Why Wall Street's Meltdown May Happen Again

Journalist Suzanne McGee's new book Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down and Why They'll Take Us to the Brink Again explores the reasons the financial crisis happened and how it could happen again. Guest host Audie Cornish speaks with McGee, who is a contributing editor at Barron's, and has written about the financial markets for The New York Post and The Financial Times.

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AUDIE CORNISH, host:

Capitol Hill lawmakers finished their Wall Street regulatory bill last week, and now comes the push to have it ready for the president's signature by July 4th. The legislation would add new rules for the mortgage industry, re-jigger the responsibilities of banking regulators, and try to better regulate the trading activities of financial titans. Titans like Goldman Sachs, a firm which thrived after the meltdown, only to be slapped down with a fraud suit this past spring by the Securities and Exchange Commission.

Suzanne McGee, a contributing editor at Barron's magazine, was delivering the final proof of her book on the company when the news of the lawsuit hit. McGee is the author of "Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down and Why They'll Take Us to the Brink Again." She joins us now from our studios in New York. Suzanne McGee, welcome to the program.

Ms. SUZANNE MCGEE (Contributing Editor, Barron's Magazine, Author, "Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down and Why They'll Take Us to the Brink Again"): Thanks, Audie. Glad to be here.

CORNISH: Now, we should start by saying that the book isn't so much about Goldman Sachs itself or the lawsuit but more about kind of the culture and a little bit of the history around the financial industry and why Goldman is the team to beat.

Ms. MCGEE: They're the gold standard and have been for years. They used to proclaim very loudly, we're long-term greedy. We don't deal in short term. We're better than the rest of the crowd. And for many years, and up until the present, even today, even despite the SEC's lawsuit and allegations of fraud, they retain the loyalty of most of their blue chip customers and they've demonstrated their ability to generate billions of dollars of profit.

CORNISH: Now, one thing that you talk about through much of the book is about how Wall Street pays itself. And I think most of us maybe remember some of this conversation last year when there was talk about outrageous bonuses in the financial industry. But you write that it goes a lot deeper than that.

Ms. MCGEE: The problem is that the incentives have been short term. If you can generate a deal for your trading desk that is very profitable for that desk, then maybe you can hope for an extra zero on the end of your bonus check. If that deal goes bad, the worst that can happen to you probably is that might get a smaller bonus the following year, you might lose your job, but if so you'll probably walk across the street and get another job.

The fees don't flow backwards when deals go sour. Bonuses are rarely clawed back.

CORNISH: And you say this goes hand-in-hand with that issue of risk, of folks on Wall Street willing to take more and more risk than ever because there doesn't seem that much in the way of consequences.

Ms. MCGEE: There is every incentive to take risk because it's only by taking risk that you can earn a reward. And we don't want to punish risk, because without that there is no reward, there's no upside. On the other hand, Wall Street stopped listening to its prudent managers. It nudged them to the sidelines and sometimes right out the front door with their boxes of personal belongings in their arms.

CORNISH: So, Suzanne, for those of us whose knowledge of the financial industry is basically bracketed by Oliver Stone movies and greed is good, how do we get back to this idea that you talked about in the book of Wall Street being a sort of public utility in a way? That its job, instead of distributing, say, electricity or water is to distribute money and that it should have some sort of benevolent attitude towards doing that.

Ms. MCGEE: Maybe it's too much to expect benevolence from Wall Street. I would be satisfied frankly with long-term greed or what I think of as good greed. The kind of greed that says, I'm collecting a fat fee for doing this piece of business but I've stopped to ask myself is this a good long-term piece of business? Are my clients going to end up hating my guts in a year-and-a-half because this deal is going to go sour on them and I'm just getting it off my own books and collecting a fee?

And there needs to be some mechanism somewhere in the system, and I suspect it has to come within the investment banks itself, something that would force them really to say, just because Goldman Sachs is doing it doesn't mean I need to do it too.

CORNISH: Lastly, lawmakers wrapped up their writing of the legislation on the financial industry. Do you see anything in that legislation that would make a difference in the culture you described in the book?

Ms. MCGEE: It's hard to see anything there that I think is going to transform the culture. If anything, many of the proposals that have come out of that are going to be scrutinized by Wall Street. And to the extent that they don't like them rather than making an effort to adjust to them, I think their initial response is going to be trying to find a way around them.

That's certainly been the case within some of the banks already. They've drawn up contingency plans, they're asking themselves, hey, if this happens then how can we keep doing what we're doing but just do it in a different way. But that doesn't address what might happen next.

I think we have to keep a very flexible approach to both legislation and regulation going forward if we're going to avert the kind of crisis that weve just been through.

CORNISH: Suzanne McGee, thank you for speaking with us.

Ms. MCGEE: Thank you.

CORNISH: Suzanne McGee is a contributing editor at Barron's and author of a new book on the financial industry titled "Chasing Goldman Sachs."

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