reasoned thought for an age of uncertainty
Self-proclaimed trader Alessio Rastani shocked the financial world this week during an interview with BBC by portraying a Wall Street trader with a brutal Machiavellian truthfulness: “I have a confession. I go to bed every night, I dream of a recession.” “The governments don’t rule the world, Goldman Sachs rules the world.”
But Rastani, as it turns out, is not really a trader–he is a self-admitted promoter, who just happened to embody the caricature of an evil trader so well that his interview went viral and led many, including Forbes Magazine, to speculate as to whether he might be part of the legendary business pranksters The Yes Men. In reality, Rastani is just a random guy who has taken the right cues from real Wall Street traders and spit them back at us–he has translated our fears and suspicions into a believable character. That’s either incredibly embarrassing for the BBC, who did not do an effective background check, or incredibly lucky, because he got the network what all networks crave: attention.
What is so fascinating (and what struck a nerve) about Rastani’s propositions is that they reaffirm what we all secretly fear and suspect: that our financial system has turned on us. That our relationship with Wall Street has now become one of predator and prey. That dubious and highly intelligent Wall Street traders spend their hours scouring our bank accounts, siphoning off money out of our 401Ks and nest eggs, only to spend our money on lavish parties. While Rastani’s caricature is clearly a hyperbole, as the saying goes, all hyperboles have a grain of truth, and that’s what scares us.
Though what is equally true is that Wall Street does add value by increasing efficiency in financial markets, advancing technology and moving money out of the hands who are not using it and into the hands of those who can use it productively. But the goal of this moving of money is not just to reallocate cash from those who are sitting on it to those who can use it. The goal is to get the money back with interest. As a result, the financial system is designed to skim productivity off the top of any investment and return it to capital holders. We do not reward work, we reward capital–we thank those who gave us money to use productively, rather than those who used it productively. Everything in our economy is tied up in this system. As a result, corporations dump all their profits into stock, which trades on open markets. By buying and selling stocks, Wall Street can not only reward companies for productivity, but they can also devour that productivity in a matter of seconds.
The fear that Rastani has hit upon is that Wall Street has become so nihilistically driven by money that it would be willing to destroy our economy to make a buck. We are suspicious that Wall Street traders would short stocks to make money, because if you can’t make money buying on the way up (investing), you might as well make money selling on the way down (divesting). This type of trading behavior certainly does occur in financial markets, where traders have easy access to margin. So for Wall Street, a clear signal down is just as valuable as a clear signal up. While Rastani may be a provacateur and shameless self-promoter, he is certainly right to say that some traders do go to bed dreaming of recession.
Consider, for example, that Goldman Sachs paid a massive $550 million settlement to the SEC because of its involvement in selling mortgage-backed securities (MBS) to customers while they were shorting the very same securities. Or consider the fact that several hedge fund raked in billion dollar gains during the economic collapse of 2007-08 by shorting MBS. Likewise, hedge funds have long been under scrutiny for moving markets by trading together in “packs“.
While these actions are easy to identify as bad, identifying a solution to Wall Street’s misdeeds is a much more difficult proposition, and unfortunately the public remains grossly under-educated about how to approach this problem. Letting major banks fail, for example, is not a viable solution (talk about cutting off your nose to spite your face…). There are, however, tangible changes that can be made, such as reinstating the uptick rule, which made it difficult to profit on short selling, and by enabling those long in stock to restrict borrowing rights (yes, Wall Street “borrows” stock you own so that they can sell it and drive the price down). Otherwise, all we can do is hope that the traders like the one portrayed by Alessio Rastani are mere caricatures, while we secretly suspect worse (and perhaps for good reason).