Matt Miller - The Archives
Where's the moral outrage on Wall Street?
The Washington Post, September 30, 2010

Elizabeth Warren, please call Michael Lewitt.


I'd have said the same thing a few weeks ago, until I stumbled on an interview with Lewitt in Barron's, which led me to his new but as yet mostly invisible book, "The Death of Capital: How Creative Policy Can Restore Stability."

Lewitt is the soft-spoken president of an investment advisory firm called Harch Capital Management in Boca Raton, Fla. His standing as a sophisticated player in financial markets, leavened by his outsider perspective on Wall Street, makes Lewitt's blistering indictment of American finance the most illuminating and sobering account we're likely to see. It's the perfect intellectual and policy bookend to Michael Lewis's "The Big Short" if you're still trying to make sense of what got us into this mess, and, more important, what dangers remain.

Lewitt comes to his task as an ardent capitalist who believes "capital can be a force for good in the world if wisely managed and regulated." Banks have a profit-making function, to be sure, but more important is their public utility role, channeling savings to productive investment. In a healthy system finance should serve industry, not dominate it. That's not where we've ended up, however.

Lewitt's great theme is that modern finance's diversion of money and talent into speculation at the expense of productive investment has enriched a small class of Wall Street elites while doing next to nothing for societal well-being. The moral language with which he makes this case is jarring because it's not what you'd expect from a money manager. "The enemies of reform are not just enemies of reform," Lewitt thunders. "They are enemies of a more just and fair society in which the rewards of capital are shared, not slopped up by a small elite like pigs feeding at a trough."

Lewitt draws on Adam Smith and Karl Marx to show how surreally detached modern finance has become from the underlying economy. "In the 1950s, President Eisenhower warned of the dangers of the military industrial complex," he says. "Today the world is threatened by a financial-political complex."

To Lewitt, the greatest failure of recently enacted reform was that it did not ban "naked" credit default swaps—the instruments that let Wall Street buy and sell the equivalent of insurance on other people's lives. This gambling on companies' creditworthiness by parties with no insurable interest in the firms' activities came to dwarf real investment activity. It lay behind speculative attacks on major investment firms, and left regulators with no idea of where the bottom lay.

While a new rule requiring some of these instruments to be traded on an exchange may help at the margin, Lewitt says, we're fools not to see that regulators will be outwitted by profit-thirsty bankers every time. Washington skirted "the overriding policy question," he writes, which is "whether society wants so much intellectual and financial capital devoted to" this kind of speculation.

In an interview, Lewitt told me the Basel Committee's recent call to raise bank capital requirements to 4.5 percent of assets (with an additional 2.5 percent "buffer") by 2019 is too little, too late. "There's no question we'll have had at least one other severe financial crisis before then," he says. He'd like required capital to be 10 to 14 percent. Having an adequate cushion to absorb losses is more important than letting banks goose their returns through higher leverage.

"We're taking for granted that we've been through a one-off event that can't happen again just because it was the worst crisis since the Great Depression," Lewitt says. "The failure to ban naked credit default swaps will come back to haunt everybody."

Lewitt also wants a small tax on various forms of speculative trading; the high margins on such activities, he says, mean the tax would be economically harmless. "As someone who has worked in these markets for two decades, I can assure people that Wall Street arguments to the contrary are both self-serving and false."

There are too many gems in the book to do them justice in a brief column. Reading Lewitt makes you realize how valuable the voice of the authoritative, morally outraged financier can be—and what a void there's been because it has been missing. Anybody else out there?

"I know what's in the kitchen," Lewitt says. "I know what stinks. A lot of what's going on is appalling, and it's damaging to society. I won't get invited to Goldman Sachs's Christmas party, and I don't care. You can't stay silent. You have to speak out."