Ben, hope is not a trading strategy.

And notice what isn’t there. The Fed is not charged with distorting natural market pricing mechanisms to the point of perverting risk. It is not asked to promote ever increasing stock prices. It does not have to guarantee that property prices are rising. It is not asked to manipulate bond, equity or commodity markets. It is not asked to seek the profitability of ‘too big to fail/prosecute’ firms on Wall Street, or to promote their interests. It is certainly not asked to indulge in secret and complex financial transactions with no clear benefit to the wider public.

Yet evidence that the Fed may have lost touch with its mandate are mounting. Sometimes it’s the little things. The Fed is reported to have leaked the minutes of its FOMC meeting to a number of major banks, including JP Morgan, Goldman Sachs, Citigroup, Barclays and others. Within hours of receiving the data, Goldman Sachs issued a research note suggesting that clients short gold. It remains to be seen whether that note was based on the leaked Fed information, but Congressmen Alan Grayson and Daryl Issa are rightly seeking immediate clarification of the issue. Whatever the outcome of those investigations – and frankly the Fed’s record in this respect does not generate much confidence – it’s astonishingly inappropriate for such data to be transmitted to major Wall Street firms ahead of the market more generally.

But it’s the bigger things too. I’ve talked about the matter before on these pages, but one of the biggest scandals in recent American history should have been the way that, during the most turbulent phase of the current financial crisis, the Fed – secretly and without the knowledge or consent of Congress – placed vast amounts of taxpayer money at risk in the support of numerous banks, many of them foreign. The idea that unelected officials should dispose of more than a trillion dollars of your money without Congress even knowing is, to my mind, a greater abuse of democracy than the Watergate scandal. Watergate was bad enough, but it didn’t involve a trillion dollars.

And yet, I suspect that there are worse things yet to be uncovered. Suspicious indicators abound.

For one thing, there’s the grotesque leverage being operated by the Federal Reserve Banks. The New York Fed has seen its leverage ratio rise in excess of 100:1. Those are the kind of numbers that make Lehman look prudent. Heck, those are the kind of numbers that make Greece look safe.

Then too, there’s the appalling conflicts of interest that are built into the system. The board of directors of the Federal Reserve banks are largely composed of officers of the very banks the Fed is there to supervise. So when crisis struck Wall Street, how was it a surprise that the Fed – supervised and directed by Wall Street bankers – was so fast to ride to the rescue?

And look too at the rise and rise of the stock market. Europe is in a slo-mo financial crisis. Japan (a country more highly indebted than Greece) has decided to devalue its currency and double up on its money supply in a massively risky gamble to get out of trouble. America is seeing weak growth and a rapid increase in the kind of toxic debt products that brought us to our knees five years back. Corporates are hoarding money instead of investing it. Jobs growth remains anemic.

So how come the stock market is rising? Who is the final buyer behind that rise if not those magic money-printing machines at the Fed? And if the Federal Reserve believes that rising financial markets are necessary to restore the country to health, we deserve an explanation of exactly how bubbling up financial assets to untenable levels is going to help with the things that actually strengthen economies: physical investment, innovation, new business formation, job growth.

It gets worse. The VIX is a measure of stock market volatility or simply put price movements up and down. It’s long been an interesting measure and has long had a part to play in financial markets. But it’s gone crazy recently. Trading in the VIX doubled from 2011 to 2012. The volume of futures contracts traded is up nearly 2000% since 2009.

I’m a hedge fund manager. I deal in these markets. And I have no idea which institution; private sector firm, sector or individual could be trading in these volumes due to the vast margin requirements (not least, because proprietary trading is now heavily restricted, at least in theory.) So could it be the Fed? And is its strategy to reduce price swings, influence and maintain the stock market’s otherwise inexplicable rise? I can’t be certain, but I think that the Fed should come out and publicly disclose any dealing or influence it has had in this area.

