Wall Street recruits young, just out of college computer science majors and mathematicians to become "quants" whose skills are used among other things to predict when pension funds are going to make huge trades so that Wall Street can jump in ahead of them and do deals effectively raising the price the pension fund must pay or lowering the profit they might make. One such young twenty something quant was Alexis Goldstein. Goldstein devised trading software for Deutsche Bank and Merrill Lynch. She has divulged some of Wall Street's most closely held cultural secrets such as the phrase "rip the client's face off" which means selling some derivative "solution" to a naive client such as a convent of nuns in Europe at a huge profit to the trader and to Wall Street while convincing the client that it's the best deal they ever made. Sometimes they refer to these clients as "muppets." JP Morgan Chase and Goldman Sachs fanned out all over Europe in the wake of the Commodities Futures Modernization Act of 2000 which legalized derivatives. The legalization of derivatives made it possible to design financial products which shifted the risks and rewards around among different clients, some seeking higher rewards at higher risk and some seeking safety with lower returns and lower risk. Derivatives could be custom designed on the trading floor taking each client's "needs" into account.
Wall Street investment bankers sold derivatives to municipalities, hospitals, convents, school districts and other institutions mainly dealing with unsophisticated people who had no idea of what they were purchasing or what could be the ultimate denouement. They believed the "F9 monkeys" from Wall Street who were nothing more than salesmen making huge commissions by selling junk to unsuspecting rubes. F9 monkeys put in a couple of inputs on their computer and then hit F9. That priced the derivatives for them and then they hit the road. Star traders could make $10-$15 million a year, a heady sum for a young twenty something.
One of the highly touted products was an interest rate swap. The town of Casino near Rome was looking to reduce the 5% interest rate it was paying on its outstanding debt. No problem. An interest rate swap could reduce the interest rate on its debt to say 2%. Little did the town fathers realize that this meant taking on more risk. They swapped from fixed rate to variable rate, from high interest to low interest and back and forth. Some counterparty would always take the other side of the bet. If Casino wanted a lower interest rate with concomitant higher risk, there was always some one or some institution that wanted lower risk and was willing to pay a higher interest rate. All went well for a while until the interest rate Casino's swap was pegged to started to go up. They paid hundreds of thousands more in interest than they bargained for. Casino ended up paying Bear Stearns (now owned by JP Morgan Chase) over a million dollars in interest. They sued and recovered half a million but they are still in the red More than a thousand municipalities and institutions in Europe bought some type of derivative from Wall Street. Potential losses are estimated to be in the billions. Scores of lawsuits have been filed.
Europe's financial troubles largely originated with the machinations of Wall Street. When countries were trying to join the euro club, they let Goldman Sachs and JP Morgan Chase devise policies of regulatory arbitrage. Regulatory arbitrage refers to using derivatives to fashion ways of getting around the spirit of the law which are still legal. Derivative solutions were a magic formula that made European countries' shaky finances still qualify for entry to the euro zone. The French cooked their books by reclassifying pension obligations. Germany played some tricks with gold. Now the chickens are coming home to roost with the collapse of the euro zone. The problem was letting Goldman Sachs and JP Morgan Chase use regulatory arbitrage to get them into the euro zone in the first place and set them on a debt based course where, no matter what they do, they will still be little more than serfs and vassals indebted to Wall Street in perpetuity.
