DWM: What's Next for Savvy Investors

When Goldman Sachs went public in 1999, its prospectus began: "Our clients' interests always come first. Our experience shows us that if we serve our clients well, our own success will follow."

We couldn't agree more with their stated mission. As our clients and friends know, that's exactly what we have established and practiced at DWM as the foundation of our firm and our dealings with our clients. But what about GS? When did their moral compass get overrun by greed and arrogance?

As Michael Lewis points out, things changed for many of the Wall Street banks in the 80's and 90's. They went public and shifted the risks from the partners to the outside shareholders. The shareholders who financed the risk taking had no real understanding of the risks involved, and as the deals got more complex, their understanding diminished. It is fair to say that much of the risk taken in the last decade by Wall Street firms probably would not have existed if the partners of the firms were bearing the risks personally.

Furthermore, in 1998, Congress repealed the Glass Steagall Act. This Act had kept banks separated from Wall Street since 1932. The result: Citigroup, Countrywide, and Washington Mutual, among others, shattered and/or collapsed.

Then, in 2000, Congress passed the Commodity Future Modernization Act. It made derivatives completely free from all oversight and regulation. The result: AIG blew up, costing taxpayers $185 billion.

And, in 2004, SEC granted a special waiver to the five biggest investment houses (Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman Brothers and Morgan Stanley) to increase their leverage, in most cases reducing their required capital to 4% of assets. The result: Bear Stearns and Lehman are gone, Merrill Lynch was rescued with billions of taxpayer dollars, while GS and JPM borrowed billions from the US.

As the SEC charges and Senate investigations of Goldman and others are becoming more transparent, we must ask whether GS or other investment banks deserve the huge public subsidies they receive. Do they do anything that has any real social value? Do they serve as conduits for transferring savings to those sectors of the economy needing capital? Do they provide liquidity and stability in the markets to permit the free flow of capital on an ongoing basis? Or are they just running a casino?

We taxpayers have given Wall Street billions based upon the theory that they perform economically useful activities. They need to prove that they do. In the meantime, GS and others are providing evidence why there is new life for the "Volcker Rule". This rule would effectively bar banks from the risky and often lucrative practice of trading for their own accounts. We're all for the Volcker Rule and other aspects of Financial Reform that would regulate derivatives, mandate tougher capital requirements, stop too big to fail, restore partnership liability to investment houses, rein in rating agencies and eliminate future taxpayer funded bailouts. Aren't you?