[This is the second half of my review of Dave Kansas's The Wall Street Journal Guide to The End of Wall Street as We Know It. If you haven't already, you might want to read part 1 first.]
According to Kansas, in September of 2008 the Bernanke-Geithner-Paulson troika thought that a government rescue of Lehman was unnecessary. “They felt some confidence that they could let Lehman Brothers fail without causing too much of a wider crisis.” If true, this will go down as one of the greatest misjudgments in financial history and suggests a shocking lack of understanding of markets by those supposed to regulate them. But Kansas may be scapegoating the troika for a more systemic problem. Regulators worked hard for weeks to avoid a Lehman failure. But they did so without a clear legal mandate and without any kind of formalized fund to draw on. When the Fed convened what turned out to be a weekend-long meeting of Wall Street’s leadership before the terrible Monday, Geithner kicked it off by announcing that “There is no political will for a Federal bailout.” In other words, elected officials in Washington, afraid of a backlash from voters, would not acquiesce to a bailout and without them the regulators were powerless.
The horrible week that followed Lehman’s death was eventful. Merrill Lynch was absorbed by Bank America. AIG was bailed out. Money market funds experienced panic redemptions. The SEC banned short selling of financial stocks. By Thursday afternoon the stock market was down nearly 10% on the week, before rallying on what turned out to be false hopes of a quick government bailout of the banks. Kansas’ narrative peters out shortly after this, presumably because it is here that he started writing his book.
The second half of The End of Wall Street is taken up with advice for readers on what to do now with their own finances in light of the “new world order.” This personal finance advice is undoubtedly the marketing hook for the book, the reason its creators imagined that people would buy it, and the reason they hired Kansas to write it. (He is Editor at Large at FiLife.com and the author of The Wall Street Journal’s Complete Money and Investing Guidebook.) Unfortunately, it is also the weakest part of The End of Wall Street. The advice is not unsound, indeed with regard to reasonableness it is above average. But it is generic and vague. Pay down your debts, particularly credit cards. Young people should invest mostly in stocks, older folks less so. Do not obsess over the value of your home and think of it as a roof over your head, not as an investment.
Other than starting the occasional sentence with a phrase like “in times such as these” it is difficult to see how this advice is sculpted to the post-apocalyptic world after the end of Wall Street. It would have been just as reasonable and bland five or ten years ago. Indeed, Kansas makes a weak case that Wall Street as we knew it really ended last year. Yes, one of the five largest US-based investment banks is now gone, and two others have been merged into other institutions, but that sort of turnover is not unprecedented. At its most basic level, although fewer people may work there and they may be making much less money than before, Wall Street operates today as it always has.
But the assertion that Wall Street has ended is not the weakest part of the book’s title. That distinction goes to the premise that we, the readership of the book, knew Wall Street to begin with. It is one of the great peculiarities of that institution that, as critical as it is to the larger economy, almost nobody outside the few that work there understands what happens there and why. And in a way, this phenomenon may be at the root of our current problems.
The financial regulatory regime that was in place during the fall of 2008, and which hobbles along still, dates to the 1930s. It was then that the banks of the nation were divided into two groups. The wholesome Main Street or commercial banks became heavily regulated and enjoyed a government guarantee of their principal liabilities. The somewhat sinister Wall Street or investment banks were largely left to do as they pleased, provided that they did not seduce any regular Main Street folk over to the dark side. (Indeed much of what regulation Wall Street was subjected to concerned its intersection with Main Street rather than its internal workings. Retail brokers who handle transactions in the thousands of dollars need to be licensed. Investment bankers who handle transactions in the millions do not.) It was if lower Manhattan was cordoned off as a financial free-fire zone where those strange people could do their strange things as long as they kept to themselves. The commercial banks were understood to be vital to the economy. The investment banks, well, nobody quite knows what they do, but it seems vaguely useful and harmless enough. They were allowed to take as much risk as they could stomach, and did not enjoy a government safety net, because the failure of a Wall Street bank was not thought to have wider economic implications. The past five months have shown this to be the most tragic folly.