Self restraint is always easier to apply than the stick, or even the carrot.  Hence, Dimon and Blankfein taking less and putting more skin the game of what their organizations can do for shareholders.  A wise move, as painful as it must have been (especially if Dimon has any real ambition to be Treasury head in Obama II, if not sooner).  And now we learn that he giveth and taketh away too with the NYT reporting today at Mr. Dimon isn’t so happy about all the bank bashing going on in the house of O.  This is all, of course, only so much posturing.  We’re sure O and Dimon understand each other very well. 

Thain has resurfaced and not surprisingly at the helm of a public company, which was always his ambition.  He got a raw deal at Merrill, at the hands of someone now being sued under the Martin Act, and are glad to see him tackling the job of rebuilding CIT.  We know the first thing he won’t do is splurge on redecorating his office.

The old saw about blind men touching the elephant applies aptly to Wall Street and the culture of blame around who and what caused the financial meltdown.  One blind man feels the beast and says it was irresponsible mortgage brokers.  Another says it was structured finance, securitization, etc., and derivatives.  Yet another accuses regulators of being asleep at the wheel.  A feeble voice from the back end of the giant animal even blames Greenspan for his Ayn Randian myopia. 

Now Obama wants to reinvent the elephant that is Wall Street.  We agree with him.  Citibank did not have to get as big and complex as it did.  In the days of Walt Wriston, and even John Reed, it was good enough as it was.  Sandy Weil destroyed that company.  Bank of America ran off the rails for much the same reason.  Did it really have to buy Merrill?  JPMC seems charmed and credit must go to Jamie Dimon (especially for buying assets like Bear Stearns as cheaply as he did) but we wouldn’t be surprised if that one hits headwinds too in the fullness of time.

There is no rational reason, if one thinks back to what the role of a bank, merchant or commercial, is and should be that one single entity MUST take the huge bets they have over the last decade using depositor’s money on the roulette table of proprietary trading and providing leverage to hedge funds.  It can be argued, as it was, that such financial gaming helps provide liquidity in the markets, etc., but ultimately, finally, and dramatically, it failed.

We’re just fine with a smaller Citi or Mother Morgan.  We’re just fine with a break up of these large institutions, which will only create more competition which is, after all, what this country is all about, right?  We’re also just fine with a consumer protection agency.  We don’t like more government but this is an exception.

So, the problem is not, metaphorically, about what part of the elephant the blind man feels.  It’s that we’re talking about an elephant.  If Wall Street were a cow (even a cash cow) we would all benefit.

Even though, supposedly, some of the happiest people on the planet are also the most taxed (Danes, according to surveys) we don’t fall into that category.  Nor does Wall Street.  Our own business has been hit with thousands of dollars of new taxes payable to New York State for using mass transit.  Arrgghh.  Now there’s a plan afoot to assess special taxes on Wall Street bonuses and to recoup TARP losses.  We oppose the former and support the latter.  But the solution isn’t just to throw more money at bankers in this climate of populist outrage about Wall Street.  The solution is enlightened self interest – Wall Street reading the winds and proactively devising solutions that will quiet the storm.  Attempts have been made at this by giving more incentive comp  in stock and less in cash (supposedly this reduces short term risk taking).  Goldman Sachs has proposed giving more money to charity.  But the banks have to do more if they want to escape some night of the taxman’s long knives from Obama.  Time to put the thinking caps on. . .or wait it out until the next election.

Regarding TARP’s losses, Wall Street has to pay for that.  That’s the only way to create the right approximate stimuli for better risk management. 

We will acknowledge that in the weeks and days leading up to 2009, we were feeling low.  Having gone through, as a working adult, three recessions up to that point, we thought we’d seen the worse of what could happen to the economy and a wide variety of industry sectors in one stage of meltdown or another (steel, aerospace, dot.com).  But 2008 proved how much worse things could become.  The last quarter of 2008 was the depth of the credit crunch and then, of course, Madoff hit, along with a variety of other disasters for Wall Street.  There seemed no end to the shocks. 

But ends did come and the worm turned and we all survived.  Or most of us.  Herewith, our assessment of 2009 and the Great Recession for Wall Street and our predictions for 2010: 

1.       Never be surprised that things are not what they seem.  The mighty do fall.  Once seemingly untouchable financial institutions can’t seem to do (much) of anything right.  Populist activism can cow Masters of the Universe (publicly).  Presidents will take on Wall Street (privately and publicly).  So many of our assumptions about what Wall Street is, who and what is sacred and who and what isn’t, were challenged.  All of which makes it very hard to determine what Wall Street will look like tomorrow.  A smaller industry, to be sure.  Even the shortness of American memories will have a hard time forgetting the scandals in investment management and mortgage lending/securitization. 

2.       Now that Obama has put healthcare reform to bed we’re expecting him to intensify his focus on reforming the financial services industry.  But we’re unsure how much appetite he has for taking on this challenge.  Wall Street essentially has only one constituency: Wall Street.  Consumer activism is present but not powerful.  Only the big financial institutions spend big on lobbying Congress.  Barney Frank, for all his abilities and good intentions, can’t do this one alone.  So we don’t expect there to be “reform” that creates a “disturbance in the force”. 

