No Comment — September 16, 2009, 10:00 am

One Year After the Meltdown, Wall Street Takes Some Lashings

In remarks delivered on Monday at the nation’s first capitol, New York’s Federal Hall, President Obama marked the first anniversary of the collapse of Lehman Brothers—an event that launched the meltdown of the nation’s financial sector in the last months of the Bush presidency.

Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we’re still recovering, they’re choosing to ignore those lessons. I’m convinced they do so not just at their own peril, but at our nation’s. So I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

For all of Obama’s language, however, it is hard to see much difference so far between the regulatory posture of his administration and that of his predecessor. In both cases, the prescription for Wall Street’s ills seems to come from the wizards of Wall Street—a group of economists, lawyers and bankers huddled around a group of core financial institutions and the Federal Reserve. Obama may talk a tough game, but the medicine he prescribes looks an awful lot like sugar water.

The day after Obama spoke, the denizens of Wall Street unfolded their papers to some unpleasant news. It came from Jed Rakoff, a federal judge in Manhattan, who disapproved a proposed settlement between the Securities and Exchange Commission, the Bank of America, and Merrill Lynch in a blistering 12-page opinion. Rakoff’s incisive words offer a careful guide to much of what ails Wall Street today. “Oscar Wilde once famously said that a cynic is someone ‘who knows the price of everything and the value of nothing.’ The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators… And all this is done at the expense, not only of the shareholders, but also of the truth.”

Rakoff, a highly respected student of Wall Street antics who teaches a seminar in securities law at Columbia Law School, had tough words for all the parties involved, starting with the SEC, which he said had failed in its most basic duties of oversight. The $33 million settlement that the SEC crafted “does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct.” Rakoff reviewed and dismissed the unconvincing arguments offered by SEC lawyers that the settlement would furnish a proper deterrent and would result in more prudent corporate management. “Absurd” was his well-chosen rejoinder.

In his opinion, Rakoff blew the lid off the unspoken conspiracy that drives the Wall Street world. The outer pockets of acceptable corporate conduct are constantly charted by lawyers who pass their careers between stints at the SEC, large corporate law firms, and key financial institutions. The heaviest remuneration in this process flows from the financial institutions themselves, and it rewards those lawyers who give corporate decision-makers the most freedom in calling their shots. Increasingly, this entire interplay has been about compensation—the nine-figure compensation packages for corporate executives, with their golden parachutes and bonus packages paid even in the event of gross mismanagement, the $750-dollar-an-hour rates of the corporate powerhouse attorneys who advise them. This golden regime of wealth generation is Wall Street’s precious and guarded secret.

The lawyers play a key role in this culture of irresponsibility, and Rakoff handed them some well-deserved lashes. When the bankers noted that they had simply relied on advice of their lawyers in issuing false statements—what is known as an “advice of counsel defense”—Rakoff responded: “If that is the case, why are the penalties not then sought from the lawyers?”

Rakoff’s opinion puts on paper the obvious but unstated truths that fill the cocktail and dinner party conversations of New York’s elite: regulators don’t regulate, and the financial industry calls its own shots.

For a deeper understanding of the problem, it’s worth investing some time in “Better Regulate Than Never,” by Eliot Spitzer in the current New Republic. Spitzer parses the collapse of the regulatory regime over the last decade—noting that it’s not that deregulation occurred in a formal sense, but rather that the regulatory institutions suddenly lost the appetite and will to perform their jobs.

Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players. Too many of our regulators have been tarnished by the culture of Washington, where the constant movement between government and the private sector has created a fear of disrupting the status quo. It is an environment where stringent enforcement–the very type we needed–jeopardizes future confirmations, alienates potential clients, and engenders social ire. This cozy world isn’t exactly corrupt. Rather, it perpetuates an insidious process of socializing the regulators and the regulated alike. Everyone emerges accepting a way of doing business that ultimately fails the public and the economy. Groupthink has prevailed, leading to an ideological conformity that forecloses challenges and alternative theories.

Effective regulation requires a more intellectually nimble regulator–a regulator that won’t be duped by all the cosmetic changes offered by firms. After all, trading vehicles will be renamed, leveraged assets will look slightly different, but the underlying issues that jeopardize the economy will remain the same: excess debt, leverage, and lack of integrity.

There may be no better demonstration of these forces than the settlement that Judge Rakoff sank. But another case worthy of more study involves former Governor Spitzer himself. When he began to chastise the Bush Administration over its failure to enforce restrictions on the financial markets, the regulators did not react by taking another look at the conduct he identified. Instead, they trained their guns on Eliot Spitzer, opening up a massive fishing expedition designed to embarrass him and drive him from office. And when the erstwhile “sheriff of Wall Street” had bagged Spitzer as his kill without ever bringing a high-profile regulatory case involving the financial sector, he retired, taking a $3-4 million per annum partnership at a major law firm that serves, unsurprisingly, precisely the corporate actors Spitzer was criticizing. This is the “cozy culture” of Wall Street that Jed Rakoff has just shaken up. About time.

