By David Galland
The Casey Report

 Of all the social memes related to the economic and investment landscape, none is more dominant than that there is a small cadre of powerful Wall Street money men who, working behind the scenes, effectively control investment markets, the global economy and the politicians that play such a big role in that economy.

Whether you call them fat cats, greedy bankers, soulless manipulators or unindicted co-conspirators, the one sure thing, in the minds of most, is that they wield the power behind all thrones and that it is their whispered agreements, invariably made in darkened rooms full of cigar smoke, that decide the economic fates of us all.

Over the years, I have met quite a few of these "Lords of Finance" and found them to possess the same wide range of traits, positive and negative, shared by all humans: fear, insecurities, self-delusion, high hopes, good intentions, social aspirations, good habits and bad.

And, of course, the greed that the Lords of Finance are said to possess in extra doses. Like Gordon Gekko, I have no problem with greed, as long as the pursuit of that which gives you pleasure does no harm to others. 

There is one trait, however, that, in my experience, is almost always present in a Lord of Finance – and that is an acute intelligence. When it comes to matters of finance, even the average Lord of Finance has a keenly honed mind that has been trained to precision to understand the complex pieces of investment markets.

Which brings me to my interview. We'll call him LOF, because the only way he would agree to be interviewed was if it was anonymous. A former colleague of a friend of mine, his career on Wall Street has stretched over 40 years and includes 10 years as the chief financial officer for one of the world's most powerful investment banks. Leaving that position to strike out on his own, he and a group of colleagues went into money management, overseeing billions of dollars. Now, slowing down in the latter years of his career, he and his colleagues manage "only" tens of millions.

My goal for the interview was two-fold. First, it is to help calibrate our own views on the outlook for the economy with an individual who is not just hyper-intelligent but who has spent a lifetime immersed in the money game at the very highest levels. Casey Research sees ongoing crisis, getting far worse before it gets better. But what about a Lord of Finance?

Secondly, I wanted to gain some insights into the rarified world inhabited by the Lords of Finance. Is their dismal reputation warranted, or are they just people whose education and professional instincts have taken them to the top of highly rewarding and highly influential careers?

Let's find out.

DAVID: People have a lot of perceptions about the "Lords of Finance," if you will – the big banks, the operations in New York, the political connections and so forth. As you worked in the executive suite of one of the largest and most influential of these institutions for a long time, I want to get your take on those perceptions and also see how well our views on the current economic situation sync up, or not.

LOF: This is totally anonymous, right?

DAVID: Yes, completely anonymous.

LOF: Okay, great.

DAVID: So as a background, the first question, how long have you worked in the financial industry, what did you work in, and what sort of capacities?

LOF: Right. Well, I guess it started in the mid-'60s, so I've been in the business now for 45 years. It is hard to believe, and the first 25 or so, really the first 30, I guess, were with a major investment bank that will go unnamed, rising to the position of chief financial officer.

Since retiring, I was involved with a firm managing billions of dollars. So, in answer to your question, most of my career has been with a big bank, but I have also run my own money management business. I am also a CPA, having started with a big CPA firm back in the early '60s.

DAVID: Right. So 40-plus years in the business.

LOF: Correct.

DAVID: In all that time, have you ever experienced anything in the markets and the economy similar to what's going on today?

LOF: No. In my experience, this is unique. And I remain concerned about the potential for another serious crisis. And for the first time, I'm concerned as to whether or not the American economy really has the kind of robust characteristics that we have enjoyed for most of my life and most of our careers, which is something quite new to me.

DAVID: So you aren't buying the story that we're out of the worst of this and that it's happy days from here?

LOF: No, I certainly don't buy that story.

DAVID: How would you describe the current state of the big financial houses? Does the fact that they're still laying off thousands of people suggest these firms are hunkering down for a protracted period of slow growth?

