But I do think prop trading did play a role in the crisis. Morgan Stanley took a $7 billion loss on a proprietary position in 4Q07 (dwarfing the nearly $1 billion it lost on its investments in Crescent real estate). While you can argue that this was a result of the crisis, rather than the cause, losing $7 billion certainly didn’t help!

Additionally, when markets tanked following Lehman’s bankruptcy, MS counterparties had to wonder whether MS might be on the wrong end of another trading disaster, which was a plausible possibility. That only increased the fear that nearly brought the firm down, which eventually led to their bank charter and their current regulatory predicament.

Thanks again for your post, and hope all is well.

If you ask me, anything, any politician does, ever, for any reason, to rein in the freedom of the big banks is something to celebrate. A bank that has deposits backstopped by the US Taxpayer SHOULD be hobbled as much as we can conveniently arrange – they are playing with other people’s money. In my opinion they should not only not be able to do prop. trading, they shouldn’t be allowed to make markets, or buy cds to offset their risk, or buy stocks, ever, or bonds either, except for Treasury Bonds, and definitely they shouldn’t be able to buy securitized loans, or do underwriting. In fact, about the only thing that they should be allowed to do is clear checks and make loans, and only then with a very considerable cushion of capital – like 20 or 30 percent.

Wall Street banks think that is too onerous? Ah, how sad. Let them go start their own private banks, without backstops from the US Taxpayer. I don’t care what you do as long as I don’t have to bail you out when you screw up, or when you figure out a way to loot your company and leave the taxpayers holding the bag.

No, what he is responding to, right here, right now, is the fact that it is pissing off middle america that the banks are taking TAXPAYER BACKSTOPPED MONEY and GAMBLING WITH IT ON THE STOCK MARKET instead of making LOANS.

Just like it is pissing off middle america that bank executives are paying themselves huge bonuses ditto, ditto, ditto.

And, since the defeat in Mass. he has decided to try to mend his fences a little bit with his aggrievied constituency. Plus (my guess) he is hoping that the Republicans in Congress will defend the Wall Street Banks. Whoo hoo, wouldn’t that be sweet.

Gotta question your numbers there (and I’m as big a Goldman defender as anyone). Goldman definitely levered up — from 21:1 in 2004 to 26:1 in 2007. And Morgan Stanley levered up more than a little bit — from 26:1 in 2004 to a whopping 33:1 in 2007.

Now, it’s true that Goldman levered up less than Lehman, Bear, and Merrill, but they definitely levered up. And Morgan Stanley was right in there with Lehman, Bear, and Merrill as well.

Otherwise, though, I largely agree with all of your points.

You also write plainly. One gets so tired of the tortured, jargonized prose deployed by economists in academia and the banks. Wrapping up simple notions in attentuated language to try to make it sound more profound than it really is.