From the inside, things are not as all that certain. The Australian writer Kate Jennings offered a wonderful snapshot in her novel Moral Hazard. The protagonist, Cath, is a feminist, a veteran of the radical politics of the sixties, and an admitted financial idiot: “I could barely tell a stock from a bond. Balancing my checkbook was beyond me, much less understanding option trees.” A friend finds her a well-paid job as a speechwriter for a prominent Wall Street investment bank (mirroring Jennings' own experience).
The protagonist's outsider status makes her all the more effective a mole for the rest of us in as she burrows into “a firm whose ethic was borrowed in equal parts from the Marines, the CIA, and Las Vegas. A firm where women were about as welcome as fleas in a sleeping bag.”
The novel spans six years and concludes with a banking industry crisis involving hedge fund Long Term Capital Management that almost blows up the entire financial system, although the perturbation scarcely is noticed by the general public and nothing really changes.
“To date, no follow-up. Nothing. Nada. As if afflicted with Alzheimer’s, the Fed remains adamant that banks can police themselves,” Cath muses after the collapse of a hedge fund modeled on Long Term Capital Management. The spectacular demise of LTCM in 1998 was an eye-opener for industry insiders, but after a bailout arranged by the Fed it was quickly forgotten. “Deregulation rackets along like a runaway train, banking lobbyists clinging to its side, climbing into the cab, waving from the windows, hollering in their exhilaration. Hoo-ha.”Hoo-ha, indeed. To mangle a metaphor, you might say that the chickens swept under the rug in 1998 have come home to roost.
Much of our securities trading now takes place under the totally unregulated umbrella of the hedge funds, which have been operating on a laissez faire frontier for a long time now. They should have learned -- and been regulated -- after LTCM in 1998, but that didn't happen.
Now, nobody knows what's going on behind their walls. There's no way to know, with their very limited reporting requirements. The bottom could fall out tomorrow, and the damage would be done before anything could be done about it.