It’s been four years since Lehman fell and everything went into the shitter. Here’s a sharp take from a former Goldman VP who’s working at the think tank Demos:
Unfortunately, the disease lingers on even as the symptoms are treated. Thirty five years of deregulated free-for-all trading has changed the way we all think about the system. There was a time, before the Reagan administration commenced the dismantlement of the New Deal (including financial regulation), when investment was primarily about the fundamental value of shares of stock and corporate and municipal bonds. Investors acquired with a view to hold their investments long enough to realize this fundamental value. But the investing public is now enthralled by the mythic trader, able to spin gold from straw using only his sharp wits. Investment is largely accomplished through pooled vehicles like pension funds and mutual funds. These funds, more and more, resemble hedge funds, and the fund managers are compensated accordingly. The quest is a search for “alpha” returns that exceed the markets. Investment in a sound company or a plain vanilla municipal bond seems so very boring when the opportunity to grab a fraction of the limitless wealth of the Wall Street trader is on offer. The problem is that alpha is unachievable, except by happenstance, as study after study demonstrates.
Make no mistake, Wall Street likes this investor infatuation with alpha. Every confidence man knows that the perfect mark is someone who is intent on getting an advantage over the common “Joe.” The pooled funds are increasingly investing in the market, not in projects or companies. They act as if the markets somehow work fairly and predictably so that they can execute some tailored strategy devised by their fund managers that secures healthy returns with minimal risk. After decades of indoctrination, they have yet to shake the ideas espoused by Ayn Rand and the Efficient Markets Hypothesis perpetrated on the world by the University of Chicago.
The latest in the banking world is that JP Morgan Chase is under investigation for weak money laundering controls.