John Sakowicz writes,
There is no glory on Wall Street. There is only greed. There are no good guys or bad guys. There are only winners and losers. In fact, there are only guys like Steve Schwarzman and Pete Peterson. In 1984, Schwarzman and Peterson got crushed like a couple of grapes under the very chubby feet of a guy named Lew Glucksman. (Everything about Lew was chubby, not just his feet.) This happened at a place called Lehman Brothers, at that time a venerable Wall Street partnership. It was a classic power struggle, but no biggie in the whole scheme of things.
Schwarzman and Peterson bounced back quickly. In 1985, they started a new firm with a shared secretary and $400,000. Their new company was called the Blackstone Group, and it is the stuff of legend to say that fortune smiled on them. Schwarzman and Peterson are now two of the richest men in the world. Since 1985, they’ve done over $400 billion in deals. They are arguably the leading global alternative-asset managers in the world. What’s more, they invented an entirely new financial world while they did it. Problem is, we have to live in it.
Problem is, there are lots of problems on Wall Street. For starters, we’ve seen the consolidation of power and the concentration of both capital and revenue in fewer and fewer hands. The few institutions left on Wall Street—and there about 10—are now like superstores or warehouses. And the story of how they came to dominate Wall Street is very much like the story of how Costco or Sam’s Club came to push mom and pop retailers off the map. I would know. I started my career at Alex Brown & Sons, the oldest investment bank in the country, established in 1800. A guy named A. B. “Buzzy” Krongard hired me. (Buzzy later turned out to be the No. 3 guy in the CIA.) Alas, in the decade of the 1990s, the proud people at Alex Brown got swallowed up by Bankers Trust, which in turn got swallowed up by Deutsche Bank. I also worked for Colonial Management Associates, which got swallowed up by Columbia Management Group, which got swallowed up by FleetBoston, which got swallowed up by Bank of America.
I worked on the floor of the NYSE for Spear, Leeds & Kellogg, which was swallowed up by Goldman Sachs. I worked for Dean Witter, which got swallowed up by Morgan Stanley. None of the firms I worked for were small companies, what we on Wall Street quaintly call “boutiques.” I worked for big companies. Yet they’ve all been swallowed. All of them. Now, the 10 or so institutions that dominate Wall Street are monopolies. We’ve also seen the reinvention of these very same companies on Wall Street. There is now no difference between a commercial bank and an investment bank, no difference between a lender and an adviser. There is now only the monolithic Merrill Lynch or the monolithic Citigroup. Capital is concentrated in these few firms. Naturally, so are revenues. But risk, too, is concentrated. This is a big problem. Because if every deal has got to be bigger and bigger to earn fatter and fatter rewards, then these few institutions must assume greater and greater risk. And risk management is what making money is all about.
The Glass-Steagall Act, enacted during the Great Depression to prevent another stock market crash by separating commercial banking from investment banking, was repealed in 1999. In today’s lineup of traders, deal makers, underwriters, lenders, advisers, market makers, portfolio managers, brokers and others, it is impossible to point to the chief suspect in the defrauding of America that is now being commonly called the “subprime crisis.” The traditional institutions of commercial banks and investment banks have given way to a new set called hedge funds, private equity funds, and other alternative asset managers. Emphasis on “alternative.” Schwarzman and Peterson saw the trend; this was their genius. But there is little to no regulation of alternative-asset managers.
Which brings us to the next problem: There is little to no regulation of the alternative assets that these alternative-asset managers dream up and manage. A lot of this stuff is debt—debt that is diced, spliced, altered, reheated, topped off with nuts, whipped cream and a cherry and then packaged and repackaged to the American investor. This debt is sold not directly to the little guy, the retail investor—you and me—but to the institutional investor who is presumably acting on our behalf through pension funds, insurance companies, mutual funds, endowments and others.
In the parlance of Wall Street, this debt is “securitized.” Call this debt by any name, but don’t call it secure. The popular names for this debt are collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs), first widely heard last summer when the subprime market was blowing up. These CMOs and CDOs are spread across the spectrum of risk. Some are senior debt. Some are subordinated debt. Some are OK. The rest are junk. Junk as in subprime junk.
Guess who owns that debt now? You do. Through your pension plans, insurance policies, mutual funds, university and hospital endowments—you do, we do, I do. More
Sphere: Related ContentTags: advisers, brokers, CDO's, CMOs, Collateralized Debt Obligations, collateralized mortgage obligations, deal makers, hospital endowments, insurance policies, lenders, market makers, mutual funds, pension plans, portfolio managers, traders, underwriters, university