And it wasn't just in Europe. Birmingham, Alabama, county seat of Jefferson County, had squandered $2 billion on a sewer system in 1996. Many constituents ended up with a sewer system to nowhere and huge monthly bills. County officials were looking to refinance their loan and borrow more money to complete the system without raising rates. In 2002 a former TV personality turned politician, Larry Langford, took charge of Birmingham's finances They wanted to refinance their sewer debt by borrowing another $3 billion.This was no problem for derivatives trader, Charles LeCroy, leading producer at JP Morgan, who devised a "solution" consisting of a series of interest rate swaps. Langford consulted a friend, Birmingham financial adviser Bill Blunt, who said it was a good deal. However, far from solving Jefferson County's financial problems, the intervention of JP Morgan Chase only added to them. In 2008 there was a big change in the markets. The county suddenly owed hundreds of millions of dollars in fees and penalties to its debt holders including JP Morgan. And there was another complication. LeCroy had paid Bill Blunt $3 million in bribes according to Federal prosecutors, and Blunt had given money to Larry Langford. In 2010 Langford went to jail for fifteen years on charges of bribery and fraud. JP Morgan was fined $25 million by the SEC and was ordered to forgive Jefferson County $697 million. Blunt cooperated with Federal prosecutors and got a 4 1/2 year sentence. LeCroy got 3 months. In 2011 Jefferson County filed the largest municipal bankruptcy in American history. Over 100 schools and hospitals as well as state and municipal governments bought swaps. In the last 5 years interest rate swaps have cost American taxpayers $20 billion.
Alexis Goldstein recounted how they talk about "FU money" on Wall St. That was when you had so much money that you could say "Fuck You" to anybody and not have there be any consequences. You are above everything and are immune from the world.
At one point in my career, I was being recruited by a hedge fund. During the recruitment process, one of my interviewers frankly described the fund’s founder—his boss’s boss—as a “spoiled brat billionaire.” My interviewer related a story about a meeting between the hedge fund and an executive at a company the fund wanted to work with. At one point, the visiting executive made statements the fund founder didn’t like. The founder turned to the visitor and said, “So, you came here just to try and fuck me over?” The visitor quickly stormed out in a rage. But the founder wasn’t satisfied just yet. He followed the man out of the room, into the elevator, shouted the entire ride down, and then yelled at him in the lobby until he finally left the building. When the founder came back upstairs to greet his shaken employees, he said, invigorated and beaming, “Wasn’t that fun?!”
This is Wall Street’s equivalent of the American Dream: to earn enough money so that you can behave in a way that makes the very existence of other people irrelevant.
She talks about a culture of admiring cheaters. If you do something against regulations and you only get caught once and pay a fine, it's worth it because the end goal is to make money. Wall Street exemplifies an ethic of profits at any cost. Finally, Goldstein said to herself, "I dont know if I can stay here and still be an ethical person." So the ones who end up remaining on Wall Street are the ones who have the least ethical scruples, the ones like the Enron traders of a decade ago who don't mind screwing Grandma out of her pension.
Many young Wall Street quants and traders who can't take the ridiculous long hours and have moral qualms about ripping their clients' faces off and legally gouging pension funds leave Wall Street after a short sojourn there. Alexis Goldstein now has her own consulting company. She started out teaching Occupy Wall Street about the Glass-Steagall Act, the depression era act that separated commercial from investment banking. That act was dismantled by the Gramm-Leach-Bliley Act of 1999 signed by President Bill Clinton. This made it possible for the combination of investment banks with insurance companies and commercial banks paving the way for collateralized debt obligations, credit default swaps and other sophisticated financial products.
I'll give Alexis the final word:
"It is hard to contrast the joy of community I feel at Occupy Wall Street with the isolation I felt on Wall Street. It’s hard because I cannot think of two more disparate cultures. Wall Street believes in, and practices, a culture of scarcity. This breeds hoarding, distrust, and competition. As near as I can tell, Occupy Wall Street believes in plenty. This breeds sharing, trust, and cooperation. On Wall Street, everyone was my competitor. They’d help me only if it helped them. At Occupy Wall Street, I am offered food, warmth, and support, because it’s the right thing to do, and because joy breeds joy.
I was privileged enough to make it in the door on Wall Street, and to get bonuses during my time there. But I never felt as fortunate, or joyful, as I did the night after the eviction of Occupy Wall Street from Liberty Square, when we had our first post-raid General Assembly. When the thousands of supporters who filled the park necessitated three waves of the people’s mic. When our voices together echoed not just down the park, but up into the sky as the buildings caused the sound to ricochet off their glass walls.
And so I say to my friends who still dwell behind the Wall: come join us. The spoils of money can never match the joys of community. When you’re ready, we’ll be here."