These questions go still. further What products and markets is the Fed trading in? The Fed has admitted to trading swaps with the ECB, which compels us to ask: which other off balance sheet derivatives is the Fed currently trading? Is the Fed active in gold swaps? Is it trading in gold, silver or other metals, futures and or options? Bear in mind, that the Fed’s leverage is so extreme that a small movement in prices could make them insolvent. And given that there’s no known exit strategy to their QE program, the risk of a disorderly exit with catastrophic losses is highly probable.

These are disturbing questions, and I’m not the only one asking them. David Stockman, Director of Management and Budget in the Reagan administration, looks at our current financial landscape and calls it ‘a giant Ponzi scheme’. He’s right. That’s why I wrote Planet Ponzi 2 years ago. Nobel Prize winner and former chief economist at the World Bank, Joseph Stiglitz, commented recently, ‘If we [at the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’ He’s right too.

All the evidence suggests that the Fed has turned into an entity which is too big to fail/jail/bail or prosecute, manages the financial system on behalf of Wall Street and is accountable to no one. That system delivered one huge financial crisis in 2008-09, but an even larger aftershock is brewing now. Isn’t it time we demanded some answers? Isn’t it time we demanded change?

Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

‘Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy,’ he said. ‘This crisis was not originated in Europe; seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.’

Hmmm. So evil Americans are responsible for European woes, huh? That’s an interesting claim, but does it really stand up? And who, really, is to blame for this extraordinary mess?

Who’s to blame? World leaders assemble for the G20 summit in Los Cabos, Mexico

In the spirit of Euro 2012, I thought I’d follow a system of ‘player ratings’. I’ve listed the major players in the Eurozone crisis below. A score of 10 implies, ‘Totally to blame. Why are these guys not in jail already?’ A score of 0 implies … well, it doesn’t really matter: there are no zeroes. Who’s to blame for the Euro crisis? Here are the major players with their scores.

1. American Banks 4/10

OK, I’m no fan of the US banking system. US regulators completely failed to enforce their own rules. The banks screwed up horribly and did a vast amount of damage to the the US economy. But there’s the point: they blew up the American finance system, not the European one. Get a map, Manuel. That big blue thing? It’s the Atlantic Ocean.

2. European banks 9/10

European banks, on the other hand, are vastly to blame for the mess in Europe. For one thing, a lot of the mess in the US was created by the US subsidiaries of European banks: outfits like HSBC, Deutsche, RBS. But then Societe Generale, Paribas, Lloyds, Northern Rock, Bankia, Unicredit, Dexia – these are all home-grown awful, and it’s their problems which have added so much to the European debt load.

Star performer: Greece must take full responsibility

3. Greece (Star Player) 10/10

Every team needs a star man, a Steven Gerrard, Captain Reliable character. The Euro-Blame Team has to name Greece as that €500 billion star. It cooked its books. It never even attempted to reform its economy. It doesn’t get its citizens to pay taxes. It offers crazy pensions. Its rail system notches up losses that exceed its sales. It has a mountain of Ponzi debt that, even after vast write-offs, will be unpayable. You can’t beat that performance. Greece: it’s ten out of ten, all the way.

4. Spanish Real Estate 9/10

It wasn’t so long ago that the Spanish state looked prudent. It had debt levels way lower than those of Germany. (Indeed, it still does.) Its economy thrived. It had a team that played beautiful football. What could possibly be wrong with this picture? Answer: a real estate bubble even worse than the one in America and Ireland. A bubble that Spanish regulators never even attempted to address. A bubble that is currently threatening to wreck not just the Spanish government, but the entire Euro project.

Spain is higher up the radar of international investors at the moment, but Italy is a whale of even larger dimensions. In the decade to 2010, do you want to know how many economies had worse growth than Italy’s? Answer: just two. Zimbabwe and Haiti. If you add to that terrible economic performance a mountainous debt and a corrupt and dysfunctional state – well, 8/10 seems way too generous. I must be Mr Nice Guy as it’s sunny in London today. Portugal, by the way, has somewhat similar problems, but the country’s size means I can’t award it more than a 6/10. Think of it as an impact sub.

