Who Needs Wall Street?

By ROGER LOWENSTEIN
NYT

Mike Mayo is a veteran of six Wall Street banks. In the wake of the street’s disaster, he found refuge at a boutique brokerage and has lately taken to startling his peers with the question “What part of Goldman Sachs is good for the country?”

Regular people will be tempted to answer, “None of it,” but the question reminds us that, at least in theory, Wall Street serves society (not the other way around). And as opposed to Harrah’s, Trump Casino and their ilk, Wall Street is endorsed and regulated — with marked restraint — so as to let it perform an important task.

Because some people have savings and others need capital, some unifying force must bring the two together. Royalty once taxed its citizens and chartered corporations. Wall Street privatized this function, aggregating the savings of disparate individuals through the sale of stocks and bonds. Industry thus gained access to capital; what’s more, public markets performed a miracle of equivalence. Quotations on the stock exchange effectively calibrated, down to the penny, how many hours’ worth of wages would afford a share of General Motors.

Since the street stood at the intersection of capital and savings — or, if you will, of insiders and Main Street — the potential for conflict was rife. No firm better resisted the temptations than Goldman, which, from its founding in 1869 through recent decades, epitomized, with only rare slip-ups, the best of American finance. Serving the client was its lodestar, and its bankers were pillars of society, more conversant in literature than in the vagaries of, say, mortgage securities.

Wall Street’s emphasis began to change in the ’90s, as financiers devised new securities — the more incomprehensible, or so it seemed, the better. These instruments, in the main, did not involve selling bonds so that a DuPont could build new factories; they were rearrangements — new permutations, new alignments of risk — on flows of cash that already existed. Most famous was the trading that stemmed from complex derivatives (like mortgages) with only a remote connection to the underlying product. For all the trading in mortgage-backed securities, homeownership increased only a trivial amount.

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