Financial History 25th Anniversary Special Edition (104, Fall 2012) | Page 40

between the financial sector and the rest
of the economy appears inexplicably large
from 1990 onward . . . deregulation and
corporate finance activities linked to initial public offerings and credit risk are the
primary causes of the higher compensation differential.”
In short, Wall Street compensation certainly was responsible for some of that
discrepancy.
Initial public offerings (IPOs) were only
part of the picture as the credit market
crisis continued in 2009. The crisis had a
serious impact on the capital-raising process in both equities and new corporate
debt offerings. All new stock offerings,
including IPOs, diminished from $206
billion in 2008 to $131 billion in 2010.
New corporate bond offerings actually
increased from $861 billion to $983 billion
during the same period. But the numbers
belie the fact that $2.3 trillion worth of
new corporate bond offerings were sold in
2007 and $169 billion of new stock.
Many of these latter bond issues were
mortgage-related securities, so when
that market collapsed it became apparent that mortgage-related financings had
dominated Wall Street debt offerings in
recent years. Other parts of the securitization (asset-backed) market also fell significantly as institutional investors began
to question the quality of the collateral
pledged to bonds, especially in light of the
controversy over the credit ratings agencies and their analysis of the CMO market.
The dominance of what earlier 20th-century writers called finance capitalism also
could be seen in the statistics. Of the new
corporate bonds issued prior to 2008, 75%
were issued by financial institutions. The
same institutions accounted for 50-60%
of new stock issues. The economy had
been dominated by Wall Street, and when
retrenchment came, it took a heavy toll.
The decline in collateralized mortgage
obligation (CMO) issues in particular
meant that spending by homeowners
would be curtailed as mortgage financing
became scarce and writing checks against
home equity declined. Before the crisis,
consumer spending had risen to almost
80% of GDP. In 1929, it reached about 67%
and had held steady for decades, establishing a trend for the economy. Now that a
major source of credit for that spending

had been curtailed, what became known
as the Great Recession soon followed.
The shadow banking system demonstrated that it was incapable of maintaining stability after the excesses of the
2000s. Investors responded to the crisis
by refusing to purchase securitized bonds
of any type, and that market began to dry
up quickly. Commercial paper was being
supported by the Fed. Once venerable
Wall Street institutions such as Morgan
Stanley and Goldman Sachs now were
officially commercial banks. After the
post-1999 deregulation party, Wall Street
was forced to sober up. But anyone predicting that banking attitudes or behavior
would change would be surprised in the
following years, since banking hubris did
not abate despite the rapidly changing
economic climate.
The aftermath of the Lehman dissolution displayed another irony for which
Wall Street was fast becoming known. In
2009, Barclays Capital, the US subsidiary
of the British bank, was voted first in
the Wall Street analysts’ league tables by
Institutional Investor for its bond rating
abilities. Barclays achieved the distinction
after absorbing some of Lehman’s fixed
income operations and more than a dozen
of its top bond analysts. In fact, four other
banks whose analysts scored well in the
same league table were recipients of TARP
funds at one stage or another during the
crisis. While their customers apparently
were impressed with their analytical abilities, Wall Street firms again proved they
were better at sell-side analysis than they
were at admitting or solving their own
internal problems.
Another parallel to the 1930s was seen
in the manner in which Wall Street handled the crisis. A lack of leadership was
clearly evident as the Street came under
increasing criticism for causing the crisis, all the while denying any role. A few
senior bank executives went on record by
talking about the crisis, but many of the
remarks were purely tendentious, as they
had been 75 years before.
The top CEOs went on record dozens of times inveighing against the need
for any further regulation of Wall Street.
Similarly, the CEOs of the large, failed
savings bank mortgage lenders continued
to blame everyone else for the misfortunes

38    FINANCIAL HISTORY  |  Fall 2012  | www.MoAF.org

of their companies rather than focus on
the misery caused hundreds of thousands
of foreclosed homeowners. When public
hearings finally were convened to investigate the crisis, the chorus of complaints
and denials only grew louder. It would
become demonstrably clear that Wall
Street CEOs had been practicing what Ferdinand Pecora once called “low standards
in high places.”
The crisis also had a severe effect on
the financial services industry in general.
The Financial Crisis Inquiry Commission,
assembled in 2008 to examine the crisis,
noted that a total of 583,000 financial
services jobs had been lost between 2008
and 2009. Wall Street firms fared slightly
better, however, losing around 200,000.
While jobs were lost, a record $61.4 billion in securities industry profits were
recorded in 2009 after $54 billion of losses
in 2007 and 2008. Similarly, commercial
bank profits rose from $7.6 billion in the
first quarter of 2009 to $18 billion in the
first quarter of 2010.
Of those indus