Uncle Sam goes to Wall Street

October 27th, 2008 at 06:05pm Annette LaCross

First published Aug. 11:

I’ve never been a big fan of too much government involvement, in business or in my personal life. In fact, I’d say I get suspicious the very minute I hear that the government has decided to save me.

My suspicion springs in part from my unwillingness to give someone else — particularly lawmakers who will have forgotten all about me in four years — too much say over my life. It’s a peculiarly American virtue, the same one that drove the British off the continent more than 200 years ago.

But the rest is largely practical:

The only money lawmakers have to spend is mine. And yours.

And if someone is going to be spending my money, I’d prefer they take a careful, reasoned approach and not go chasing after a shadow that someone with an agenda has convinced them is there. (Even though Wall Street seems to have been following the latter model.)

You can understand, then, why I become alarmed when the beady eyes of the federal government turn toward Wall Street.

Then again, it’s not like it hasn’t been invited, even unwittingly.

Wall Street’s latest comeuppance for the floundering reality of its investment strategies, which began in earnest a year ago but really picked up speed six months ago, have brought about some of the most stunning events to hit the financial markets since the Great Depression.

The Federal Reserve’s 11th-hour campaign to salvage collapsing investment bank Bear Stearns Cos. cemented its newfound reputation as the lender of the last minute. The hastily produced deal allowed JPMorgan Chase & Co. to buy the failed investment bank at a fire-sale price — a week after the Fed made its first unexpected announcement, becoming the lender of last resort for investment banks.

Those were bellwether moments on the Street, when joyous bankers knelt at the feet of Fed Chairman Ben Bernanke and wept.

Six months later, despite the involvement of the Federal Reserve, I’ve decided they were necessary.

Bear Stearns’ near-death experience was sparked by its reliance on mortgage-backed securities, but it flamed out of control because of its investments in complex financial instruments that only about seven people in the world can figure out — or value. If those securities succeeded in strangling the bank, it could have killed others.

It could, in other words, have caused a financial breakdown of catastrophic proportions.

Here’s where I start to contradict myself, because all those complex instruments — with exotic, if obfuscating, names like collateralized debt obligations — are terrifically hard to explain. As it turns out, they’re even harder to quantify.

So when the markets determined that they were worthless, they were. In many ways, they’re what got us where we are today.

But here’s Wall Street’s real comeuppance: Wall Street has bitterly opposed any sort of government intervention in its strategies. It can handle itself, it argued every time the government decided that more regulation was needed.

For a number of reasons, I used to agree with them. And while I believe global finances need to be handled by those who actually know what such things as collateralized debt obligations are — I don’t trust them anymore.

Wall Street has just introduced itself to a hell of its own making:

Welcome to Wall Street, congressmen.

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