Two major events took place this past week in the financial world. First, news came out that finance is about to become the largest industry in the S&P 500 again. The last time that happened was May of 2008. We all know how that movie ended. Second, government regulators actually managed to, get this, regulate someone on Wall Street. They indicted the massive $14 billion SAC Capital hedge fund for insider trading “on a scale without known precedent.”
On the surface, these two news items seem unrelated. But, to my mind, they’re intrinsically linked–and not in a good way.
Taken on its own, you might think that an (allegedly) crooked hedge fund getting busted is the signal of better days to come on Wall Street, with more responsible money managers and more robust oversight. But with financial companies making up such a massive portion of our economic growth–without banks, the S&P’s profits would actually be down this quarter–I am not at all optimistic that the SAC indictment will lead to anything like the reform we need. Sure, the widely publicized case might hammer the hedge fund industry, which has already been taking plenty of lumps lately for underperformance. But it’s not going to get at the core problem that led to SAC’s downfall:
Wall Street has been living through its own steroids era. And both the SAC case and the resurgence of Big Finance show that it’s not even close to being over.