Who's Looking Out for Wall Street?

This election year, shamed and battered financial firms face a leadership crisis

Credit-crunch lunch hour in New York's financial district, and all seems well. Junior analysts cue up in packed delis to bag $12 panini and tossed-to-order salads. Delivery men wheel Saran-wrapped catering into elevators. Traders scarf down in the glow of their monitors, while old-timers repair to dimly lit steakhouses, drowning their market woes in single malts and sirloin grease.

Then from Washington comes a shout: "No soup for you!"

In an election season beset with all sorts of fiscal exigencies, the Beltway is about to tear up the Street's meal ticket. The financial sector, uncharacteristically diminished, will have a muted response. Wall Street has no true horse in the Presidential race, no credible arch-advocate, and too much subprime egg on its face to be taken seriously.

The November '08 stakes are huge for investors, from rarefied Morgan Stanley (MS) and Blackstone Group (BX) down to Charles Schwab (SCHW) and Ameritrade (AMTD); from Connecticut hedge funds to Boca Raton boiler rooms. As both President George W. Bush's tax cuts and agenda sunset, the term "bulge bracket" is about to take on a whole new meaning, as the top tax rate and capital-gains and dividend levies are all set to ratchet higher. Meanwhile, banks are paralyzed by the prospect of a systemic meltdown. Bond insurers could fail. The U.S. dollar is perilously weak.

Who has Wall Street's trembling back?

No one on Wall Street at least. The place has been laid too low by subprime innovation gone horribly awry. Some $150 billion of writedowns have subsumed multiples more in market value. Shares of Merrill Lynch (MER), Citigroup (C), and Bear Stearns (BSC) have been cut in half, their CEOs ousted in rapid succession. Robert Rubin, yesteryear's über-savior, is being roused from his Citigroup board sinecure to help the bank navigate its crisis. But where was he when management was bingeing on bad debt? "The executives' stature and credibility have been eroded—and by their own doing," says Samuel Hayes, a capital markets professor at Harvard Business School. "It's almost like a headless Wall Street."

It's great that Hank Paulson, former CEO of idolized investment bank Goldman Sachs (GS), is manning the Treasury Dept. But his time is hogged by decidedly Main Street demands: selling a blue-collar tax rebate; fielding dumb questions from legislators; torch-bearing for the hokily named Hope Now Alliance and Project Lifeline schemes to fight home foreclosures. High finance it ain't.

The leadership vacuum is being filled by pitiful headlines. Hat in hand, Credit Suisse (CSR) and JPMorgan Chase (JPM) are lobbying the federal government to assume more risk from delinquent mortgage borrowers. Then there's Wall Street's most pressing crisis, the fate of the bond insurers, whose failure could set off a chain of liquidations. With Warren Buffett passing on the role of White Knight, their cause is now being championed by New York State Insurance Superintendent Eric Dinallo. People, we're looking at potentially the worst global financial crisis since the Depression. Can I get any more volunteers here? Anyone?

Presumptive GOP nominee John McCain can still save the day for Wall Street, right? Yeah, good luck with that.

Consider that Hillary Clinton and Barack Obama have already out-fund-raised McCain on the Street. Avowed trickle-downers in the financial sector were rooting for Rudy Giuliani and ex-private equity boss Mitt Romney. McCain opposed Bush's 2001 tax cuts, by waxing populist: "I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us at the expense of middle-class Americans." In 2003 he cited his aversion to deficit spending to vote against another round of cuts. On the 2008 stump, he can barely keep a straight face when pledging supply-side allegiance. The truth is, a Democratic Congress, and not a President McCain, would hold the fiscal trump card: simply letting the tax cuts expire at the end of 2010.

Wall Street, mouth so full of panini, porterhouse—and crow—doth not protest.

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