The Seven Sins of Wall Street calls for change

Author suggests deposits be kept separate from investment banking

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The_Seven_Sins_of_Wall_StreetWith the financial crisis now in the rear-view mirror five years ago, it should be clear sailing for the giant U.S. banks that arguably created the problem, right?

Not according to veteran Bloomberg News editor and investigative reporter Bob Ivry. In his recently published book, The Seven Sins of Wall Street, Ivry pulls no punches about the continued sins of the major players like Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Their collective sins? Gluttony, Wrath, Envy, Pride, Sloth and — he saves the best and most obvious for last — Greed. And as the book’s subtitle suggests (Big Banks, Their Washington Lackeys, and the Next Financial Crisis), the fact that so few of these sins were punished the first time around could mean a repeat of the crisis.

Just when you thought it was safe to go back into the water!

Too big to jail?

Sadly, it seems that the slogan “Too big to fail” could as easily be modified to “Too big to jail.”  We should be “very afraid” of the shenanigans of these financial behemoths  “since the crisis” Ivry writes.

Ivry brings to life the contrast between the lavish lives of the masters of the universe running these institutions, and the thousands of Americans who lost their homes to predatory lending practices and shady mortgages. And he doesn’t shrink from making his own recommendations: the financial giants need to be shrunken down to a size where they can no longer be deemed “too big to fail.” He gives voice to the outrage of Main Street and the essential proposition propagated by these banks that it’s “heads we win, tails you lose.” By which he means, the system is still such that these institutions can take enormous bets with other people’s money (i.e. depositors) and if they win, they go home with giant salaries and even more gigantic bonuses. And if they lose, well again, their mistakes are paid with other people’s money (i.e. taxpayers) and more often than not the executives not only keep their jobs but still end up with enormous bonuses.

Ivry calls for a return to the days when deposits were kept separate from investment banking. Or as he colourfully phrases it, “The easiest way to make the biggest banks smaller is to separate their dice games from Granny’s deposits.” He’d also like to see them exit from commercial activities: “They ought to be financing oil exploration and coal mining, not doing it.”

If you can’t beat them…

Let me add a few points that Ivry does not cover. Since this is a blog about financial independence, it may be worth observing that if you feel there’s little you can do as a small investor about the dominance of North America’s giant banks, you could at least profit from them. If the advantages depicted by Ivry are are as overwhelming as he makes out in his book, then it might make sense to buy an ETF focused on this sector.

For U.S. financials you might try the Vanguard Financials ETF (VFH/NYSEArca), which includes not just big U.S. banks but also wealth managers and financial services issues of all stripes. Canadians wishing to focus on U.S. banks but hedging back into Canadian currency could consider the BMO Equal Weight US Banks Hedged to CAD Index ETF (ZUB/TSX). And of course, seeing as Canada’s big banks sailed through the financial crisis practically unscathed, you could also try the iShares S&P/TSX Capped Financials ETF (XFN/TSX).

Jonathan Chevreau is the editor-at-large of MoneySense. He blogs here and at findependenceday.com. Find him on Twitter @jonchevreau.

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