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WALL STREET NEEDS REFORM BUT NOBODY WANTS TO DO IT

The eminently respectable chairman of the New York Stock Exchange, Richard Whitney, went to Sing-Sing on April 11, 1938, for stock market abuses originating during the Roaring '20s and extending beyond the 1929 crash. By the time Whitney was locked up, public outrage had fostered a whole raft of new laws tightening the regulatory noose around Wall Street.

Today, however, the spectacle of the junk-bond impresario Michael Milken being whisked by limousine to confer with his high-priced lawyers about alleged market manipulation has not excited an organized agitation for more tightly regulated markets. Doesn't the public care any more?

Of course it cares! People are asking how Milken could possibly be worth $550 million a year. They are asking if a few Wall Streeters and entrepreneurs should earn multimillion dollar sums for dismembering well-established companies rather than creating new industrial capacity and economic momentum.

Some economists dismiss Milken's half-billion dollar salary as an "aberration" within an otherwise efficient system. Likewise, they believe that insider trading may be a "necessary evil" by which the prices of stocks and bonds are quickly adjusted to more realistic levels. They also point with satisfaction to the statistical evidence that productivity generally increases after these breakups and restructurings.

This does not seem to satisfy many Americans who are angered by the specter of lost jobs, "raided" pension funds and windfall profits accruing to a few insiders. And the extravagant lifestyles of some Wall Streeters have inflamed public opinion.

Much of this criticism is reminiscent of the 1920s, when stock market abuses and preoccupation with personal enrichment were, rightly or wrongly, then blamed for the crash of 1929 and the Depression.

Then, however, an outraged public demanded that political leaders "do something." They responded with a wave of reform legislation that transformed a basically unregulated financial marketplace into a highly regulated one. Even though some scholars later concluded that some of these measures were counterproductive, the reforms were considered a successful political response to the public's sense of injury.

Why isn't there a similar reaction from Washington today? Much of the answer flows from political alignments and a view of how the U.S. relates to the rest of the world.

Powerful forces are allied on the side of continued deregulation and privatization. These include the two major political parties, an academic community and much of the government bureaucracy. These forces view deregulation as an effective means of increasing economic efficiency and competitiveness in the international marobody wants to do it
ketplace.

They are largely convinced that, unlike the 1930s, when industrial nations were flat on their economic backs and politicians reacted by circling the wagons of protectionism, a similar response now could court disaster.

The reimposition of tighter regulation with its potential cost in flexibility and productivity could put companies in a number of industries at serious risk in international markets.

They see the financial-services industry as a perfect example. The fact that money is easily transferred, bought or sold around the world, has propelled the markets toward truly global integration. New information about economic events and financial transactions courses throughout the global network and is quickly analyzed by market participants in other countries looking for ways to profit.

Thus, policy makers are fearful of imposing harsh constraints on financial intermediaries that might put these vendors -- and ultimately the U.S. -- at a competitive disadvantage to foreign banks, securities firms and other financial institutions.

Nevertheless, Wall Street is rapidly building a bank account of ill will with the public and constituencies closer to home. Corporate executives are becoming skeptical of the motives of their investment banks. Young professionals are thinking twice about careers on the street. Even many seasoned Wall Street executives have been embarrassed by the media's seamy portrayal of their industry.

External circumstances and the absence of powerful advocates may be providing the financial community with a temporary shield against the full wrath of the society's judgment, but at some point the bill will be presented for collection. Wall Street may be unpleasantly surprised by its cost.

SAMUEL L. HAYES III teaches investment banking at the Harvard Business School.

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