First, there was the well-chronicled sub-prime mortgage-backed security disaster where investors, taxpayers and savers ultimately paid the price for the excesses of the wise guys on the Street. Next, there was the flash crash, which was a preview of things to come.
Government regulators failed to do their jobs and they failed miserably. If they could not bag Bernie Madoff for decades, why would anyone think they were going to stop Wall Street traders from bilking investors? Whether the regulators at the SEC and CFTC were told to look the other way by their superiors or were simply incompetent, the result was the same. They were conspicuously missing in action as Wall Street churned out mountains of dubious securities backed by mountains of dubious mortgages, all of which were assigned blue chip rankings by ratings agencies, which were paid generous fees by the Street for favorable results. Somehow, the regulators did not think any of these shenanigans merited their intervention on behalf of investors. The SEC is not about to rein in high frequency algorithmic (HFA) traders either at this point. They let this hydra-headed monster loose in the marketplace and it has increased and multiplied beyond their control. Traders using HFA computerized trading defend the practice under the pretense that it makes for a more efficient market, but in reality, it simply permits them to steal more efficiently from investors every day of the week. They and they alone are served, while unsuspecting investors pay higher prices for the shares they purchase on what is supposed to be a fair and open market. The foxes have been in the hen house far too long. The hens are on life support and the foxes are starting eat each other’s lunch. Good judgment is not about to stand in anybody’s way.
Wall Street firms and investment banks gamed the system and escaped unscathed. The Fed and the Treasury rushed to their aid when they got into trouble and made them whole. Lehman and Bear Stearns were collateral damage and left hanging in the breeze when the music stopped as their former colleagues took their seats at the table. Instead of showing humility, the bailed out bankers preened and complained that their bonuses should have been larger while struggling Americans on Main Street had their homes, retirement nest eggs and investments slashed in value in the aftermath of the meltdown. Wall Street bankers have the best access to decision makers money can buy and that access gets them into the White House, right through the front door. They are clever enough to buy protection with their huge campaign contributions and they make sure public officials, who are the target of their munificence, understand exactly who their benefactors are. As Don Corleone told the undertaker at his daughter’s wedding: “Some day, and that day may never come, I will call upon you to do a service for me”. That day comes every day as Wall Street calls on government officials for special favors, even when those favors hurt Main Street Americans. It is up to the politicians to spin it through and make it happen. Wall Street had their bureaucrats of choice, Ben Bernanke and Timothy Geithner, appointed to run the Federal Reserve and the U.S. Treasury, respectively. These two individuals, who were cheerleaders for Wall Street during the credit bubble, wound up in charge of the two most powerful financial institutions on the planet and proved once again that no bad deed goes unrewarded. The crony capitalist system worked exactly as intended. Wall Street avoids serious repercussions for its questionable business practices by prudently cultivating the people that count. They can rest assured that government officials will heed the call when things go awry as they often do when you rip-off everybody with a pulse. Hundreds of millions of taxpaying Americans cooled their heels as the wise guys cut to the front of line. It is easier for our elected representatives to recognize the friendly faces of lobbyists bearing gifts than it is to recognize the faceless crowd of common Americans. Why should Wall Street bankers concern themselves with the rabble? They have the best connections money can buy and they intend to get an outsized return on their investment. After all, isn’t that what investment bankers do for a living? In their world, greed rules and they are in charge. The public be damned. As Ayn Rand wrote, “When you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.”
We have a very tiny percentage of the U.S. population on Wall Street riding herd on the rest of us. They are inflicting maximum economic pain on us with impunity, as our government leaders rush to protect them instead of us at every turn. When you think about it, the game is tilted in favor of the wise guys out of all proportion. It is so disproportionate that it defies logic were it not for the power of money. Americans are not only wise to this; they are livid. Americans are too well educated and too well informed for it to be otherwise. The bubble in high frequency trading will inevitably burst and the fall-out will be devastating to American investors. You do not have to know what the word ‘algorithm’ means to know intuitively that Wall Street will use it to pick your pocket. The flash crash was like a stone hitting a windshield. First, there is a tiny chip in the glass. If you don’t fix it in a timely manner, it is only a matter of time before the chip develops into a crack and starts spreading across the windshield. If you continue to neglect the damage, the windshield could implode inward into the passenger compartment ripping apart its occupants. The same is true with market manipulation using high frequency algorithmic trading. Regulators have neglected the problem far too long. They are not up to job. They hope nothing untoward will happen, but hope leaves everything to chance. Too-Big-To-Fail now applies to high frequency algorithmic trading and that is not good for America . By all indications, we are near the tipping point.
Government regulators apparently think investors are too dense to understand how high frequency trading works to enrich Wall Street traders at their expense. See investmentwatchblog.com/the-wave/. It is just a matter of time before the house of cards comes crashing down. As soon as HFA traders are threatened with losses, they step aside and leave investors holding the bag, just as they did on May 6th. See investmentwatchblog.com/flash-trash-talk/. They pull back their bids and close their long positions the moment their automated early warning systems sense any market dislocation. That is exactly what happened during the flash crash. If they cannot game the market, they leave it. As usual, investors are left to suffer the consequences and foot the bill. The wise guys always win.