Wall Street Isn't Dead

10/08/2008 10:00 am EST

Focus: MARKETS

Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of IQ Trends, looks past the current crisis to see how the financial system might evolve.

If the prevailing wisdom among the punditry is correct, then "Wall Street, as we know it, is dead."

I totally disagree; Wall Street, like all market places, simply undergoes change. To be sure this type of change is rarely organic; historically it is due to legislation or regulations that are in response to a crisis or series of events.

For example, the 1933 and 1934 securities acts and the Glass-Steagall Act were born from the Crash of 1929; the crash of October 1987 resulted in trading curbs and a modification to "portfolio insurance," and the Sarbanes-Oxley Act was intended to prevent another Enron, World Com, et al.

Accordingly, as a result of the current situation, the entire US financial system is about to undergo the mother of all makeovers.

So like it or not, our capitalistic system is going to change. Capitalism, also known as "creative destruction," is the system that formally allowed one to freely engage in or disengage from any business, the only absolute being that risk and reward go hand in hand.

What we'll end up with heaven only knows. Hopefully, whatever "it" is, will result in real reform with objective oversight and thoughtfully designed regulation.

As for where the blame lies with the current situation, it is simply too widespread and long in the making to chronicle here. Suffice it to say that the sins were many and the sinners plentiful. I think nearly everyone would agree, however, that at its crux the descent began with the mortgage market.

The single best explanation of how the residential mortgage-backed securities (RMBS) market works was in a recent article by John Mauldin in his Thoughts from the Frontline Weekly Newsletter in a piece titled Betting on Financial Armageddon.

Of course, all eyes now are turned toward how to rectify this mess and stabilize the financial and credit markets. Passions and opinions are running hot as to how to accomplish this. One thing I can guarantee is that no one will be totally satisfied with the outcome.

One view that I find intellectually compelling, which doesn't have a snowball's chance in Hades of being implemented, comes from the most recent weekly commentary of Dr. John Hussman of the Hussman Funds. 

My one bedrock opinion in this matter is that if nothing else, any new regulatory and oversight scheme must provide transparency as to when money (campaign contributions) is given to the regulators from the regulated.

Note I did not write "eliminated;" that would probably violate the First Amendment. By transparency, I mean we need to know who is giving and who is getting because the bright light of day effectively eliminates the propensity for any impropriety.

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