Share
Single Page

More from Scott Horton:

Conversation August 5, 2016, 12:08 pm

Lincoln’s Party

Sidney Blumenthal on the origins of the Republican Party, the fallout from Clinton’s emails, and his new biography of Abraham Lincoln

Conversation March 30, 2016, 3:44 pm

Burn Pits

Joseph Hickman discusses his new book, The Burn Pits, which tells the story of thousands of U.S. soldiers who, after returning from Iraq and Afghanistan, have developed rare cancers and respiratory diseases.

Context, No Comment August 28, 2015, 12:16 pm

Beltway Secrecy

In five easy lessons

Get access to 169 years of
Harper’s for only $23.99

United States Canada

CATEGORIES

THE CURRENT ISSUE

February 2020

The Cancer Chair

= Subscribers only.
Sign in here.
Subscribe here.

The Birds

= Subscribers only.
Sign in here.
Subscribe here.

The Skinning Tree

= Subscribers only.
Sign in here.
Subscribe here.

The Interpretation of Dreams

= Subscribers only.
Sign in here.
Subscribe here.

Dearest Lizzie

= Subscribers only.
Sign in here.
Subscribe here.

Trumpism After Trump

= Subscribers only.
Sign in here.
Subscribe here.

“My Gang Is Jesus”

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Article
Trumpism After Trump·

= Subscribers only.
Sign in here.
Subscribe here.

The city was not beautiful; no one made that claim for it. At the height of summer, people in suits, shellacked by the sun, moved like harassed insects to avoid the concentrated light. There was a civil war–like fracture in America—the president had said so—but little of it showed in the capital. Everyone was polite and smooth in their exchanges. The corridor between Dupont Circle and Georgetown was like the dream of Yugoslav planners: long blocks of uniform earth-toned buildings that made the classical edifices of the Hill seem the residue of ancestors straining for pedigree. Bunting, starched and perfectly ruffled in red-white-and-blue fans, hung everywhere—from air conditioners, from gutters, from statues of dead revolutionaries. Coming from Berlin, where the manual laborers are white, I felt as though I was entering the heart of a caste civilization. Untouchables in hard hats drilled into sidewalks, carried pylons, and ate lunch from metal boxes, while waiters in restaurants complimented old respectable bobbing heads on how well they were progressing with their rib eyes and iceberg wedges.

I had come to Washington to witness either the birth of an ideology or what may turn out to be the passing of a kidney stone through the Republican Party. There was a new movement afoot: National Conservatives, they called themselves, and they were gathering here, at the Ritz-Carlton, at 22nd Street and M. Disparate tribes had posted up for the potlatch: reformacons, blood-and-soilers, curious liberal nationalists, “Austrians,” repentant neocons, evangelical Christians, corporate raiders, cattle ranchers, Silicon Valley dissidents, Buckleyites, Straussians, Orthodox Jews, Catholics, Mormons, Tories, dark-web spiders, tradcons, Lone Conservatives, Fed-Socs, Young Republicans, Reaganites in amber. Most straddled more than one category.

Article
The Cancer Chair·

= Subscribers only.
Sign in here.
Subscribe here.

The second-worst thing about cancer chairs is that they are attached to televisions. Someone somewhere is always at war with silence. It’s impossible to read, so I answer email, or watch some cop drama on my computer, or, if it seems unavoidable, explore the lives of my nurses. A trip to Cozumel with old girlfriends, a costume party with political overtones, an advanced degree on the internet: they’re all the same, these lives, which is to say that the nurses tell me nothing, perhaps because amid the din and pain it’s impossible to say anything of substance, or perhaps because they know that nothing is precisely what we both expect. It’s the very currency of the place. Perhaps they are being excruciatingly candid.

There is a cancer camaraderie I’ve never felt. That I find inimical, in fact. Along with the official optimism that percolates out of pamphlets, the milestone celebrations that seem aimed at children, the lemonade people squeeze out of their tumors. My stoniness has not always served me well. Among the cancer staff, there is special affection for the jocular sufferer, the one who makes light of lousy bowel movements and extols the spiritual tonic of neuropathy. And why not? Spend your waking life in hell, and you too might cherish the soul who’d learned to praise the flames. I can’t do it. I’m not chipper by nature, and just hearing the word cancer makes me feel like I’m wearing a welder’s mask.

Article
“My Gang Is Jesus”·

= Subscribers only.
Sign in here.
Subscribe here.

