Is William Cohan Right That Wall Street "Regulation" Has To First And Foremost Curb Greed?

Tyler Durden's picture

Now that the world is covered in at least $707 trillion in assorted unregulated Over the Counter derivatives (as of June 30, the most recent number is easily tens of trillions greater) and with at least one JPMorgan prop|non-prop trader exposed to having a ~$100 billion notional position in some IG-related index trade, pundits, always eager to score political brownie points, are starting to ruminate over ways to put the half alive/half dead derivative cat back into the box. Unfortunately they are about 20 years too late: with the world literally covered in various levered bets all of which demand hundreds of billions in variation margin on a daily basis, the second the one bank at the nexus of the derivative bubble (ahem $70 trillion JPMorgan) starts keeling over, it will once again be "the end of the world as we know it" unless said bank is immediately bailed out. Again.

As a result William Cohan, in a half-right narrative, suggests that instead of trying to curb derivatives this late in the game, which is a lost cause by definition as the JPMs of the world will simply change the rules to abuse the regulatory loopholes, says that regulation should be geared toward capping the potential of infinite greed to generate next to infinite losses. His suggestion is not to curb financial innovation, but to make "traders and bankers once again financially liable for what they are selling. If that were the case -- as it was when Wall Street was a series of private partnerships -- financial innovation would once again be revered and help to restore the luster of America’s capital markets." So far so good. The problem is that even in a private arrangement, those who become TBTF, whether with clawbacks or not, would still abuse the system? Anyone remember all too private LTCM, and how its legal team was frantically begging the Fed and Wall Street to bail them out, in essence launching the modern equivalent of TBTF? The truth is that modern Wall Street does have too much innovation, whose only purpose is to extract as much cash flow from increasingly worthless assets. And once the assets are completely depleted, to create synthetic assets which generate all too real cash flows out of parties close to the Fed.

From Cowan:

Ah, I can hear you scream, didn’t Milken’s junk-bond monsters bring about the stock market crash of 1987, when the Dow Jones Industrial Average lost 22.6 percent in one day, leading to the credit crunch that engulfed the economy from 1989 to 1993? And didn’t Ranieri’s little devils lead to the current financial crisis when one mortgage-backed security after another went into a tailspin? Wouldn’t an FDA-type agency, like the “pre-cogs” in the 2002 movie “Minority Report,” have seen these two train wrecks coming and prevented them?


This is beyond ridiculous, for the simple reason that there is no way to deconstruct a financial product before it goes to market to determine whether it will end up doing more harm than good. Yes, the excesses in Milken’s junk-bond market helped cause the speculation in the stock market that led to the Crash of 1987. But both before the crash and most certainly for the last 25 years the junk-bond market has been robust and vital, allowing thousands of companies access to capital while also providing investors with the sorts of risk-adjusted yields they most certainly cannot find in the overinflated Treasury market.


Much the same can be said for the securitization market, which worked brilliantly for more than 20 years before credit standards deteriorated miserably in the middle part of the last decade, sending the mortgages tied to them and the entire housing market spiraling downward. Chances are good that as we emerge from the downturn, securitization of mortgages will again be a viable and important market.


The problem on Wall Street is not financial innovation per se or the risks tied to untested products. Rather, it is a terribly outmoded incentive system that rewards -- with big bonuses -- the Wall Street armies who generate revenue by selling the array of new products without any accountability.


The key to Wall Street reform is to make Wall Street executives, traders and bankers once again financially liable for what they are selling. If that were the case -- as it was when Wall Street was a series of private partnerships -- financial innovation would once again be revered and help to restore the luster of America’s capital markets.

Alas, while superficially correct, this merely a case of revisionist history of a story that has ended well. For now. Yes: it took $20 trillion in backstops, cash infusions and guarantees from the central planners to stabilizie the system, but what happens next? What happens when the central bankers themselves need bailing out. After all none other than that modern day champion for all things right, Austan Goolsbee himself was a strong advocate of, get this, subprime back in March 2007. Just read the following sheer idiocy from a man who was Obama's economic advisor:

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.


Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.


A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.


These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.


And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.”

