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Wall Street Needs A History Lesson

I’m always amazed how little Wall Street ever learns from the past.

That goes for its regulators and media followers, too.

Take JPMorgan Chase.

The bank lost $2 billion (and stands to lose more) on bad bets on “credit derivatives.”

You’d have thought that, after the Fed and Treasury had to rescue us from these toxic instruments in 2008, caution would be in order.

Apparently not for Chase.

When I started practicing law in 1971 (OK, I’m being an old codger), credit default swaps and like esoterica were illegal under federal and state laws.

These were enacted, in part, because of customer losses in old-time “bucket shops” — betting parlors masquerading as stock and commodities trading firms.

But people forgot.

Deregulation came along, and these laws were gutted.

This allowed mega-institutional bucket shops to develop, placing not only individual customers but the entire world at risk.

Or consider Facebook, whose stock imploded rather than popped when it went public.

The consensus is that there was too much media and marketplace hype.

Again, when I started out, legal constraints and journalistic norms were in place to curb touting of IPOs and prevent the abuses experienced in pre-New Deal days.

For example, I worked on the 1986 Microsoft IPO, representing the underwriters.

We let reporters from Fortune magazine follow us around, researching a cover story about Bill Gates’ $350 million payday (imagine that!).

But to comply with regulations then limiting publicity about new issues, we asked Fortune to hold the story for 90 days after pricing. It agreed.

Enter financial “reform” and “liberalization,” which considerably relaxed those publicity rules (even after the dotcom fiasco).

Add to the mix Internet bloggers and cable news talking heads who aren’t about to regulate themselves.

The result: Facebook.

Collective faulty memory at work again.

Which brings me to my favorite topic: endless “quantitative easing.”

Central bank money-printing seems to be Wall Street’s panacea for most ills, from shaky European debt to a simple decline in stock prices.

And the powers-that-be “accommodate” Wall Street’s wishes.

Few reflect seriously on the stagflation-plagued 1970s, when too many dollars chased too few goods and services.

I can understand this. It got ugly.

But it’s about time we took a history lesson and put the financial genies back in their bottles.

Unfortunately, with Dodd-Frank implementation bogged down, and the current congressional and regulatory environments, there seems little hope of that.

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  1. Desert Diva said:
    on May 24th at 11:09 am

    Great article.
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