Warren’s Mistake About Wall Street Risk-Taking – Bloomberg 07-21-13

Salient to Investors:

William D. Cohan writes:

Senators Elizabeth Warren and John McCain are wrong in believing that the 2008 financial crisis was caused by commercial banks taking undue risks with depositors’ money, though it is true that they courted too much risk,

Causes of the financial crisis were many and complex. Key was institutional investors’ justifiable loss of confidence in the quality of assets on the balance sheets of the large Wall Street investment houses. The big Wall Street investment banks were far too reliant on cheap, short-term financing and the go-to saviors were the big, diversified commercial banks.

The one exception to this narrative was Citigroup, which failed in large part because, under the leadership of Robert Rubin, it abandoned any semblance of risk-taking discipline.

Since the mid-1980s, many investment banks went from being private partnerships-to being public companies with no personal exposure, and the financial system has been subject to one crisis after another. Wall Street’s problem is not risk-taking but the incentives to engage in it – big bonuses for taking foolish chances with other people’s money, but no criminal, civil or financial liability when things go wrong.

To prevent the next crisis, we should change how people on Wall Street get rewarded. Glass-Steagall kept financial calamity at bay for 60 years by making risk-takers pay when things went wrong.

Read the full article at  http://www.bloomberg.com/news/2013-07-21/warren-s-mistake-about-wall-street-risk-taking.html

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