“I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it.” — Gordon Gecko in Wall Street

At a certain point, reading about the meltdown of the financial markets in late 2008 can become tedious and repetitive.  The basic facts have been known for some time and dozens of books have been written regarding the human misjudgment and folly that led to the greatest financial meltdown in decades and ushered in the worst recession since the Great Depression.  However, the story is still unfolding and the system is not yet out of the woods.  The casino mentality that brought Wall Street to its knees in September 2008 has created the impression that finance is merely a game and bankers are simply gamblers.  In fact, the function of Wall Street, when properly understood, remains as critical to our modern capitalist system as oxygen is to human life.

Roger Lowenstein did not succeed in being first to market with his book on the financial crisis.  However, it is fair to say that The End of Wall Street represents one of the best portrayals of the events leading up to the subprime meltdown that ultimately triggered the unprecedented collapse in September 2008 and prompted the type of government intervention previously considered unthinkable in America.  Mr. Lowenstein’s book is well suited for a reader who is unfamiliar with the details of the crisis and is looking for a concise presentation with the right balance between a careful accounting of the facts and the personalities involved in the crisis.

Well Researched and Compact Account of Crisis

The book’s roughly three hundred pages includes both on the record quotes and references as well as information provided on background.  The author states that he interviewed over one hundred individuals and this shows in the “color” behind several of the more contentious decisions taken by government and banking officials.  Compared to Andrew Ross Sorkin’s Too Big to Fail, there are fewer personal details regarding the people and the story line is therefore more compact and efficient.  (For a review of Too Big to Fail, click on this link.)

Paulson’s Goldman Ties

Former Treasury Secretary Hank Paulson’s ties to Goldman Sachs have prompted endless conspiracy theories particularly related to the AIG bailout.  The common allegation is that Mr. Paulson engineered the AIG bailout in order to save Goldman Sachs from potential ruin due to Goldman’s counterparty exposure to AIG.  Mr. Lowenstein doesn’t buy into these charges:

This charge does not add up.  Paulson necessarily consulted with the firms (JP Morgan as well as Goldman) involved with AIG;  Paulson had also called Blankfein during previous crises that bore no relation to Goldman.  He would have been wise to call Blankfein less, but Paulson did not think of the AIG bailout as critical to Goldman in particular, because in fact, Goldman’s exposure to AIG was less than life threatening.  Thanks to its zealous collection efforts prior to the rescue, Goldman was already holding $7.5 billion of collateral from AIG.  After the bailout, Goldman collected an additional $7.3 billion;  however, it was at risk of losing only about a third of that sum.  In short, a forfeiture by AIG would not have been crippling to a firm with $40 billion in net tangible assets.  – Pages 214-215

Mr. Lowenstein goes on to suggest that the AIG bailout was more related to the indirect systemic effects that an AIG default would bring about particularly in wake of the Lehman failure.  He believes that the explanation offered at the time (that AIG was a better credit risk than Lehman) was merely a rationalization and the real reason for the bailout was that government officials were simply scared that AIG’s failure would bring down the rest of Wall Street.

The End of Wall Street?

From the final chapter, it is obvious that Mr. Lowenstein believes that the story of the financial crisis is still being written.  Unwarranted faith in market efficiency led to deregulation that went too far and a mentality in the Greenspan Fed that believed  bubbles could not exist in a free market.  Further action by the Fed to soften the blow of prior crises prepared the groundwork for the events of 2008.

While Wall Street is, in many ways, still shaken from the impact of the financial crisis, the institutions that are now considered “too big to fail” have enjoyed a significant recovery over the past eighteen months and most Americans who are still suffering from the effects of the economic downturn continue to be outraged by reports of high levels of compensation.

Unfortunately, very few individuals have bothered to defend the appropriate role of Wall Street, as differentiated from the perverse behavior of the individuals who brought about the crisis.  Wall Street exists to serve a vital function in our capitalist economy.  By facilitating the allocation of capital throughout the economy, Wall Street contributes to economic growth in the real economy.

While the quant wizards who came up with various permutations of synthetic CDOs did in fact “create nothing” of economic value (other than generating fees), traditional investment banking helps match investors with real companies making real products and employing real individuals.  Investors who allocate capital to businesses are, in aggregate, a vital part of Adam Smith’s invisible hand.  This brings about an interesting observation regarding value investing as a contrast to Gordon Gecko’s famous quote.  Value investors, by allocating capital intelligently with a long term orientation, are in fact contributing to the well being of our economy.  They obviously do so with self interest in mind, but in the process, optimize economic outcomes.

Appropriate regulation is certainly required in response to the financial crisis, but regulators and the American public in general need to be reminded that not all of Wall Street represents a casino.

More on Roger Lowenstein

For more on Roger Lowenstein’s books and other writing, please refer to the following articles on The Rational Walk:

Roger Lowenstein: The Fed Should Burst Our Bubbles
Lowenstein’s Review of “The Myth of the Rational Market”
Selecting a Buffett Biography: Lowenstein vs. Schroeder
While America Aged by Roger Lowenstein

Lowenstein’s ‘The End of Wall Street’ Examines the Financial Crisis
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