In their latest books about the wicked ways of Wall Street, authors Michael Lewis and Matt Taibbi both portray a system where the little guy gets burned. In Flash Boys, Lewis hones in on Sergey Aleynikov, a slight, Soviet-born programmer who’s crushed by Goldman Sachs (GS) for taking high-frequency trading code that he helped to create and can’t even use in his new gig. As the bewildered Aleynikov stumbles off to jail, Lewis wonders why it’s OK for a computer to detect orders, race ahead of buyers, grab the shares, and sell them back at a higher price within nanoseconds.
For Taibbi, who famously described Goldman Sachs as “a great vampire squid wrapped around the face of humanity,” the focus of The Divide isn’t rigged markets but a rigged justice system that waves aside white-collar criminals in favor of prosecuting the poor for petty demeanors.
Taibbi leaves Wall Street and crosses the Brooklyn Bridge to find a hapless casualty named Andrew Brown. The African American bus driver has to convince a judge that he wasn’t “obstructing pedestrian traffic” by talking to a friend outside his building at 1 a.m. Even Brown’s lawyer pesters the poor guy. Meanwhile, on the other side of the East River, the wolves can go back to sniffing for fresh targets, knowing that they’re too big to jail.
Taibbi and Lewis are right: It’s not fair. Even such fiscal heavyweights as former Treasury Secretary Larry Summers and Nobel-winning economist Joe Stiglitz agree that the system often enriches those who set out to abuse it.
The problem, of course, is that there’s nothing necessarily illegal about unfairness. Just ask TD Bank (TD) Chief Executive Officer Ed Clark, who heads one of North America’s largest and most profitable banks. He thinks high-frequency trading creates unfair advantages and that unethical behavior precipitated the crisis. But, he says, policymakers often applauded that same behavior when times were good.
As Clark noted last weekend at the Institute for New Economic Thinking’s annual conference in Toronto: “Barney Frank used to go around and say we want you to do more subprime lending.” Moreover, the risk of that lending is negligible if those loans barely touch your books before being bundled and sold off to become someone else’s problem.
While policymakers have made moves to reduce leverage and raise taxes, they continue to tempt lenders to take on more risks and borrowers to pile on more debt. “If you make [something] cheap, people will use a lot of it,” Clark says. “We’ve made debt cheap.” To Swedish economist Axel Leikonhufvud, that “means doubling down on the policy that got us into trouble in the first place.”
With so much money to be made, who can resist a chance to get rich quick? Crossing the line into harmful and possibly illegal behavior becomes part of the game—especially when the downside isn’t jail time but an expense to be accounted for in a quarterly earnings report. In Stiglitz’s view, “the current system has banks viewing fines as a cost,” one that’s vastly outweighed by the potential profit generated by the actions being sanctioned. Without the specter of jail time and a personal reputation hit, there’s little reason to fear getting caught.
As Lewis and Taibbi take on the titans of Wall Street, they’d do well to also shine a light on Washington. Bankers didn’t create the system that’s brought them such wealth. They’re just the beneficiaries of it. If we want to see more bad actors brought to justice, policymakers need to create laws that criminalize the bad behavior, and regulators need the resources to put the criminals in jail. Until then, Wall Street’s worst players can brush aside both books as more whining by losers who don’t know how to play the game.