With $1.6 trillion to go in AIG bailout, it's time to trim Wall Street's power

We forget that Wall Street is supposed to be a support function. Its primary role was intended to be helping CEOs come up with cash to make investments. But since Ronald Reagan, Wall Street has become the tail that wags the economic dog. Today, Paul Krugman highlighted this by pointing out that in the 1960s Wall Street accounted for just 4% of GDP -- by 2007 that figure had doubled to 8%. Reagan began the process of deregulating Wall Street, and in 2004 the SEC accelerated it. The result is an unprecedented economic catastrophe, including an American International Group (AIG) bailout that will cost another $1.6 trillion.

This is why I am grateful for New York Attorney General, Andrew Cuomo, who seems to be the only government voice not cowed into submission by the promise of enormous Wall Street campaign contributions. He's moving beyond the outrage over AIG's $218 million in bonuses and focusing on what I posted was the bigger issue of AIG's paying $105 billion of taxpayer money to cover derivatives "losses" for Goldman Sachs Group (GS) -- which alone received $12.9 billion from the deal -- and a posse of European banks. So he's launching an investigation into why these banks got 100 cents on the dollar while ordinary investors are having to take a major haircut.

Meanwhile, AIG has $1.6 trillion in derivatives still on its books that have yet to be "wound down." Are you wondering who will pay those contracts? If so, I suggest you walk to a mirror. That's because the counter parties on those derivatives trades are none other than the biggest Wall Street banks. And they have a choke hold on the U.S. government, which will force taxpayers like you to cough up the cash to pay them.

Krugman points out, as I did a year ago, that deregulation and too much faith in securitization have led us to this juncture. As I said then, I think securitization should be banned, but the U.S. seems determined to revive it. Unfortunately, the arguments being used to get hundreds of billions of taxpayer money are based on fear rather than facts. And it will take more people like Cuomo, who appears willing to force Wall Street to attach some numbers to its claims of catastrophe, to get government to act in America's interest -- rather than Wall Street's.

For all the talk of how how the center of economic power has moved to Washington, the fact remains that the myth of Wall Street invincibility lives on inside the beltway. And this will make it hard to rein in Wall Street enough to return it to its proper support role. To revive the economy, it is not enough merely to cut back on Wall Street's power. We must create something better to replace it. In particular, more needs to be done to encourage technology-based innovation -- which in my humble opinion is the economic engine that should be attracting the most talented minds to drive the U.S. economy forward.

Until that shift occurs, Wall Street will remain the enemy within that sucks the marrow from America's economic bones.

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG shares and has no financial interest in the other securities mentioned.

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