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The future of Wall Street

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Kai Ryssdal: Senate negotiators have really been scrambling the past couple of weeks, trying to come up with amendments to that financial reform bill that’ll cover all the news that we’ve been getting about how Wall Street goes about its business. Goldman Sachs and the fraud lawsuit from the SEC. The market crash from a couple of weeks ago. And new investigations into banks and the ratings agencies.

But if we’ve learned nothing else the past year-and-a-half, it’s that we really haven’t learned anything about Wall Street yet. Michael Lewis has been writing about that section of lower Manhattan for years, most recently with his new book “The Big Short.” Michael, it’s good to talk to you again.

Michael Lewis: Thanks for having me back.

Ryssdal: Let me start with the news from last week about Andrew Cuomo investigating banks for feeding bad information to the ratings agencies. Seems to me that what we’ve had the last month or so is just drip, drip, drip of more of the same out of Wall Street.

Lewis: I feel like what we had the last month is a launching of a culture war with the SEC’s suit against Goldman Sachs and Cuomo’s activity in the U.S. Attorney’s office in Manhattan all basically coming to the conclusion that now everybody wants to actually know how Wall Street firms make their money.

Ryssdal: Well, that’s a little scary, because maybe we don’t want to know, right?

Lewis: I think we probably don’t. Or rather, when we do, I think it’s going to trigger a revolution in financial services. When people see how the bond market actually functions — and this is all about the bond market — important distinction, the bond markets overwhelm the stock markets in size and in their importance to the Wall Street firms. They’re sources of enormous profitability, and you see there’s a sort of — you say, drip, drip, drip — but I see this sort of natural progression in these lawsuits. And they’re all with merit. I don’t know if it’s illegal for Goldman Sachs or Deutsche Bank or Merrill Lynch to game the ratings agencies model so they can get triple-A ratings put on things that are actually junk. But it should be. And even if they end up getting off the hook legally, I think they’re going to be on the hook for a new set of rules.

Ryssdal: Do you actually have hope for the financial reform bill that’s in Congress?

Lewis: The way you phrased that question, I can tell what you think I should say. You think I should say, “Noooooooooo.” But no, I do have, I have great hope. I’m actually — I don’t want to put this too strongly — but almost proud of our Congress. They’re grappling with these issues, and they’re getting very entrepreneurial. The Franken Amendment, which is going to prevent the ratings agencies from essentially competing for the business of rating the bonds by lowering their standards, is a good example of the sort of thing that should happen.

Ryssdal: So I was just thinking of how broad a brush we all use to paint Wall Street as if it’s this one thing, but it’s not. It’s a bunch of really big companies, and then, many, many smaller companies who are doing all kinds of different things. When you talk to people who are in the financial industry, do you get a sense of relief that all of this is now coming out and the system is becoming more the way it’s supposed to be?

Lewis: Not in the bond markets. People in the bond markets are disturbed and outraged; their world’s being turned upside down. On the bankers, the investment bankers and the mergers and acquisitions advisers and people in the stock markets, I think, are relieved, because they look at what happened, and they say, “We didn’t have anything to do with this. We had these guys, these numnuts, in the bond departments who are doing this to our firms, and yeah, they made a lot of money in a few years, and they paid themselves way too well. But they destroyed the firm.” There is plenty of appetite for cleaning up the system inside the system.

Now having said what I just said, it’s also true that if the reform is done well, the end result is a smaller, less profitable financial services industry.

Ryssdal: Does Wall Street do what it was originally supposed to do? Does it does that anymore? You know, allocate capital and get companies to be able to get into the market and float their debt and invest that money?

Lewis: It obviously does it not so well. The point of Wall Street is to assess risks, make risks plain, so capital can be allocated efficiently. And we’ve been through this period, this debacle we’re living through is the result of Wall Street having done precisely the opposite. Having disguised the risk, so capital could be misallocated and squandered. It’s serving the purpose of enriching a handful of people who happened to work at the big Wall Street firms. But it’s not serving the larger society and the productive economy. It’s become divorced from that in some strange way. But this is a process that has taken, this is a story that is not a story of the last four or five years, but a story of the last 25. And I think that’s why the change now feels so wrenching and slow. I mean, we’re changing something that’s very deeply embedded into our culture.

Ryssdal: So it’s going to take 25 years to unwind all this?

Lewis: No, but three or four. I mean, I think it’s reasonable to expect that… I mean, just as after the crash of ’29, it was four years before the Glass-Steagall Bill was passed. It took four years to actually have decent hearings on the subject. It’s going to take our society a little time to get our minds around what just happened. Three or four years? That’s fine by me.

Ryssdal: Michael Lewis, his most recent book is called “The Big Short.” Michael, thanks a lot.

Lewis: Thanks for having me.

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