6. France 6/10

France lies even further from international radars than its two big southern neighbours, but when you think about a highly indebted country with an exceptionally leveraged banking system, gigantic unfunded pension liabilities, an addiction to state spending, and huge assets parked in the not-so-safe countries of the Mediterranean … well, you probably don’t feel like putting your funds on deposit anywhere that smells of garlic. Stay away.

7. The European Central Bank 9/10

The ECB. What can you say? How Ponzi-ish, irresponsible, non-transparent and undemocratic can a central bank be? The answer, it seems, is ‘very’, four times over. The ECB enabled asset bubbles to form in Spain and elsewhere. It permitted a vastly overleveraged financial sector. And its response to crisis: to extend trillions of euros in soft loans to insolvent banks to gamble on dubious bonds issued by failing governments. That’s not monetary policy. It’s monetary insanity.

Damaging to Britain: But can Sir Mervyn King and Gordon Brown really be blamed for the eurozone crisis?

8. Gordon Brown & Swervyn Mervyn King 6/10

If we were talking about how far this pair of superheroes had injured the UK economy, we’d be pulling out perfect tens. But the question here is about the damage to the European economy and although Britain has been saddled with eye-watering debt, hideous inflation, rotten banks and a stagnant economy, those things have only a marginal impact on the Eurozone. That little strip of blue, Manuel? It’s the English Channel. (And don’t call it La Manche.)

9. Angela Merkel 7/10

OK, this is a tough one. Germany has a strong economy. It has weak and overleveraged banks, a scarily under-recognised pension problem, and too much government debt. But still. Angela and team didn’t create this problem, they’ve only compounded it. They’ve compounded it by always choosing to kick the can down the road, instead of addressing and fixing the giant issues in the European system. Germany’s not mostly to blame, but still. It should have done so much better.

10. Jacques Delors 9/10

Jacques Delors, the principal architect of the Euro, has admitted that the project was structurally flawed from the outset. He’s even admitted that British objections to the idea had real substance. (Thanks, Jacques, and it only took you 15 years to figure that out.) Basically, this project could never have worked and now here it is not working. Quelle surprise.

L’homme culpable: European Commission President Jose Manuel Barroso should take a look in the mirror

11. Jose Manuel Barroso 9/10

Manuel Barroso: if you have a mirror anywhere in your €1.4 billion offices, take a look. The person looking out at you is responsible for maintaining and boosting an impossible system. If EU officials had ever had any respect for democracy, this crisis would never have occurred. If the EU had ever recognised the real gravity of the crisis, if it had allocated blame and responsibility in the right quarters and in a timely way, this would never have happened. Manuel Barroso, l’homme culpable – c’est vous.

Meantime, and in light of the football theme of this article, I have a simple, neat suggestion to make everything right. Spain wants to be bailed out by the German taxpayer. German taxpayers, understandably, aren’t all that keen with the idea. But there’s a footie tournament on, right? Spain and Germany: the two favourites. So what about a simple little wager, double or quits according to which team fares better. And that’s a game I’d pay to see. 

I published this in todays Daily Mail

But it’s not Zuckerberg who gets to choose the company’s valuation. It’s the banks he retains to manage the transaction. I wrote that the firm was being ‘vastly and obviously overvalued at the levels currently being discussed.’

Unfortunately, I’m being proved right at sickening speed. The firm had its IPO (Initial Public Offering) on 18 May – that is, the date when its shares first began to trade on the market. Since last Friday, the firm has lost 31% of its value, in comparison with the intraday high of $45 per share. Yesterday’s close was $31.

Disappointing: Facebook shares have lost 31pc of their value since the company’s IPO last Friday

But let’s not talk about the firm. Let’s talk about you. If you invested £1000 in the company’s shares, that money is now worth around £700. Realistically, given various costs and fees, you might well find that money worth just £600. And you’ll lose more before things stabilise.

