zealand, the distortion of wealth has resulted from the fact that most tax income derives from salaries, wages and the sales of goods and services (GST). So companies and rich individuals can buy and sell assets (mostly property) for capital gains and incur little taxation. Until recently, they could also claim most of their expenditure in “developing” properties for tax deductions.

    I know there are lots of issues around transparency in the Chinese economy because I’ve traded with the Chinese and visited the Asian countries several times over the last 12 years. Their system of communistic capitalism is obviously flawed in some ways, but they have definitely directed capital investment towards the production of goods and services, and more recently research and development as much as possible.

    Once, I used to find that American small to medium-sized businesses were the most responsive and fastest at getting anything done in the world (although I’ve only dealt with a few, including top publishing companies); but now it’s the Chinese who seem more driven to perform. In my limited experience, I’m not sure what has made US companies less proactive, but the mismanagement of the economy and financial markets must have had some negative effects on the confidence and motivation of those people investing and working in the productive and service sectors.

    Of course,in spite of all the macro issues, protests, and proposed financial legislation that exist around the world, I still expect to see another run-up in the US markets because the trading banks and fund managers will remain in control for some time yet. Like most of us, they are habitual in their behaviour but, unlike most of us, they seem to want to make a lot more money than anyone else.

    It is interesting, but a current spell of unemployment and living off capital, has made me really question what attributes and skills I have that can add value to businesses and the local economy. The experience
    is definitely a reality check and has been just as challenging as trading in any markets. Unfortunately, I find myself thinking that much of the work of financial managers rates down there with that
    of many bureaucrats in the public service. The work is administrative and largely self-serving because it doesn’t add much value to the productive and service sectors.

    Anyway, thanks for enlightening me a little more.

    Cheers!
    Bruce Rae
    New Zealand

  5. Tom Stiebler says:

    Shah – Excellent comments as always. Another key piece of the financial follies was the passage of legislation allowing AIG to sell credit default swaps. In essence this allowed selling insurance with no reserves required. I can’t imagine anyone being stupid enough to believe that was a good idea. Therefore I am inclined to believe it was a thoroughly corrupt process that allowed it to become enacted.

  6. Fakhri Shamsodien says:

    Every game must have rules and referees to implement the rules and the same goes for business and government if no rules or lax refereeing then mayhem will follow at some future date

  7. Tim says:

    Shah, again thank you for your insight. Please write more so we on Main Street can learn more on what happened in the last 20+ years. I obviously will have a harder time watching Larry Summers speak from here on out. I have lost all respect for a Phil Gramm who on the surface showed that he was concerned for the country. Apparently, he was more concerned about his own pockets. I don’t completely disagree with the Occupy Wall Street protests, but those on the ground don’t realize that their efforts may turn out to be fairly unfruitful. Why? You just mentioned 3 men who should be indicted in this whole mess. There are so many other players from this fall-out that it would take years of investigation and tax payer dollars to determine who else should come under fire. I believe America should not only be voting
    on the next President in 2012, but I also feel we should vote on whether or not we should spend those tax payer dollars on going after those who took us down this path. It would not be pretty and we would all be embarrassed in the end. What door do we want to open to find out the truth. We definately won’t like what we see behind any of them.

  8. nmi44 says:

    Shah, thank you for getting a much needed conversation started. I have been talking this issue for quite some time even before the crash of ’08 (albiet a lot of talk has arisen that there was not a crash in ’08, only a correction because it did not fulfill all of the required indicators and that the following months did not constitute a depression, but only a correction) The CRUX of the matter IS NOT about whom we can put a RED LETTER around their neck, but rather how we can regulate to prevent this from happening in the future. What checks need to be in place to monitor and prevent infraction? Do we not have institutions who can penalize those individuals who have literally stolen millions from small investors and pension funds because those same individuals mishandled fiduciary funds sometimes intentionally for their own profit and sometimes mistakeningly as their stupidity fostered a subservient mentality to the loudest con artist?

    Let’s focus on prevention, now, and fix the system. Then, we can focus on bringing those individuals to bear in the Federal legal system. Regulation should exst on what percentage a CEO, CFO, any top executive, can take as an annual salary from the profits of a publicly owned enterprise. If a business is privately owned, the top executes are usually owners and have a strong vested interest in longevity; therefore there is no need for regulation in the private sector of this sort. Owners of a private business have no fiduciary responsibility to a general public, they have a responsibillity and accountablility to private investors which is a much more transparent relationship. Mamy investors of puclic corporations do not understand the processes, accountability and responsibilities of the persons who ultimately control the investors capital and rely solely on their brokers or bankers to make their investments. These investors are vulnerable to those who use their money or those executives who take a larger proportion of the profits for a salary instead of raising the value of the stock or distributing as a larger dividend or returning to the company for growth or diminishing company debt. There should be limits that are regulated.

  9. Wayne says:

    Excellent article and I applaud you for being willing to speak out against Wall Street and the big banks. The financial crisis of 2007 was a direct result of deregulation of banks by a Congress that was controlled by those same banks. Congress (and the laws enacted by Congress) should protect the “real” people of America instead of allowing the financial institutions to rape the public in their quest for profits. And rape the public is just exactly what they did.

    The really sad thing is that four years later Congress has done nothing to restore the safeguards that would prevent this from happening again. In fact, they have allowed the “Too Big To Fail” banks to get bigger and avoid or circumvent regulations that protect the public. But what would you expect from a Congress that is “bought and paid for” by Wall Street and big banks.

    There are lots of books that deal with the decline of the economy and the rise of the of influence of Wall Street and big banks in the decisions made in Washington. Three that I recommend are: Winner Take All Politics: How Washington Made The Rich Richer And Turned It’s Back On The Middle Class by Jacob Hacker and Paul Pierson, Throw Them All Out by Peter Schweizer, and Greedy Bastards by Dylan Ratigan. Enlightening reading for every voter.

    Nobody seems to have a real solution for the mess that the collusion of the Congress and the big banks have caused. No matter who is elected President in the upcoming election nothing will change if we (the voter) cannot take back our representation in Congress. And the only way we can do that is to resolve to vote every incumbent Congressperson out when they come up for reelection. When they realize that we (the voter) are not going to stand for a Congress that has continually failed to represent the interest of the “real” people of the U.S., they will decide that they need to reevaluate who they were really elected to represent.It won’t happen overnight, but with diligence it will happen.

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