And this man shaped US policy two years later? Is it any wonder America's is progressively collapsing into the worst Depression in history despite optical gimmicks that fool increasingly less of the people, all of the time?

While we agree with Cowan on one part of his analysis, we disagree that financial innovation is reasonable going forward, as all it does is take flawed exit assumptions (yes, the securitization market did work for 20 years but only because it was a hyper-levered bet on one very wrong assumption: that markets and home prices can only go up, and that the cost of money will always go down). And yet it is precisely the flaw embedded in Goolsbee's simpletonian argument that has also fooled Cowan, and all those other sophisticates on Wall Street: the ability to predict cash flow. Alas, that is now impossible, because the very cash flows depend on the level of future innovation! Yes, there may be a greater fool if even more greater fools pay Facebook $10 billion to buy companies with 13 employees which make photo filters, at a valuation that is about 50 times greater than reasonable. But one day the greater fools run out of money, courtesy of their own capital misallocation decisions. And as shown here before (read How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement), it is none other than the Fed which is now the ultimate driver of capital misallocation across the US corporate sector. When predicting the future depends entirely on reading the mind of the central planners at every given moment, what can possibly go wrong?

Well, everything.... as history teaches us over and over. And which lessons humanity, in the pursuit of its own selfish infinite greed interests, always ignores.

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mayhem_korner's picture



Regulation is never about curbing greed; it's always about transferring power.

P.S.  I want to know how big the reward was to the shill who came up with the catch-phrase "innovations in mortgages."

nope-1004's picture

Austin Goolsbee resigned because when the mortgage market started to implode, his views went with it and he lost all credibility.

Austin Goolsbee is an educated, but wholly unwise, political shill.  In my day, we just called that type of person an idiot.


SilverTree's picture

Curb greed...good luck with that.

It's not greed, it is the "risk of missing out on the next opportunity".

TrafficNotHere's picture

Regulation is about creating barriers to entry. It is about enforcing oligopolies and restricting competition. In the financial world, unhealthy greed always fails (as we have seen) as it is willing to take on to much risk. The way to solve it is: (1) prosecute corruption, (2) let failures happen and (3) make sure "Too Big To Fail" does not exist. Hold people and firms accountable - such a simple concept that has been lost.

Regulation does not solve these problems; we keep adding more and more regulations and has it helped? Thanks to the Dems and Obama (yes, mostly them this time around) the "Too Big To Fail" banks are now even bigger and then next crash will be even more painful. The only group talking about breaking up these banks is the Tea Party. But the Big Government supporting MSM have done their best to marginalize them because ideas of personal responsibility, limited government are foreign to their liberal mindset.

Stax Edwards's picture

Greed without sufficient consequence is what Cohan really alludes to, not greed in and of itself.  Certainly having more skin in the game for the masters of the universe could take the place of much regulation, Cohan has made an excellent point IMO.  Just look at what has happened to Goldie since they went public.

Hugh_Jorgan's picture

The system is based on greed, most things mankind do are motivated by green in on form or another.

The real problem we have is when "Captains of Industry" and Wall St. Banksters get in bed with the reguators themselves and there is no one guarding the hen house. You will never curb greed, but you can keep the Government from legislating for those who get the Politician elected, but we are LONG way from a Government that values this kind of morality. UNtil then get used to a whole lot of pain at the gas pump and the grociery store, and a whole lot of sophistry from those who should be addressing the systemic problems we have.

Woodyg's picture

Half of wall street would blow up the world for an extra nickle's worth of profit......

'growth for the sake of growth is the ideology of a cancer cell' Ed abbey

Unfortunately it's sociopaths running our largest corps and the guv......

Its only a matter of time until we go the way of dinosaurs in the next Great extinction event - (which we're in the middle of)

A world blown up by debt, war, nuke pollution, global warming and Monsanto cancer....

Should be fun!

ACP's picture

So much regulation, some day Congress will be the only place where you can conduct criminal activity with zero consequences.

What's the world coming to?

Bob Sacamano's picture

The federal government is as greedy as anyone -- and it's worst because it is always pitched under the guise of "helping" the people.  

ljag's picture

Curb greed? How about curbing FRAUD!! It is one thing to grab an extra stack from the pile and a totally other thing to grab the whole pile.......then tell the taxpayer he's gotta cough up some more or the system will come crashing down. BTW, where is that re-set button located? I wanna push it until it goes off!!!!!!!!!!!!!!