So what happened? Well, quite simply, the banks did what banks do: they looked after their interests and didn’t give a damn about yours. Here’s how the whole ugly operation proceeded.

Step one: they pumped up Facebook’s valuation as high as they could. Since a bank’s fees are in general a percentage of total money raised, the more highly they valued the firm, the greater the fees they got to rake off the top. They were assisted in this by irresponsible cheerleading from across the mainstream financial media.

Allegations: It has been claimed that Morgan Stanley told institutional investors that the shares were overvalued, but left retail investors in the dark

Step two: since banks know that professional investors aren’t that easy to fool, they didn’t try too hard to do so. Facebook is a company with a huge profile amongst ordinary retail investors, so it’s pretty easy to ensure a huge retail following for the IPO. Morgan Stanley, one of the firms involved in running the whole operation, stands accused of effectively differentiating between different classes of investor.

Allegedly, one of its analysts shared negative news about Facebook with institutional investors that it did not also share with retail ones. If those allegations prove true, Morgan Stanley was effectively protecting its most valuable clients and letting the retail investors – that means people like you – go hang. Or to put it at its starkest, the suggestion is that Morgan Stanley sold a stock that they knew to be overvalued to retail investors while protecting its wealthiest clients.

Step three: they launched the IPO, took their fees, watched the share price plummet, and will now wait until a sensible price has been reached, before going back to their original rich clients in order to start the business of actually trading the stock in the normal way.

Have I left anything off? Well, yes actually, Step Four – the one step no Wall Streeter would ever forget about – the bankers involved will almost certainly pay themselves giant bonuses.

Now, I want to be clear that Morgan Stanley vigorously denies these accusations. (No surprise there: it is possible that a serious criminal offence has been committed). A spokesman for Morgan Stanley said in a statement, ‘Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. These procedures are in compliance with all applicable regulations.’

OK. So one of two things is true. Either, Morgan Stanley did not follow those regulations, in which case I personally would argue that the only fair penalty would involve a significant number of Morgan Stanley bankers serving a long sentence in jail. Remember that during the London riots, we saw people jailed for breaking a couple of windows and nicking a couple of TVs. The destruction of value in the Facebook IPO has so far run to many billions of dollars and we haven’t seen the last of it yet. My own rule of thumb – call it the Feierstein rule – is that for every million dollars criminally destroyed by a bank, one banker should spend one year in jail.

It’s a pretty gentle rule, in all honesty (the London rioters were dealt with far more harshly), but even so, thirty billion dollars translates into thirty-thousand years of banker jail time. Sounds good to me.

That’s option one. Here’s option two: what Morgan Stanley says is correct. Let’s say it scrupulously followed every regulation, every procedure, every last detail of compliance. If so, those regulations have totally failed to protect retail investors. Who cares if the rules are followed, if they don’t do what they need to do?

Or actually, now I think about it, there’s a third option. Which is both of the above. Maybe, Morgan Stanley didn’t follow those rules and maybe, in any case, those rules are inadequate. Maybe the regulators are feeble; the banks dangerous, slipshod and unethical. Maybe the courts just can’t cope with the money and sophistication of the bandits they’re struggling to deal with. Perhaps, in fact, the entire, ugly, destructive machinery of Wall Street and the City of London is the same as it was in 2007: destroying value, threatening economies, beyond reach of the law.

Time will tell which of these options is correct. But until we see the ‘too big to fail’ firms broken up and until we see bankers in jail for ruining the lives of countless retail investors, the system is failing. The end can’t come too soon.

I published this in todays Daily Mail

Facebook is a phenomenal company. Mark Zuckerberg is a remarkable man and an astonishing entrepreneur. He’s created something sensational — something genuinely world-changing — and he’s young enough to be my son.

But Facebook the company is one thing. The mooted valuation of Facebook is quite another. I admire the first, and hate the second.