3.       Innovation will take a long time to pick itself up again.  Wall Street evolved into an innovation machine.  The best and brightest (especially in the long, intellectual drought of the Bush Years) went for the money and they came up with concepts and devices and trades, especially in structured finance and amongst hedge funds, that stretched the boundaries of creativity and wealth creation.  Except among the hedge funds, such innovation will take some time to reemerge.  Over-regulating the hedge funds would be a huge mistake.

4.       We really don’t need all those banks.  The death of Bear Stearns and Lehman taught us that Wall Street didn’t really need all the money machines it sprouted.  Or does it?  We won’t know for a few years.  Fewer big banks means less competition.  The implications of that won’t be felt for years.  We may hark back to the Fed’s decision to let Lehman die and, once again, say it was a mistake.  Or maybe not.  But until that’s proven either a good or a bad decision in terms of the competitive implications for Wall Street there’s a case to be made that we also might not need Citi. 

5.       How can it be that a bank as big and as important as BofA had so much trouble finding a CEO?  All sorts of reasons it turns out.  We would lay bets that the homegrown CEO who ended up with the job is a 50/50 ball as to how long he’ll last.  Very few B-Team players emerge into A-Team leaders.  Happy for this to be the exception.

The New York Times today discovered that Goldman Sachs is in the business of making money.  And that the trader culture is at war with the banker culture.  Both are stories as old as money itself.  Some years the traders rule and others the bankers do.  Wall Street’s always been that way.  The paradigm of the investment banker as a counselor to capitalism is a quaint notion but not an “ethos” as the Times tried to frame it.  There were legendary counselors at the banks over the decades.  But more of them were on the commercial banking side.  At places like heritage J.P. Morgan.  Those days are long gone.

What’s more interesting is why Goldman’s PR people can’t think their way through these rough reputational waters with a little more success. 

Wall Street can’t pay back all that fed TARP money fast enough.  And for good reason.  Although, Goldman being the first to pay it back, didn’t buy its executives the customary levels of cash incentive compensation for 2008.  Now even Citi is going to step up to the shareholder dilution plate.  It would have been wiser, if even possible, for Citi to have made its move prior to the House passing its financial overhaul plan. 

No one expects the final bill to look exactly what House Dems assembled here.  But unlike the healthcare industry, Wall Street doesn’t have the kind of teeth anymore to influence legislation like it used to.  It’ll have to find a new voice, and credibility.  Consumer protections are important and long overdue.  Given shareholders rights over compensation will backfire – especially when you have regulators deciding what is “imprudent risk” in compensation packages.  No council of federal regulators will accomplish anything meaningful.  More transparency in derivatives trading is a good idea.  Hedge fund regulation with the SEC was tried before and defeated in court.  That may happen again, even in this climate of opinion. 

The interesting thing about the $60 billion mess in Dubai is that this was created after the meltdown in the “western” financial markets.  Western money, and a fair amount from Arab oil states, went to this so-called safe haven investment – in this case a spit of sand built not on oil but the ambition to become a financial hub of the Arab middle east.  The last illusion of the liquidity boom and bust?  Maybe.  Chances are Dubai’s neighbors won’t permit a meltdown, and western banks won’t either.  But Dubai’s future will never be the same. 

The four healthiest bulge bracket investment firms – Goldman, Merrill, Morgan Stanley and the I-bank unit of JPMC – earned $22.5 billion in the first nine months of this year, vs. a loss of $40 billion for 2008 as a whole.  Who says government intervention doesn’t work (and save the day thank you Mr. Paulson)?  These profits can be directly attributed to a low cost of capital (like, pretty well zero thanks to the feds) and smart trading; or just trading as usual.  So here’s the problem: Washington saved Wall Street, after culling out the weaker elephants, Bear and Lehman, and now the bankers, once again, will reap the rewards in the form of salaries and bonuses.  Some estimates are that the top six American bank holding companies could dish out $112 billion from the first three quarters of performance alone.  With unemployment continuing to rise, a dip in the markets being talked about, and economic recovery all but uncertain, how will Wall Street justify that bonanza? 

The New York Times devoted a page one story today to Goldman Sachs’ PR problems.  If anyone wonders why the Old Grey Lady is having such problems with its viability, this story is a prime reason why.  Not really news, guys.  And on page one?  Goldman’s PR problems started a long time ago, even before it took $10 billion, at 100 cents on the dollar, of AIG’s taxpayer funded cash to fulfill a counterparty trade.  Since then it has done few things right to protect its reputation, except make boatloads of money, which is the business it’s in after all.  So, we don’t begrudge Goldman’s doing what it’s supposed to do, for shareholders, and itself.  We don’t even begrudge its plans to pay hefty bonuses from all that smart trading this year.  We do wonder why its PR people can’t shoot straight. 

Junk bonds are making a comeback, largely because money, once again (government money) is so cheap and corporate borrowers are taking advantage of that before Washington wakes up and realizes that it’s making the same mistake twice (or half a mistake: the years of keeping money cheap from the Fed and failing to adequately police Wall Street was the double whammy of this meltdown) and jacks rates up again.  Ditto CLOs, which are re-emerging.  All of which means leverage is coming back, slowly.  Creating a new super-regulator won’t prevent the next meltdown.  Rules on leverage will.  Which will never happen, except in defining how much tier one capital banks must have on hand to bet against.