Sandmann's picture

Get real - Wall Street lawyers WRITE the Regulations and draft the back-door

ACP's picture

That has a dual meaning...they write it specifically so that We The People also GET the backdoor.

InconvenientCounterParty's picture

Transferring power is good if you are attempting to achieve stasis.

Why bother curbing greed? Humans are wired that way, why fight it?

All you have to do is reintroduce rule of law and then make whistle-blowing both honorable and financially rewarding.

lincolnsteffens's picture

I'll vote for that. The problem is if you have lots of Dr. of  this and Dr. of that before your name you don't know how to make something like finances simple. You have to bring in charts and studies and scholarly opinions and conferences and think tanks into the equation.  You bring in such horse shit that no one can smell anything but a lot of confusing shit. Simple and direct does not need interpretation. Fraud actually can be prosecuted. Theft actually can be prosecuted,  market manipulation can be prosecuted. All you need is someone to have enough intelligence to recognize it and the authority to put an end to it. 

The Federal Government as an entity does not want anything adverse to happen to their club or the club member's friends. It is just that simple. If you are not in the group, good luck. Screw the rest of you simpletons, pay your taxes and shut up.

The Swedish Chef's picture

Is "ruminate" the word of the day?

CClarity's picture

When "debt" and "exposure"  of governments and banks actually recognize derivatives, actual mark-to-market valuations, debt of regional and local governments and banks guaranteed by sovereign governments, and liabilities to various organizations (like IMF and EU and LTRO) it will become obvious that a debt Jubilee will need to be called.  Most currencies will evaporate as method of commerce and barter and real assets will rule the very chaotic day.

The debt numbers bandied about by MSM are fantasy - which suits the Fed and TPTB just fine.

Stoploss's picture

Oh, like the banktards have quietly been chaining all global active fiat currencies together? So the reason Greece can't "fail", is because if it did, they all go down together? Euro, Yen, all the way through the dollar?


Mercury's picture


Sometimes what looks like unbridled "greed" is actually just rational risk assessment. I think you'll find that absent TBTF, government bailouts and government manipulation of risk pricing, a lot of bad behavior will simply take care of itself. 

Buckaroo Banzai's picture

How about this as an idea: NO REGULATIONS WHATSOEVER.

Instead, make all investors (whether individual or institutional) read and sign a brief statement before they buy any securities, that might read something as follows.

"The securities you are about to buy are purchased under the assumption that you will lose every cent you have invested. By entering the securities marketplace and dealing with professional brokers, you are dealing with people who have vastly superior information and financial resources. You will almost certainly be taken advantage of as a result. Any money you do in fact make as a consequence of these will have as much to do with sheer unadulterated luck on your part, as investing skill-- assuming you aren't lied to, cheated, or swindled, which you probably will be. Once you sign this agreement, you will have no further recourse whatsoever. Prepare to lose everything."


cossack55's picture

Enough with the common sense and dose of reality crap. Sheesh. How is a shill expected to make a buck.

Iwanttoknow's picture

Mr banzai,

I gave you an up arrow.I just have one problem.Stop the government and corporations dictate what I can and cannot do with my 401/403.

LarryDavis's picture

The culture of Wall St. is pathological and is not tempered with anything but megalomania. Look at the divide between CEOs and employees? What the fuck does these CEO's do all day? Why is that most people with an MBA think advanced technical analysis is A FUCKING BOLLINGER BAND? Is the concept of standard deviation too advanced for Wall St.? Moreover, why can't all these math PhDs paid millions of dollars find a trading system that really works (returning 10 percent doesnt really impress me)? The answers to ALL of the aforementioned questions relates to the fact that NO ONE UNDERSTANDS WHAT THE FUCK IS GOING ON. IT IS ALL A PONZI SCAM. WALL ST. IS WAITING FOR THE FED TO PRINT MORE MONEY AND GIVE IT TO THEM? IS THAT A FUCKING MARKET? SHOULD ANYONE BE PAID WHO WORKS ON WALL ST.?

