If you haven't already read this book, I highly recommend that you do. Go now and order it from Amazon or download it onto your ipod. No one, and I really mean no one, could tell this story like Michel Lewis.You don't need to know all the details about collateralized debt obligations and credit default swaps to understand that something was indeed very, very wrong. From the ratings agencies such as Moody's to the whales on Wall Street, only a handful of people truly understood the underlying risk of the sub-prime backed debt and its shockingly wrong AAA rating, and how to hedge against it.
Until Solomon Brothers led the way for the big firms to go public, effectively transferring the risk from the firm's partners to the shareholders, these kind of prop trading debacles couldn't have happened. Finally, when the whole system broke down, the cost of Wall Street's bad bets, and they were indeed bets, in fact pure speculation, not reasoned investments, the taxpayer had to foot the bill with TARP funding. OK, so there was a little shuffling. Bear Stearns was sold to JP Morgan for $2 a share. Bank of America was forced to take over Merrill Lynch. Lehman Brothers went all the way under. Morgan Stanley got absorbed into Citigroup.
Meanwhile, the Wall Street whales still got their huge bonuses at the expense of the taxpayer.
Was fraud committed, well that depends on how you define "fraud". Surely CDSs weren't being marked to market by Goldman Sachs and Morgan Stanley in an equitable way and CDOs were purposefully overvalued. Did Goldman Sachs take trading positions against their clients, well that depends on your definition of "trading positions" and "risk management". Goldman's smart guys clearly acquitted the firm in their Senate testimony.
By the way, if all of these financial scams are reminding you of the 1920s, we all have Sandy Weill and Robert Rubin to thank for the repeal of the Glass-Steagall act. Thanks guys for enriching your posse and leaving the little people to pick up the bill.
