Wall Street made this mess. Wall Street must pay for it

Am I the only investor sick of hearing financial industry insiders bleating that the US Federal Reserve must do more to ease their pain? Am I the only stock market investor who would like to see the world’s major indices fall hard to purge and punish the companies – and policies – that set the stage for the credit crunch?

Apologies to my regular readers for what really will sound like a rant. But responsible investing for the long-term by implication means taking an interest in – and having faith that – the market system will not destroy itself during your lifetime through greed and incompetence.

This current debacle is the most serious threat to Western capitalism since the Berlin Wall came down. So please, let me explain why I’m angry.

From sub-prime fiasco to prime-time TV

Watching financial television can seriously damage your wealth. With all the flashing lights, scrolling stock price tickers, and 50-word-to-the-dozen motormouth presenters, it’s hard for a viewer to just sit there and Do Nothing.

As a vaccination against the wiles of financial TV, I like to remember that Warren Buffett, the world’s richest man, lives in Omaha – a US city in the State of Nebraska that’s so out of the way it probably hasn’t yet been hooked up to cable. And while Buffett clearly isn’t the dear doddering granddad he likes to pretend to be, he certainly didn’t get where he is by Selling Stocks and Investing In Commodities Now But Being Prepared To Pull Back Into Mutuals By Half Past Two Next Wednesday Afternoon If The Dow Falls By A Gnat’s Whisker, as per the typical 15-minute financial television bulletin.

If you treat financial television like you’d treat a comic book, it’s pretty entertaining…

Indeed, as a further precaution against the potentially impoverishing affects of CNBC and Bloomberg’s bias to action, I only ever watch financial television before work, whilst I’m half-asleep and eating a comforting bowl of porridge, and preferably wearing furry slippers. I like to feel as dozy as possible. I’d take sedatives if I didn’t have to operate a vehicle.

If you treat financial television like you’d treat a comic book, it’s pretty entertaining. In recent months though, my contentment has too often turned to rage, thanks to the ceaseless procession of bankers, analysts, financial CEOs and other special interest groups for Wall Street and the City of London lining up to explain that the taxpayer, via the Central Banks, must continue to bail them out of the mess they collectively have gotten us into.

Jim Cramer’s infamous rant on CNBC from last year is still perhaps the most pure expression of what’s secretly going on behind these bankers’ bland exteriors. Seven months on, we now see three things:

1. Cramer was right. The financial situation was much worse than the consensus believed. In the UK, we’ve even seen the FTSE 100 bank Northern Rock (eventually) nationalised as a result of the credit crunch.
2. Even in hindsight Cramer doesn’t seem at all concerned about unemployment, stability, mortgages or long-term savers. He seems to me most concerned that his buddies in hedge fund land keep their snouts in the trough whatever the weather.
3. A combination of (1) and (2) has set the tone for much of the discussion ever since.

Oh, of course the bankers are cunning; there’s a reason that Cramer is on TV these days, not fronting up an investment bank. Real bankers like to affect the air of a kindly old institutional uncle in public, now that the wheels have come off their behind-the-scenes testosterone-fueled machinations.

“Dear me yes, the credit crunch is now hitting Main Street,” the bankers tag on to the end of their pleading, pointing to the US sub-prime mess that their own incompetence, in conjunction with an era of unrealistically low interest rates, directly caused. “You really need to make us an offer we can’t refuse, or else your daughter might get a visit from the bailiffs,” they add.

“Cut interest rates!” they cry. “Please make the pain go away!”

Or they say, “The US is being held hostage by foreign sovereign wealth funds”, not bothering to mention that countries like China and India can afford to splash the cash over here not just because of their booming economies, but also because their citizens have a culture of saving, rather than the spendthrift mentality that our financial services have nurtured and grown fat on in the West.

And do we see investment banks, mortgage issuers, hedge funds and the rest on CNBC making a case for tighter regulation over financial services? Of course not. “Cut interest rates!” they cry. “Please make the pain go away!”

What about the workers?

The irony is, of course, that financiers’ special interest demands are made despite the savage way that markets respond to, say, industrial hardship or trade union wage bargaining.

While the UK was running down its industrial heartlands in the North and Wales (rightly, in my view), the City was amok with chortling fat cats laughing off the hardship such destructive capitalism inevitably caused. “No Pain, No Gain!” could have been their motto. Anyone who buys shares and has seen the markets’ invariably positive response to a company slashing its workforce or outsourcing its manufacturing will know what I’m talking about.

That’s fine, that’s capitalism, only where are the newspaper headlines telling us that the financial companies are now shedding 50% of their staff as a result of the credit crunch? Nowhere, just the vague threat on page five that Things Will Get Worse.

Sure, bank share prices have been plummeting, but dividends have kept rising; as an investor in banks that obviously pleases me, but as a citizen I want to see the wilder adventures of these companies reigned it.