LOF: Yes, I'm sure that's what they're doing. I think they're also in an environment that is extremely uncertain, looked at from their point of view. You have a public that is still angry at them, for good reason, for their culpability in what happened in 2008 and 2009 and continues to happen.

Then you've got a regulatory bill, this Dodd-Frank bill, which has really yet to evolve because so many regulations have yet to be written by the various agencies. So the banks really don't know what the landscape is going to look like going forward, and that makes it very difficult to plan, especially when it's clear that the appetite is for more stringent regulations and not less.

Another aspect is that the environment in which they were able to make so much money by using tremendous leverage has certainly changed. It is highly questionable whether they can do that sort of business again, given that the balance sheets of these big banks are so opaque and so difficult to manage. So much so that I question whether any outside regulator can decipher and understand the risks that these banks have been taking. Actually, I question whether the banks themselves understand the risks that they're taking. I think there are so many interactions that I have to wonder whether anybody really understands the kinds of risks that are out there. All of which adds up to a very challenging environment for these banks to operate in.

DAVID: Speaking of uncertainty, Dodd-Frank contains something like 400 new rules the banks are going to have to comply with, most of which have yet to be implemented. That would support your contention that it's going to be very hard to plan in that kind of environment. Especially because some of the new legislation strikes right at the heart of key lines of their businesses – lines that have gone away and are unlikely to return anytime soon. So that's got to really add some pressure.

But actions speak louder than words. Knowing everything you know about the big financial houses, would you invest in one today?

LOF: I would not. The way I look at the world as an investor today is very different than the way I looked at it in 2007. With hindsight, I now know that I was taking much too much risk in 2007, and part of that risk was in financial companies. I have significantly reduced that risk to a very, very small fraction of my own investment portfolio.

I think that it's a fool's game to invest in those banks, because there is so much uncertainty out there, in terms of the new rules and regulations, and also there is far too much risk embedded in these companies.

DAVID: Are you referring to derivatives?

LOF: Derivatives are certainly part of it, but it comes down to the exposure these companies have to other financial institutions. The interrelationships are immense, and the credit of each of these institutions is uncertain and hard to evaluate.

Let's put it this way, they're not doing business with the Procter & Gambles of the world, businesses you can do a fairly straightforward evaluation on. I no longer understand the complex interrelationships of the institutions. If I ever did, I no longer do. And I don't like to invest in things I don't understand, certainly not in size, so I'm uncomfortable with these institutions as an investor. For that matter, I would be uncomfortable as a regulator, and I would be uncomfortable as a customer.

DAVID: To many people, the "fat cat" bankers on Wall Street are viewed as the very epitome of unchecked greed, avarice, even evil. As you were part of that world for a long time, how would you respond – is the poor image warranted? Do you think the culture in the big institutions has changed over the years since you retired?

LOF: Most of the people I worked with on Wall Street were good people – well meaning, ambitious, but with a very strong moral compass. I suspect that is still true today.

I do think that the culture has changed… in one important respect. For many, many years – including when I worked there – Wall Street was dominated by large partnerships. The partners had every nickel they had – both in the firm and outside the firm – at risk, even their homes and cars. I was stopped frequently by partners who worried incessantly about too much risk threatening their financial well-being.

We weren't permitted to take much of our capital out of the firm, and withdrawals were tightly monitored. Why? To reinforce the feeling that all we had was at stake and to encourage modest risk taking as opposed to "betting the ranch."

That all changed once firms went public and partners were able to have large stakes outside the firm and achieve "limited liability." It became "other people's money." A huge difference, I think, and one that contributed to a much greater willingness to do things that wouldn't have been done in an earlier era.

A second factor was the elimination of Glass-Steagall, which had previously kept activities within bounds. Once that was eliminated, banks and brokerages were able to greatly expand their risk taking –without the capital necessary for such risk taking. And, in many cases, beyond the managerial expertise of any firm as well as the expertise of the regulators, because their activities became too complicated for mere mortals to understand.