Sandmann's picture

why can't all these math PhDs paid millions of dollars find a trading system that really works


That isn't their job. They are there simply to priovide a marketing Gimmick to sell to suckers - the game is Making Money not Making Profits for Punters

Mary Wilbur's picture

Incomprehension is part of the problem and the way government laws and regulations are written contribute to it.

Sandmann's picture

It is pointless regulating Wall Street unless you do something about OFFSHORE like London, Jersey, Cayman, Panama since the deal structure and SIVs are not on Wall Street and regulations are circumvented through London Offshore. It was through London Offshore tat MF Global re-hypothecated and Lehman traded and Merrill functioned. Forget Wall Street, it is simply a collection of buildings on Manhattan Island - the real action is with Russian andChinese money running over London with Iranian and Russian traders and City law firms

LawsofPhysics's picture

Precisely what fucking regulation is he talking about?  Look, it is real simple, prosecute the fraud and restore the rule of law, period.  If anything, the SEC, the CFTC, and congress have been captured by the financial sector.  The financial sector should probably ask itself what they think they will do when all of those who produce real goods and services stop taking their worthless paper.

Regulation, now that is funny stuff.

Mary Wilbur's picture

Restore fiduciary responsibility. Right now there is none. The other problem is that finance and basic economics is not taught in public schools. The ordinary person who tries to participate in the market either by using credit cards, obtaining a mortgage, investing and/or saving has not been educated to make informed decisions. Thus, he is an easy mark for the unscrupulous to profit from his ignorance. Knowledge is power and the 99% are ignorant.

JW n FL's picture



Is William Cohan Right That Wall Street "Regulation" Has To First And Foremost Curb Greed?


Corruption is the Problem... not people wanting to work for MORE!!

Work Ethic / Greed / Over Production is NOT a Problem!!

Corruption!! Celebrated!!! at the highest levels of Government!

which stiffles Greed is BAD!!

If you can NOT work your ass off and have something nice to show for it?? then why would you work your ass off?

so some Lucky Sperm Club Kid can enjoy YOUR! hard work?? FUCK THAT!

Working Hard!! for MORE!! is NOT!!! the Problem!

LOBBY WHORES, Entrenched Wealth, Legislated Slavery!! for the people who work harder than the rest! is the problem!

JW n FL's picture



The Freedom to WORK Hard and Enjoy YOUR WORK PRODUCT! wihtout it being stolen by Government or Market Makers! and / or other BULLSHIT LIKE THAT!!!

williambanzai7's picture

Neither of these two jackasses understand anything about how to control financial fraud except to say...lean over everyone.


nope-1004's picture

Which be Beavus and which be Butthead?


williambanzai7's picture

A Chinese rogue trader who 'cheated' investors on her way to losing £10m in gold trading has been sentenced to death today.
The 30-year-old Wang Caipang was handed the sentence by a court in Wenzhou in east China after she borrowed the cash between January and October 2010.


WillyGroper's picture

I guess that Wang can't do wonders.

Sounds like a deterrent that needs to be adopted in the USSA. 

Hulk's picture

Go easy on the wang guys...

Yen Cross's picture

 Speechless! Eloquent!  +1 bANZAI.

insanelysane's picture

The first thing that needs to be regulated is the FED printing machine.  The world is a finite place with a finite amount of genuine AAA stuff to buy or invest in.  However, when you print or hyperhypothecate an infinite amount of credit, someone comes up with new virtual AAA stuff, which in the end is just useless paper or bytes inside of a database.  Stopping the madness at the source needs to be the first step.

UGrev's picture

ABSOFUCKINGLUTELY!!! Thank you!! to further your statement.. when you come up with new virtual AAA stuff, more schemes are created to cheat you out of your cash. 

Milestones's picture

The moving finger writes, and having writ moves on--- And did not cure or stop one friggin thing.

The moving trigger finger squeezes the colt 44 --and viola we have a solution.


vegas's picture

Any article that has Chris "sandwhich-with-kennedy" Dodd giving a quote immediately becomes bullshit. Along with Bawny Fwank this guy is a complete tool. And another thing: Milken didn't cause the crash of 1987, instititions that thought they could hedge away stock market risk through SP500 futures did. When your model says sell more the more it goes down you got a problem. Go try and sell 5,000 futures contracts [when the futures were 500 times the index] to a guy named Maury who trades a 1 lot and see how low it can go.

