Will Change Really Come to Wall Street?

Michael Lewis, author of the bestseller "The Big Short," which chronicles the Wall Street collapse, said he believes the proposed financial reform bill will help, but says the Obama administration is curiously silent about an important element of banking regulations:

"The only kind of quibble I have with their position right now is they really are squashing talk about the leverage that the big banks are running," Lewis said on CBS' "Face the Nation."

"I mean, there's a movement to put a hard cap on how much risk these firms can take. The administration doesn't for whatever reason seem to want that. That's unfortunate, because leverage is the heart of the problem. It's surprising it isn't addressed in the bill.

"But generally? I think the bill is a force for good. I mean, we've got a financial system that is so radically disconnected from the productive economy. 'Too big to fail' is only really one issue. You want our financers to be a set of eyes to create wealth, not to destroy it. Right now they're incentivized to destroy it."

When asked how Congress could legislate changes in regulating financial instruments that some on Wall Street cannot even grasp, Lewis replied, "It is extraordinary, the level of just kind of sheer incompetence at the center of this system."

Lewis said while many CEOs on Wall Street would like the public to believe that no one saw the housing crisis coming, there were some who foresaw a financial collapse as far back as 2005.

"Some people did indeed see it coming, including some traders at Goldman Sachs," he told host Bob Schieffer, yet "People were incentivized not to see the truth right in front of their eyes. If you pay someone huge sums of money not to see a financial collapse, they won't see the coming financial collapse. You pay them huge sums of money to lend trillions of dollars to people who will never repay the loans, they'll do it.

"The question is how you re-jigger the incentives inside the financial system. The bill does get at this. It's easy to just say 'No, it's all bad.' But it's not all bad. Actually the bill has got some really important things in it. And there are other important things that are being discussed.

"I think the big thing is the politics of this issue has changed so radically very fast. The possibilities are now endless."

Also on the program, Thomas Friedman, columnist for The New York Times, said the system had been set up to encourage players, from big institutions to small boutique hedge fund firms, to act like casinos.

But despite cries to change the way things work on Wall Street, Friedman said opposition to reform comes from incentives to maintain a lucrative status quo.

"The incentives are for both parties to milk Wall Street for massive campaign contributions," he said. "Therefore, they're on this knife edge between the interests of the voters - which is to regulate, bring transparency and some kind of limits to the banking system - and their own party interests, which are to milk this industry for all they can."

Yet despite the turnaround in the financial picture (Goldman Sachs and JPMorgan Chase each posted first quarter profits of $3.3 billion this week, and Citigroup announced profits of $4.4 billion, while the Dow Jones Industrial Average is up nearly 3,000 points since a year ago), Lewis says the climate on Wall Street is not indicative of better health.

"Oh, God, no, nothing has changed," he said. "In fact, almost built into the bailout was the assumption that nothing would change for a while. We've been in the system for 18 months now where essentially the government is gifting the banks out of their problem. The last thing it wanted to do is to attack these firms' revenues with financial reform, [as] financial reform, if done well, will reduce the profitability of these enterprises."

However, Lewis acknowledged that there were two important changes:

"One is that the traders at big Wall Street firms who previously were playing with shareholders' money are now playing with taxpayers' money. It's now pretty explicitly understood that the gains are privatized, and the losses are going to be socialized.

"But the other thing that's changed is more hopeful, that the relationship of these institutions to the larger society is clearly changed. There was a time not long ago where they were essentially an unquestioned master class, and now they are viewed as almost enemies of the state.

"And the problem that politicians have that want to stymie reform is nobody wants to stand up and say that's what they want to do! There's been a big change in public sentiment. It just hasn't found political expression yet."