In his book, The Big Short, Michael Lewis writes "The ability of Wall Street traders to see themselves in their success and their management in their failure would later be echoed, when their firms, which disdained the need for government regulation in good times, insisted on being rescued by government in bad times. Success was individual achievement; failure was a social problem" (The Big Short, p.210, Norton 2011)
Today, "Goldman Sachs Group Inc. agreed to the largest regulatory penalty in its history, resolving U.S. and state claims stemming from the Wall Street firm’s sale of mortgage bonds heading into the financial crisis." (Goldman Reaches $5 Billion Settlement Over Mortgage-Backed Securities - WSJ)
A small drop against the trillion in fabricated products created by Wall Street in their creation of wealth....
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| https://en.wikipedia.org/wiki/Subprime_mortgage_crisis |
The impression from his book, as well as Flash Boys and his original foray Liar's Poker, is that this parallel universe has been created where money begets money until an inevitable reset must occur. Those on Wall Street are too human and too clever not to make advantage out of the position afforded to them. "It's too much to expect the people who run big Wall Street firms to speak plain English, since so much of their livelihood depends on people believing that what they do cannot be translated into plain English." (The Big Short p.218). Now technology only enables them to be more creative, and forever one step ahead of the regulatory bodies and ratings agencies.
In fact, once more it seems that the Ratings Agencies are Still Coming Up Short, Years After Crisis - The New York Times: "Eight years after these companies were found to have put profits ahead of principle when they assigned high grades to low-quality debt securities, some of the same dubious practices continue to infect their operations. That’s the message in the most recent regulatory report on the companies from the Securities and Exchange Commission."
But, when one takes the time to look at the data, look at the bigger picture it paints, trends can be seen. Those characters Lewis writes about, on the edges of Wall Street, and even well outside of it, did see it and were able to profit from it (with perhaps some regret as they realized the whole economic system was actually threatened). So, I think it was very possible to see the crisis coming, if not predict it's exact timing.
It's also important not to over-estimate the capacity of Wall Street to know what it is doing. Those on Wall Street are really not that much better at predicting the future than the average retail investor or even mildly interested but literate observer. "Since 2000...consensus predictions were inaccurate in every single year, sometimes by preposterous margins." (The New York Times) They are just in a position to apply their intellect and cunning to a 'club' of institutions able to make money from money - that pool being topped up by the average investor and bailed out from time to time by government.
Free markets are the way to go, but we need to be honest with ourselves about the beast we have created, and then be smarter about how to manage it for everyone's equal opportunity to benefit.
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One Market Prediction Is Sure: Wall Street Will Be Wrong - The New York Times: "Since 2000, it found, the consensus has called for an average yearly increase in the S&P 500 of about 9.5 percent. The actual average annual change was less than 4 percent, however, and consensus predictions were inaccurate in every single year, sometimes by preposterous margins."
Aye M. Soe, senior director of index research and design for S&P Dow Jones Indices, shared the new data with me...As in the past, the numbers showed that active mutual funds that performed well in one year were rarely able to sustain that performance in subsequent years....“I feel the game is rigged against the average investor,” Ms. Soe said. People often pay high fees for investment management that produces scant measurable benefit. It’s usually wiser, for longer-term investments, to hold them in broadly diversified, low-cost holdings, probably in index funds. As for where the market is heading this year, you might as well flip a coin."
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