Book Review: In Bed With Wall Street
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In his book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, Larry Doyle is analyzing the relationship between Wall Street, the regulators, and Washington. Using his experience in Wall Street, Larry’s goal in writing this book was the pursuit of “truth” and “desire to help people.” These are noble goals and Larry was brave enough to ask questions many people were afraid to ask. Who regulates the regulators? How do we know that regulators didn’t collude with Wall Street firms?
However, Larry wasn’t clear about what type of truth he was looking for or how was he going to help people who were victimized by the crisis. He wanted to expose the corrupt relationship between Wall Street and Washington even though we knew all along that this type of relationship existed before: revolving doors from Wall Street to Washington, or Wall Street to regulators and vice-versa. We also know the role of lobbying from Wall Street to Washington. This is the structure of capitalism and the way we function here in the US.
In summary, this is a good book to read if readers want to understand history and stories about whistleblowers. But this is not a book to read if you want to understand the root cause of the crisis in depth and how to solve the crisis problem.
Larry Doyle’s main ideas of the book could be summarized as follows:
- Executives, legislators, regulators are more interested in protecting their own interests.
- The issue for an economic recovery is structural. Hence, the fundamental weaknesses need to be exposed in order to cure the system.
- Because Wall Street and regulators do not want to change, the new system that the government, regulators, and self-regulatory organizations is supposed to fix is more or less the same old regime, pre-crisis one.
- Wall Street is the source of funding of self-regulatory bodies (e.g., FINRA) and the Washington elite and continues to be so.
- Transparency and financial regulatory reforms are keys to rebuilding trust in our financial systems.
What I like about this book:
- Public confidence and trust have been badly damaged, which could unravel our regulatory foundation.
- In order to fix it, more transparency is needed to be injected into the system, such as transparency of hidden fees, transparency of the derivative markets, risks parameters that need to be outlined to retail investors, etc.
- The conflict of interest between self-regulated organizations such as FINRA and its own portfolios is self-serving and self-revealing.
- The Glass-Steagall Act needs to be re-established.
- The stories of whistleblowers revealed that there are people who want to fight the corruption but fail because of the system.
- The author was asking for a real debate and wanted to expose the real weaknesses in our regulatory foundation.
Areas of the book that could be improved:
- The author had a constant critique of FINRA and the head of FINRA, “FINRA in bed with the regulators.” Larry delved into the past and offered no real solution.
- Several comments or blogs from third parties were included in the book. The author should have analyzed them rather than list the reports or comments from others.
- The author was speculating about the investments (especially Auction Rates Securities or ARS) made by FINRA. Even though the argument might be valid and the issue was needed for review, FINRA and other entities probably believed they were safe investments too at that time.
- Larry Doyle was a little idealistic when he wanted to uncover the “real” truth behind the regulatory bodies with their conflict of interest. We can spend countless of hours and tax dollar money to understand that. But shouldn’t we go forward instead and learn from our mistakes? We all know the imperfection of our foundations, but we surely cannot do a revolution. Incremental changes could be more efficient to fix it.
- While we understand that fighting against Wall Street firms is a winless value proposition, this is our legal and arbitration system. It is a known thing. Popular outcry was helpful in having banks and other financial institutions pay for their deeds during the crisis. It is a work in progress. Rome was not built in one day.
I think Larry Doyle is right in tackling the issue of transparency, and rebuilding trust between the public, Wall Street and our regulators. However, I believe one main root cause of this crisis was the result of leverage in the system, something the author fails to mention: leverage caused by greed; laxity of convenants in structured finance; everyone believed we could borrow and played and everyone knew that the music would stop one day. And it did stop! We were too complacent. It was a wild casino.
The relationship between Wall Street and the regulators was a known thing and this relationship still continues. This is the way the US capital market has been functioning. The system is not perfect, but there is no perfect system. What I believe is missing is some warning signals to detect leverage in the system, I think regulators are trying to implement some sort of a early warning signal such data collection, Basel rules, stress testing under extreme scenarios, etc.
In hindsight, it was easy to blame on the regulators. Amidst the height of the crisis, we need to be creative and bold. We have the hindsight to be able to analyze whether the Fed or the government was right to help the banks and financial institutions. History will tell. I personally think that if the government and/or the Fed haven’t stepped in, we would still be in the crisis and things would get worse before getting better. My view is that, based on the events since 2008, banks in the US are better capitalized now. The regulators are more aware of the complex link among banks, the financial system, and the inter-connection among capital markets in the world.
I am for self-regulation. The government is not in the business of banking. However, I agree with the author that we need strong, independent regulator bodies to help prevent the next crisis. Regulators did implement some sort of reforms, such as Dodd Frank and Volker Rule. Europe is implementing its own rules regulating the derivatives markets. Our system is not perfect, but we still have to work within the system in order to change and improve the system from within, rather from the outside.
Overall, it is a good book to read if you don’t know the history of past crisis, or how the government dealt with them. It is a good educational book. It is also his personal view where the author suggests his own idea of solving the issues. I personally didn’t learn anything new. Having only structural reforms of the financial regulator may not be enough to prevent another crisis and rebuild trust among the public. Putting in new faces may solve the issue in the short term. We probably need education and training to understand and be able to tackle the next crisis. We were too complacent during the last crisis. We were trained to understand the fundamentals and financial models. The 2008 crisis was an eye opener, changed the way we look at our assumptions, the way we look at crisis (concept of a risk free rate, concept of LIBOR, concept of efficient markets, everything we learned and studied at business schools, etc.). We would need to be a little more skeptical, develop our own judgment and rely less on the mathematical and financial models in order to build a more resilient system and re-build trust among the public.
Author Larry Doyle will speak at "NYSSA "Author Series™: Wall Street: Path to Prosperity or Enclave for a Selected Few." To register, click here.
–Kampo Pal, CFA