Let’s start with some facts. Facebook enjoyed first quarter revenues in 2012 of $1.058 billion. Those revenues are up around 45 percent from the same quarter in 2011. They are somewhat down on the company’s fourth quarter, but Facebook is (strangely enough) a seasonal business, with a strong fourth quarter and a quiet first one.

The book is by Suzanne Collins, who published her novel one day before Lehman Brothers collapsed: the moment that inaugurated the collapse of a fragile and bloated financial system. Since that day, a tiny coterie of the wealthy and powerful – notably the barons of the international financial system – seem to have done remarkably well for themselves, while ordinary citizens have suffered job losses, wage freezes, high inflation, perennial financial scares, and the destruction of value in their savings and pension funds. We aren’t yet battling each other to death in exchange for food, but give it time. We’re not even four years on.

Naturally, policy makers want us to believe that everything’s going to be OK. George Osborne’s tough talk about borrowing our way into crisis and earning our way out is intended to be Churchillian. This is going to betough, but with enough blood, tears, toil and sweat (he means yours, of course; no one’s expecting bankers to chip in), we’ll get through it.

Unfortunately, economies don’t respond well to stirring words. They respond to facts. And, as I’ve long predicted, and as the OECD’s latest data also suggest, the British economy is back in recession. We’re not earning our way out of anything. The economy is shrinking. Our debt is growing. The problem’s not smaller than it was; it’s bigger and getting worse.

That bad news isn’t restricted to the real economy. Mortgage approvals for house purchases have dropped sharply and are expected to fall yet further. Such falls will drive house prices down from their current (unsustainable) levels and will put further pressure on bank’s balance sheets and household confidence. And given that bank lending is already falling short of unambitious targets, the news is hardly better for a struggling corporate sector.

Bank of England figures have fueled predictions of further property price falls

This fundamental frailty comes in part from our own head-splitting debt hangover, but it comes also from Europe. Italy’s hopes of paying back its massive debts rest partly on swingeing austerity, but mostly on finding some path back to economic growth – a path it hasn’t been on for a decade and more. Alas, the OECD reckons that the Italian economy is contracting, not growing, which means its debt burden is increasing.

Anxiety over the Euro remains so acute that even government advisers – Steve Nickell of the Office for Budget Responsibility – admits to MPs that he checks William Hill for the odds of a euro collapse. (You can get odds here, if you’re worried.)

The authorities’ response to these things has been part-good, part-feeble. The good part is that we have a government which understands that debt is not a good thing, that money has to be repaid, that borrowing from the future to fund consumption in the present is an idiot’s game. An idiot’s game with a horrible ending.

Box office hit: Jennifer Lawrence as Katniss and Liam Hemsworth as Gale in a scene from the Hunger Games

The bad part is that the Bank of England still loves debt. Inflation is high? Hey, who cares, let’s print some more money. Let’s monetise our debt and try to to inflate it away instead of properly addressing and properly restructuring it.

Dilma Rousseff, the Brazilian president, talks about the world being swamped by a ‘monetary tsunami’. She’s right. And that tsunami is like an addiction to borrowing: you get the nice bits upfront (low interestrates, some impact on growth); you get the bad parts later (inflation, inflation, inflation.) You want to know why the price of gold is so high? It’s because professional investors are watching the progress of that tsunami. It’s still offshore, but it’s heading towards us and getting bigger all the time.

And meantime, where is the recovery going to come from? George Osborne does seem to understand, intellectually, that recovery will come from jobs growth from small and medium businesses. (The big firms will create jobs too, but they’ll also be cutting them, so the net effect is not reliably positive.) Yet that intellectual understanding isn’t matched by radicalism of action. The tax and regulatory burden facing small firms wanting to grow islike a massive weight that has to be rolled uphill before the firm can even think about generating sales and hiring new staff. And why, for example, is there not a huge effort to slash payroll taxes? If we want more jobs, why in God’s name are we taxing them?

