Lucy sets the ball.
Charlie Brown goes to kick the ball.
Lucy snags the ball away.
“Oh, good grief!”
Does this remind us of Wall St. vs. Main St.?
As long as there is a “Lucy” to present an opportunity, there will always be a “Charlie Brown” to fall for it. Similarly, there will always be increasingly complex derivatives and people to invest in the derivatives. It’s only human nature.
Humans learn from time to time, however, just when we do, something new comes along to deceive us. Nowadays, investment banks are hiring lawyers for the sole purpose of drafting ever-complex financial derivatives.
What’s the problem? Well, how do you value a contract that the salesperson doesn’t even understand? And if the goal is profit, where’s the incentive to be truthful? This poses a tremendous problem when recording long-term assets. Sure more regulation would be nice, but how likely is this going to happen?
At least conservative buy-side analysts are on our side, right? Good grief.
On top of the problem that Vincent mentions of a salespersons “incentive to be truthful,” there was also the problem of lost trust in the ratings agencies. Just like the salespeople, it turns out that the rating agencies were giving out good ratings to these securities backed by bad assets. This weakness has further hurt any trust of Wall Street and those that are supposed to regulate it.
Also, as Vincent mentioned, “Humans learn from time to time, however, just when we do, something new comes along to deceive us.” Even without something new, human memory can be shockingly short. While the financial crisis is still fresh in our minds, we will move on, but hopefully not forget what led to it.