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Wall Street's Second Act

After a miserable period that has brought billions of dollars in write downs, surging mortgage defaults, investigations into market manipulations and wrongdoings, an investment bank pushed to the brink of bankruptcy and a complete loss of investor confidence, it's time for Wall Street to reinvent itself.

Of course, the impetus for instituting fundamental changes in how Wall Street operates rests firmly with the many misdeeds exposed by investment banks and hedge funds over the past year. All of Wall Street's major players, including UBS, Merrill Lynch, Morgan Stanley, Citigroup and JP Morgan Chase, have made their flawed risk management policies blatantly available for public viewing - from shoddy lending practices that led to the subprime meltdown, to broker scandals and arrests, to allegedly defrauding investors with the sale of auction-rate securities.

In the end, the actions of Wall Street contributed in some shape or form to the nation's subprime problems, the current credit crunch that followed and the dismal-and-getting-worse state of the U.S. economy. Billionaire Warren Buffett, who proclaimed months ago that the United States economy was in a recession now contends it's likely we are only halfway through the credit crisis that to date has sent home foreclosures and mortgage delinquencies to record levels and sparked the near-collapse of Wall Street's fifth-largest investment firm.

Is it any wonder Wall Street needs an extreme makeover - and fast?

The most likely adjustments to materialize over the next few years will focus on transparency, openness, and better policing of commercial and investment banks. Already, signs are pointing in that direction, with the announcement that the Federal Reserve and the Securities and Exchange Commission (SEC) would share information and resources to mitigate chances of another future credit crisis and a repeat performance like that of Bear Stearns.

Indeed, restoring investor confidence, which has been shaken to its core in the past six months, will no doubt be a critical component of Wall Street's second act. As reported June 30 by Michael Santoli in Barron's, investment products are expected to be more standard, less tailored and more transparent.

Some of the changes that are anticipated for Wall Street will likely be mandated under a new regulatory structure - a move that, in turn, could help investment firms win back the trust of disgruntled investors. A tentative plan under consideration is to give the Federal Reserve broader authority to collect information and exercise authority over financial firms, which also would provide consumers with expanded access to information about the complex ways Wall Street actually handles risk. And, in the process, the federal government will update a financial system that hasn't been altered since the days of the Civil War

Federal Reserve Chairman Ben Bernanke touched upon the much-awaited changes for Wall Street in a speech July 8 and the challenges confronting policymakers as they try to stabilize a shaky U.S. financial system in the months ahead. To that end, Bernanke said the Federal Reserve may allow squeezed Wall Street firms additional time to tap the central bank's emergency loan program, which initially was created in March following a run on Bear Stearns that pushed the 85-year-old investment bank to the edge of bankruptcy and ignited fears that other banks would soon follow.

The Fed also plans to crack down on the shady lending practices that have burned untold numbers of the nation's riskiest subprime borrowers. The plan, details of which are scheduled to be unveiled next week, would apply to new loans made by all types of lenders, including banks and brokers.

Investors Remain Doubtful

Of course, many of these changes mean little, if anything, to the thousands of financially weary investors whove experienced financial losses in the billions of dollars over investment deals gone bad. For them, the perception of Wall Street is changed forever.

Moving forward, however, there is reason to hope that some good may result from the weaknesses exposed in Wall Street - and that is a better understanding of risk management, greater awareness on the failures of credit rating agencies in their reviews of subprime mortgage-backed securities and a renewed emphasis on investor protection. Now, finally, maybe Wall Street will decide what it wants to be when it grows up.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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