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Wall Street's Credibility Problem

Wall Street sign
Paul Giamou | Aurora | Getty Images
Wall Street sign

One of the big frustrations of running a large financial institution these days is that your shares rise and (mainly) fall based on rumor, speculation, and guess work. Trying to placate markets with reassuring words about capital or liquidity only seems to make things worse.

This is largely because Wall Street has a large and well-deserved credibility problem. No one really trusts that we are getting accurate and reliable information about the financial health of our financial behemoths.

Take this report from Bloomberg News today:

Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s (Federal Reserve) loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.

Now there are probably all sorts of good public policy rationales for this kind of thing, especially when the markets have gone into panic-mode. But the end result is that we know we cannot really trust the information we're given or not given by senior management or regulators. There's just too much going on in secret.

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