Collins’ book, The Hunger Games, was the first of a trilogy. Which seems optimistic to me. A trilogy of misery – I’d take that like a shot. But I don’t think we’re in a trilogy. I think it’s a soap opera and we’ve only just introduced the characters. The OECD has just welcomed you to the double-dip recession. Next up: the triple-dip. You heard it here first.

This blog was published in todays Daily Mail
 

Those two acronyms apply — with as many exclamation points as you care to add — to a piece published yesterday in the New York Times. The op-ed by Greg Smith, a former Executive Director of Goldman Sachs, accused the firm of having abandoned its principles in pursuit of profit. Specifically, he says, ‘The environment [at Goldman] now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.’

That may not immediately strike you as remarkable — or at least, you might find it remarkable merely that it took Greg Smith a dozen years to notice the nature of the beast he worked for. It would be like a Santorum aide quitting because he found his boss too Catholic. Or like a Romney aide quitting because he didn’t want to work for a rich guy.

Yet Smith’s testimony is important in two ways. First, Smith is a genuinely senior figure. The Goldman spin machine is already out in force to blat away his comments, but Smith ran the US Equity Derivatives business for Europe, the Middle East and Africa. That doesn’t place him at the top of the firm, or even in the next rank down, but his job is — sorry, was — of real heft and substance. It’s people like Smith who are most closely in touch with how the firm treats its clients day to day.

Secondly, his article summarizes the entire problem of the last few years in a remarkably succinct way. The financial industry — exemplified and led by Goldman Sachs — lost touch with its clients. It forgot its ethics. It forgot that its first duty was to serve others.

I believe Smith is right. When I first joined the financial services industry thirty years back, Goldman had an almost unblemished reputation. It cared more about its integrity than its rivals. For a long time it wouldn’t handle a hostile M&A bid, because it wasn’t sure it would be able to preserve its ethics in the trench warfare of a proxy fight. The firm did well financially, because it did right ethically. The two things fed each other.

But as other firms improved their act, as competition intensified, Goldman sought other ways to maintain its edge. Since everyone fought over the same Ivy League and business school graduates, since everyone paid top dollar, since everyone compelled their employees to work all the hours of the clock, Goldman figured that it could make money from an ethical arbitrage. In plainer language, the firm’s senior executives thought, ‘We’re Goldman, we can shaft our clients.’

And they did. I think the firm has been going sour for longer than Smith suggests, but he works there. Maybe he knows more. They key point, however, lies in his remark that, ‘I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them … It makes me ill how callously people talk about ripping their clients off.’

And of course, competition breeds a response. Goldman has been so good at doing what it does that others follow. There has been, during my time on the Street and in the City of London, a long slide downhill in ethics. We used to serve clients. Now we serve ourselves. I myself became a hedge fund owner so I could choose my own investors, select my own investment strategy, and cleave to my own ethical path. I’m shocked to reflect that there is almost no leading Wall Street firm I would now be willing to work for. I think they’re cowboys.

There is a still more somber side to this story, however, and it’s that the people we pay to protect us from these rogues have become the rogues’ own henchmen, nodding dolls that wave through every new outrage. David Stockman, a former White House budget director, said in an interview with the Associated Press,

Here’s the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything [it does] is designed to keep this rickety structure from unwinding. If you had a [former Fed Chairman] Paul Volcker running the Fed today — utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn’t have half, you wouldn’t have 95 percent, of the speculative positions today.

He’s right. Smith is right and Stockman is right. Read those two pieces (here and here) and you have everything in a nutshell. The moral corruption at the heart of the Wall Street. The regulatory failure that means the Fed, the SEC, Congress and every other regulatory agency we have are failing in their duty to protect ordinary citizens. That Goldman is a vampire squid has long been recognized. The conflicted and non-transparent nature of the aquarium is, as yet, far too little understood.

Asked how he sees the immediate financial future, Stockman says, ‘The carnage will be unimaginable.’ He’s right again and I’ll bet Greg Smith agrees. But you know what? Nothing will change. There are times when you have to be teenage to know what to say. OMG and WTF.

This article was published in the Huffington Post and may be found here