Financial History 25th Anniversary Special Edition (104, Fall 2012) | Page 40

between the financial sector and the rest of the economy appears inexplicably large from 1990 onward . . . deregulation and corporate finance activities linked to initial public offerings and credit risk are the primary causes of the higher compensation differential.” In short, Wall Street compensation certainly was responsible for some of that discrepancy. Initial public offerings (IPOs) were only part of the picture as the credit market crisis continued in 2009. The crisis had a serious impact on the capital-raising process in both equities and new corporate debt offerings. All new stock offerings, including IPOs, diminished from $206 billion in 2008 to $131 billion in 2010. New corporate bond offerings actually increased from $861 billion to $983 billion during the same period. But the numbers belie the fact that $2.3 trillion worth of new corporate bond offerings were sold in 2007 and $169 billion of new stock. Many of these latter bond issues were mortgage-related securities, so when that market collapsed it became apparent that mortgage-related financings had dominated Wall Street debt offerings in recent years. Other parts of the securitization (asset-backed) market also fell significantly as institutional investors began to question the quality of the collateral pledged to bonds, especially in light of the controversy over the credit ratings agencies and their analysis of the CMO market. The dominance of what earlier 20th-century writers called finance capitalism also could be seen in the statistics. Of the new corporate bonds issued prior to 2008, 75% were issued by financial institutions. The same institutions accounted for 50-60% of new stock issues. The economy had been dominated by Wall Street, and when retrenchment came, it took a heavy toll. The decline in collateralized mortgage obligation (CMO) issues in particular meant that spending by homeowners would be curtailed as mortgage financing became scarce and writing checks against home equity declined. Before the crisis, consumer spending had risen to almost 80% of GDP. In 1929, it reached about 67% and had held steady for decades, establishing a trend for the economy. Now that a major source of credit for that spending had been curtailed, what became known as the Great Recession soon followed. The shadow banking system demonstrated that it was incapable of maintaining stability after the excesses of the 2000s. Investors responded to the crisis by refusing to purchase securitized bonds of any type, and that market began to dry up quickly. Commercial paper was being supported by the Fed. Once venerable Wall Street institutions such as Morgan Stanley and Goldman Sachs now were officially commercial banks. After the post-1999 deregulation party, Wall Street was forced to sober up. But anyone predicting that banking attitudes or behavior would change would be surprised in the following years, since banking hubris did not abate despite the rapidly changing economic climate. The aftermath of the Lehman dissolution displayed another irony for which Wall Street was fast becoming known. In 2009, Barclays Capital, the US subsidiary of the British bank, was voted first in the Wall Street analysts’ league tables by Institutional Investor for its bond rating abilities. Barclays achieved the distinction after absorbing some of Lehman’s fixed income operations and more than a dozen of its top bond analysts. In fact, four other banks whose analysts scored well in the same league table were recipients of TARP funds at one stage or another during the crisis. While their customers apparently were impressed with their analytical abilities, Wall Street firms again proved they were better at sell-side analysis than they were at admitting or solving their own internal problems. Another parallel to the 1930s was seen in the manner in which Wall Street handled the crisis. A lack of leadership was clearly evident as the Street came under increasing criticism for causing the crisis, all the while denying any role. A few senior bank executives went on record by talking about the crisis, but many of the remarks were purely tendentious, as they had been 75 years before. The top CEOs went on record dozens of times inveighing against the need for any further regulation of Wall Street. Similarly, the CEOs of the large, failed savings bank mortgage lenders continued to blame everyone else for the misfortunes 38    FINANCIAL HISTORY  |  Fall 2012  | of their companies rather than focus on the misery caused hundreds of thousands of foreclosed homeowners. When public hearings finally were convened to investigate the crisis, the chorus of complaints and denials only grew louder. It would become demonstrably clear that Wall Street CEOs had been practicing what Ferdinand Pecora once called “low standards in high places.” The crisis also had a severe effect on the financial services industry in general. The Financial Crisis Inquiry Commission, assembled in 2008 to examine the crisis, noted that a total of 583,000 financial services jobs had been lost between 2008 and 2009. Wall Street firms fared slightly better, however, losing around 200,000. While jobs were lost, a record $61.4 billion in securities industry profits were recorded in 2009 after $54 billion of losses in 2007 and 2008. Similarly, commercial bank profits rose from $7.6 billion in the first quarter of 2009 to $18 billion in the first quarter of 2010. Of those indus