Yes, the horse has bolted, but that’s no reason not to muck out the stables.

Admit it: They earn too much money

Of course, profits will fall. And with luck those insane salaries will, too. The disproportionate amount of top university talent that Wall Street, London and the other major financial capitals suck in is a disgrace.

This view is always dismissed as motivated purely by envy, but I think it’s perfectly justifiable. We spend billions training our brightest in science, engineering and the arts, only to see them totter off to get rockstar salaries by simply shuffling money about in increasingly arcane and lucrative ways.

Why are bankers now rewarded as handsomely as our best entrepreneurs?

Be under no illusion – that’s essentially what they’re doing. I understand that banks and investment houses are the ultimate providers of liquidity to the capitalist system, but people have won Noble prizes proving the limits of any individual player’s influence. So why are they rewarded as handsomely as our best entrepreneurs?

Morever, it’s a zero sum game. If one bunch of bright young Cambridge graduates turned hedge fund managers win billions from their peers over the road, nobody except themselves and their company’s shareholders are made wealthier. In the meantime, the cancer they might have been curing or the carbon-friendly engines they might have developed or even the poetry they could have written is lost forever.

In the old days – up until the late 1970s – a job in Britain in finance was the traditional career backwater for sociable but rather slow chaps of moderately wealthy parents, probably privately educated, certainly not expected to otherwise go into brain surgery. What’s changed to justify a new aristocracy to arise unchallenged?

Yes, the financial game has become vastly more complex, but I’d argue that’s a symptom not a cause of all the rocket scientists that finance has been sucking in. Faced with a zero sum game and an opportunity to make fortunes at almost every turn, they’ve looked to play the system just as avidly as the most cunning welfare cheat or tax avoider. Mega-salaries allied with overly-lax regulation has been a recipe for gamesmanship on an awesome scale.

As for the defense that “it’s all risk versus reward: they’ve no job security”, don’t even start with that. For example, the generation of new graduates who entered finance when the dotcom bust caused some constipation in the sector were given (sometimes paid) sabbaticals by their employers, which they used to travel the world. Those who wanted to return were back in their seats in 18 months.

I’ve yet to meet anyone made poor by a decision to work in the city. Ask a miner, a farmer, an estate agent or a secretary if you want to know about job security, not a city whiz kid. For all he worries about it, he probably thinks Job Securities are something they trade in Chicago.

Bonus insecurity, well that’s another matter. And it’s hardly a case for the defense.

We can’t get even, but we can get angry

This rant – and I can’t claim it’s anything but that – will strike financial insiders as hopelessly naive. That’s partly because they’re too close to their creation. They genuinely believe their own nonsense.

But equally, it’s because they’re right. I am over-simplifying the situation because I am angry.

• I’m angry that incredibly clever people who might have been solving real problems in the real world instead spent time devising murky financial instruments that led to the cynical selling of mortgages to poor people who should never have been offered them. And that they then gift-wrapped the resulting financial poison in tissue paper and passed it on to other institutions around the world.

• I’m angry that the Fed will almost certainly keep cutting interest rates back down towards around 1% because it has no choice but to do so to ward off even greater turmoil caused by this upscale skull-duggery.

• I’m angry that the Wall Street CEOs who have fallen on their swords have nevertheless had the blow softened by disgracefully vast multi-million dollar fortunes that completely insulate them from their company’s dangerous decisions and the consequences.

• I’m also angry that capitalism, which I believe is the best system we’ve got for growing prosperity, must seemingly go hand-in-hand with being held hostage to a termite-like financial sector that ceaselessly looks to make a fast buck before adding value, and that remains so loftily disdainful of any suggestion that it might be required to take its own medicine.

I’m an investor, and I’m a capitalist. I fully believe citizens should be rewarded for risk-taking, for building real wealth creating enterprises, and for reasonably deferring consumption today by saving and investing for a greater reward tomorrow.

I accept that means we need independent profit-motivated banks to raise money, and to take risks and be (reasonably) rewarded for distributing it through the system.

But I don’t believe that requirement entitles financial institutions to be a breed apart, both for moral reasons, and because the last thing the world needs is another Great Depression caused by recent feckless high-rollers.

Let’s hope the good times really are over for such David Copperfield banking. Stripping away the glamour that’s been awarded to them in recent decades, banks simply provide the plumbing that makes the capitalist world go around. Excuse my French, but it’s high time they realised their shit smells too.

Update: US Treasury Secretary (and ex-investment banker) Henry Paulson has promised to overhaul the mortgage securities market, and to strip out some of the complexity. It’s a start.

Update 2: Yes, I’m aware that companies like Bear Stearns, right now being bailed out by the Fed and JP Morgan, will ultimately pay a price in terms of ownership for their exposure. But unless burned shareholders have good memories and regulators are able to enact an appropriate price – tighter regulation and less unrestrained profiteering from the banks – we’ll be here again in a decade.