SheepDog-One's picture

Stop the greed....right, after all the money is gone and we're all bankrupted, we'll discuss reigning in the greed. Its not 'greed' anyway, its a lawless pirate class.

Optical gimmicks that fool less of the people all of the time. But that seems to be ALL theyve got now, just telling the broke peasantry that things are not bad, but actually good, as they face te grocery store and gas pumps again. But hey, arent you at least happy that stocks are up? Grrrrrrrr

Turin Turambar's picture

Well, there are a couple of  simple, ground-shaking changes that could curb a lot of the BS, if not downright eliminate it.

1.  Never doubt the wisdom of Thomas Jefferson.  LOL  ELIMINATE fractional reserve banking!

Okay, enough with fantasy land.  Here's a second suggestion:

2.  Restrict organization of Financial/Banking companies to sole ownerships or limited partnerships.  There'd be a heck of a lot more looking over everybody's shoulders if the net assets of all of the partners were backstopping losses like in the old days.

Now that wasn't so difficult.

Of course, you still need to address the obvious - eliminate the FED and fiat currency.


JackInTheBox's picture

I love ZH, but on this one, I disagree.  Greed is not the problem.  You can't stop people from being greedy.  The greatest check on greed is risk.  And THAT's the problem.  Risk has been removed, allowing bankers to take enough inches to add up to millions of miles.  Remove moral hazards and reinstitute risk back into banking and that's your check on greed.  Simple, smart regulations are needed, but not to curb human instincts -- a task the market is far more equipped to handle.

SheepDog-One's picture

Sure, its not 'greed' thats the problem, its 'TBTF' and 'privatize the gain, socialize the loss' culture of Wall St, banking system, and financial world, 'We're above the peons stop looking at me and get back on those oars and ROW dammit!' mentality of the politically connected 'elite' sphincters. 

Everyone could be 'greedy', no harm in that in itself, as long as its equaly as risky for everyone. But as long as we have a class that can bankrupt us, while getting rich beyond even their wildest privileged wealthy dreams, and can never break a law because of just WHO they are, it will lead to people being hanged from lamp posts sooner or later.

JackInTheBox's picture

I agree.  Greed needs to be balanced by risk as it almost always is in real free markets.  And I think we all agree, today's market is far from free.  But those looking to Washington to fix it is a waste of time.  Regulators, lawmakers, the Fed, and banks are all on the same team.  If that's not clear by now for everyone, they aren't paying attention.  For me, I continue to buy my gold and silver (physical), and marshmallows so when this system goes up in flames, I am ready.

francis_sawyer's picture

 "Remove moral hazards and reinstitute risk back into banking and that's your check on greed. Simple, smart regulations are needed, but not to curb human instincts -- a task the market is far more equipped to handle..."


Not that I disagree with POLYANNA... But WHO'S GONNA DO IT?

You? Lieutenant Weinberg?...

~Col Nathan Jessup


JackInTheBox's picture

Ha! That's actually one of my favorite quotes from a Few Good Men!  No, I don't think anyone's going to do it voluntarily, just as I don't think we are going to pay back all this debt.  Tinkering with a system that is so broken and convoluted is a waste of time.  I just assume let the system break on its own.  It's not like we need to help this system go off a cliff.  It's rolling downhill so fast, I can't keep up enough to push.

francis_sawyer's picture

 "Tinkering with a system that is so broken and convoluted is a waste of time. I just assume let the system break on its own. It's not like we need to help this system go off a cliff. It's rolling downhill so fast, I can't keep up enough to push."


"You can ignore reality, but you cannot ignore the consequences of ignoring reality"

~Ayn Rand

Note: Not trying to be a RAND-ite... but it is a great quote (assuming she said it)...


css1971's picture

Actually, thinking about it you know what. Dragging them through the courts and taking everything they own, leaving them penniless on the street would probably do the job.

Limited Liability is the problem.

ljag's picture

Courts? You must be kidding! Go ask CM bout mortgage/courts