Wall Street's Bankruptcy

Go to Original
By François Vidal

And now, Wall Street's biggest scandal. We thought we'd seen everything with the Kerviel affair and its 5 billion Euros of trading losses. Now, at year-end, the Madoff affair has exploded, with its $50 billion - or more - up in smoke! A major new earthquake a global finance sector in very bad shape could well have done without. That, in the heart of the Mecca of global finance, a member of the establishment, Bernard Madoff, should have been able to use his personal reputation to fertilize a most basic garden variety "scam" for years at the expense of wealthy clients and the most sophisticated investors seems absolutely unbelievable. But beyond the shock of an affair that promises to be worthy of a Hollywood screen play, the first elements of this new scandal prove that there is decidedly something broken on Wall Street.

A year and a half after the bursting of the "subprime" bubble, this affair testifies once again to the dangers of a system guided solely by thirst for profits, a system in which leading operators are ready to bestow their confidence on a manager solely on the basis of his pretty face, whenever they can hope for a few more points of return from it. And what does it matter that in this instance the investment strategy implemented to honor the promise of an 8-12 percent return per year had never really been defined, in contempt of the most elementary rules of prudence.

A system in which the supervisory authority - in this case the SEC, the American stock exchange's policeman - is incapable of fulfilling its mission. A pure and simple failure - or connivance: the investigation will determine. In the meantime, the facts are there. Seven years after the Enron affair and while its - at the very least, lax - supervision of Wall Street's banks has been shown decisive in the excesses committed the last few years, the SEC shines once again by its incompetence.

Under these conditions, there is no doubt that the revelation of this disastrous "pyramid' fraud will undermine the already vacillating confidence of investors still more. Since the Lehman Brothers' bankruptcy in mid-September, they've continued to liquidate their investment portfolios, preferring to be completely liquid to remaining exposed to badly identified risks. That all translates into a fire sale of assets, feeding the drop in the markets and the collapse of the "hedge fund" industry. With the Madoff affair, this every-man-for-himself stampede to liquidity will certainly accelerate. The year 2009 already promised to be very difficult for the markets. It is likely to be worse.