Attack on Wall Street

As the financial crisis continues, seemingly with no end in sight, I’ve noticed an ever increasing willingness to attack Wall Street, and to blame the big investment banks for the difficult times many parties are finding themselves in.

For example, check out this Wall Street Journal article, in which consumers say that Wall Street failed them. The gist: investment firms developed more and more complicated products that pushed onto consumers the responsibility for their investments (eg. IRAs vs. pensions) and now those products are exploding. Or this one, describing how the Pennsylvania state pension fund may have to pay Wall Street firms more than $2.5 billion because of exotic investments that have gone bad.

This anger isn’t exactly surprising, nor is it necessarily misplaced – Wall Street firms seeking short term profits pushed dicey products – but what surprises me is how widespread it is. In those two articles alone, everyone from IT workers to professional investors are blaming Wall Street. And the Wall Street Journal itself is eagerly reporting on these complaints.

I wonder if this anger will spread to pushing for some sort of action. Certainly the Merrill Lynch board heard this anger when they rejected CEO John Thain’s request for a $10 million bonus this year, giving him zero instead. But maybe the anger will drive politicians to dig deeper. As I’ve noted before, the players in the financial house of cards have already taken tons of money off the table. We know all about CEOs and hedge fund titans making obscene amounts of money, but don’t forget that your average fixed income trader or salesman was probably bringing home over $1 million per year during the boom times. Will policy makers go after that money?

A retroactive tax on boom time earnings would feel like justice. It’s difficult to see the fairness of taxing the whole country while bankers keep their Hamptons houses. On the other hand, the precedent of invoking a punitive and backward looking tax seems dicey from a policy perspective. Would we reach back and punish people other times that their decisions turned out to be wrong? Would we separate those who know their bonds were crap from those who were just doing what their boss told them? Again, it’s questionable policy. But it would feel so good.

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