When I started out in Wall St 45 years ago, there were basically the investment banks and the wire houses-retail broker dealers. The investment banks focused on the corporate clients and built long standing relationships. It was the relationship that built the investment banking franchise and the steady fee income. It was not the last transaction that mattered. It was not about what other products can I jam them with. There were no CMBS, derivatives trading, CDS, math wiz kids with structured products nobody really understood, nor was there the attitude of short term trades to get this year’s bonus. The bankers understood that they built real wealth by building long relationships. The bankers were in charge of the major name firms.

Along the way the traders shoved aside the bankers and the major investment banks became trading houses and eventually giant hedge funds. As part of the same evolution, partnerships became public companies and instead of partners using their own money to run the firms and to risk investments, it became OPM and that accelerated the evolution of what happened to Wall St. Comp went from top executives of Morgan Stanley and other firms making $7-10 million, to ordinary traders who had none of their own funds at risk, making several times that. There is a vast difference in how you conduct your business when it is your name on the door and when you are risking your own money vs when you are a public company and it is traders who run the firm with a totally different transaction by transaction mentality. That is the underlying essence of why things went so badly. All the rest is simply how it happened through esoteric financial engineering, over leverage, and hiring people to run groups within firms who had no understanding of the word long term.

The effect on real estate was that instead of dealing with your local banker, or with even a money center banker, developers dealt with kids in Wall St who only knew how to maximize the trade, or how to complicate the structure, but who had no real estate experience and who had a traders mentality. It is not that many local bankers of prior years were not dumb, nor that they did not make bad mistakes, nor that they did not over fund real estate bubbles. The difference is that now, due to the way Wall St evolved, the size of the problem and difficulty unwinding the mess is vastly more problematic and will take much longer. The S&L’s got in trouble because the rules were changed and they were encouraged to go outside their competence and make all sorts of bad commercial loans, and there was extensive fraud. But the magnitude was not so large that the RTC could not clean it up in fairly short order. It was also somewhat concentrated in a few major pockets of trouble like Texas and California, so it was easier to concentrate resources to clean it up.