When Demétrio Martins was ready to preach, he pushed a joystick that angled the seat of his wheelchair forward, slowly lifting him to a standing position. Restraints held his body upright. His atrophied right arm lay on an armrest, and with his left hand, he put a microphone to his lips. “Proverbs, chapter fourteen, verse twelve,” he said. “ ‘There is a way which seems right to a man, but its end is . . .’ ”

The congregation finished: “ ‘Death.’ ”

The Assembly of God True Grapevine was little more than a fluorescent-lit room wedged between a bar and an empty lot in Jacaré, a poor neighborhood on Rio de Janeiro’s north side. A few dozen people sat in the rows of plastic lawn chairs that served as pews, while shuddering wall fans circulated hot air. The congregation was largely female; of the few men in attendance, most wore collared shirts and old leather shoes. Now and then, Martins veered from Portuguese into celestial tongues. People rose from their seats, thrust their hands into the air, and shouted, “Hallelujah!”

Article
The Birds·

= Subscribers only.
Sign in here.
Subscribe here.

On December 7, 2016, a drone departed from an Amazon warehouse in the United Kingdom, ascended to an altitude of four hundred feet, and flew to a nearby farm. There it glided down to the front lawn and released from its clutches a small box containing an Amazon streaming device and a bag of popcorn. This was the first successful flight of Prime Air, Amazon’s drone delivery program. If instituted as a regular service, it would slash the costs of “last-mile delivery,” the shortest and most expensive leg of a package’s journey from warehouse to doorstep. Drones don’t get into fender benders, don’t hit rush-hour traffic, and don’t need humans to accompany them, all of which, Amazon says, could enable it to offer thirty-minute delivery for up to 90 percent of domestic shipments while also reducing carbon emissions. After years of testing, Amazon wrote to the Federal Aviation Administration last summer to ask for permission to conduct limited commercial deliveries with its drones, attaching this diagram to show how the system would work. (Amazon insisted that we note that the diagram is not to scale.) Amazon is not the only company working toward such an automated future—­UPS, FedEx, Uber, and Google’s parent company, Alphabet, have similar programs—­but its plans offer the most detailed vision of what seems to be an impending reality, one in which parce­l-toting drones are a constant presence in the sky, doing much more than just delivering popcorn.

Article
The Skinning Tree·

= Subscribers only.
Sign in here.
Subscribe here.

Every year in Lusk, Wyoming, during the second week of July, locals gather to reenact a day in 1849 when members of a nearby band of Sioux are said to have skinned a white man alive. None of the actors are Native American. The white participants dress up like Indians and redden their skin with body paint made from iron ore.

The town prepares all year, and the performance, The Legend of Rawhide, has a cast and crew of hundreds, almost all local volunteers, including elementary school children. There are six generations of Rawhide actors in one family; three or four generations seems to be the average. The show is performed twice, on Friday and Saturday night.

The plot is based on an event that, as local legend has it, occurred fifteen miles south of Lusk, in Rawhide Buttes. It goes like this: Clyde Pickett is traveling with a wagon train to California. He tells the other Pioneers: “The only good Injun’s a dead Injun.” Clyde loves Kate Farley, and to impress her, he shoots the first Indian he sees, who happens to be an Indian Princess. The Indians approach the Pioneers and ask that the murderer give himself up. Clyde won’t admit he did it. The Indians attack the wagon train and, eventually, Clyde surrenders. The Indians tie Clyde to the Skinning Tree and flay him alive. Later, Kate retrieves her dead lover’s body and the wagon train continues west.

Cost of renting a giant panda from the Chinese government, per day:

$1,500

A recent earthquake in Chile was found to have shifted the city of Concepción ten feet to the west, shortened Earth’s days by 1.26 microseconds, and shifted the planet’s axis by nearly three inches.

A decorated veteran of the American wars in Vietnam and Iraq had his prosthetic limbs repossessed from his home in Mississippi when the VA declined to pay for them.

Subscribe to the Weekly Review newsletter. Don’t worry, we won’t sell your email address!

HARPER’S FINEST

Jesus Plus Nothing

= Subscribers only.
Sign in here.
Subscribe here.

By

At Ivanwald, men learn to be leaders by loving their leaders. “They’re so busy loving us,” a brother once explained to me, “but who’s loving them?” We were. The brothers each paid $400 per month for room and board, but we were also the caretakers of The Cedars, cleaning its gutters, mowing its lawns, whacking weeds and blowing leaves and sanding. And we were called to serve on Tuesday mornings, when The Cedars hosted a regular prayer breakfast typically presided over by Ed Meese, the former attorney general. Each week the breakfast brought together a rotating group of ambassadors, businessmen, and American politicians. Three of Ivanwald’s brothers also attended, wearing crisp shirts starched just for the occasion; one would sit at the table while the other two poured coffee. 

Subscribe Today