Wall Street's Hurricane Katrina looms

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The parallels are eery.

Storm clouds are gathering. The president has gone on vacation. Everyone is wondering if the storm will hit, and if it does, whether the levees will hold. But this time, ground zero is Wall Street, not New Orleans.

I wrote back in June that when private equity and hedge funds want funds or help from the public, everyone should hold onto their wallets, because it means they want out. And guess what. This week, we have Jim Cramer melting down on television crying that the Federal Reserve has no idea how bad things are out in the real world and that millions of traders are losing their jobs. The irony of this is when a financial crisis hits Wall Street, that last bastion of laissez fare capitalism, runs to the government for help. Nice. Real nice.

But just as in New Orleans, both government agencies and private enterprises have been assuming that this storm would never hit. Sub-prime loans were made possible by the government not bothering to enforce existing lending limits and restrictions on the mortgage industry. The SEC allowed hedge funds to avoid most ordinary US securities reporting requirements because they were only for rich investors with high risk tolerance, yet they happily accepted the investments of retirement funds and municipalities that focus on risk-avoidance. Yet what will happen when all these assumptions go by the boards? We'll end up with hedge fund managers crowded into Madison Square garden begging for FEMA trailers in which to set up their laptops, the taxpayer bailing out the retirement funds, and leaders saying, "No one could have anticipated breech of the levees." Yeah, right.

At one time, the US markets were a magnet for foreign investment because we had the strictest reporting requirements and the most transparency of any market in the world. Investors had confidence that company information was timely, accurate, and fairly distributed. Today, that confidence is gone, washed away by the financial engineering of Worldcom, the financial manipulations of Enron, and the black secrecy of private equity and hedge funds. No one knows where the risks are any more -- and that means investors lie exposed to the elements without any information about where storms might hit or why. The past confidence in US markets is waning -- and investor's money with it.

In an ideal world, US treasury secretary Paulson would be having a conference call with the heads of the major financial institutions today, demanding a clear accounting of the financial industry's exposure to the sub-prime loan hurricane that's coming. Without it, we're just blindly hoping the levees hold. New Orleans proved that hope isn't much of a defense against disaster. Would that the finance industry and regulatory agencies had learned that lesson too.

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