Will Wall Street’s history repeat itself?

05/13/2010 12:00 AM |

The U.S. Senate is now considering financial reforms that might protect us from another meltdown like the one we’re still struggling through. The hearings began right after the Securities and Exchange Commission filed suit alleging fraud by Goldman Sachs, one of the biggest players on Wall Street. The suit itself is an eye-opener. Moralistic phrases come to me like “callous disregard,” but they’re tame in comparison to the real thing. Are these Wall Street guys for real?

Well, yes, and they didn’t appear overnight. A friend of mine worked for the House banking committee in the ’60s and, later, in the ’70s and early ’80s, for the Congressional Budget Office. Even back then, she was a longtime Federal Reserve watcher who carried its institutional memory. She once commented that her colleagues in the financial world, the young men she worked with, had never experienced a depression and didn’t believe such a thing could happen again.

Even financial innocents like me knew better. My generation grew up hearing about the crash of 1929, about stocks valued for more money than the buyer actually had, and, in whispers, of this or that man who lost all his wife’s money “playing the market.” We heard a lot about people who bet everything on winning the brass ring, and the tragedies that ensued. My father used to say, “No man ever committed suicide with a sweepstakes ticket in his pocket.” It reflects the life-or-death stakes in 1929 — and also the fact that in those days skyscraper windows were not sealed and suicides took place right on The Street. Those of us who grew up in the 1930s heard about it over and over again.

Fast-forward to a more recent example of the mind-set my friend was talking about in the ’70s: President George W. Bush’s proposal to privatize Social Security. It was clear that young sophisticates thought they could do much better with their resources than Social Security. “Let us loose and we’ll do a better job” was the idea, and many other people subscribed to it, too, lured by the idea of having their own Social Security money and thinking it would be easy to manage.

Personally I found this a scary idea. I couldn’t imagine that I, with so many other things on my plate, could also manage the role of serious investor; I knew it wasn’t my calling. As the complexities of the market and the advantages professional traders have become clearer in various Congressional hearings, I often think, Aren’t we lucky that Social Security did not become privatized? It was a near miss.

Reading some Goldman Sachs details in the government’s lawsuit and considering the traders’ duplicitous presentations, I’m grateful my welfare never depended on them. And by the way, the Goldman vice president who had the neat idea of putting together and selling derivatives that were bound to fail was in his mid-20s. It’s not that older people were born wiser, but that they’ve been around longer and are seeing these things for the second time rather than the first.

Some provisions being considered for the financial reform bill offer hope for change, such as limiting the size and amount of debt an investment bank can carry and banning such a bank’s trading on its own account or acting in any way that creates a conflict of interest (such as betting against the derivatives it is selling). But a great deal of money is being spent to influence this legislation. Will the people’s representatives have the courage to resist the huge financial incentives now in play?

Pay attention. We’re likely to be living with the answer to that question for some time to come.

Ms. Amussen, of Greenport, is a freelance writer and a copy editor at Times/Review Newspapers. E-mail: damussen@timesreview.com.