Tough year buffets brokers, but not clients

It noted that somehow the brokers always made money, even when their customers suffered. And so it has been for most of the years since then.

But not in 2007.

How could that happen? In recent years, Wall Street came up with what amounted to parallel markets. Ordinary investors could buy and sell stocks and bonds, but the favored insiders could partake in a host of investments not available to the rest of us. There were specialized securities and complex derivatives, and instruments known by their initials: CDOs, MBSs and SIVs.

In 2007, the Standard & Poor's index of 500 stocks rose a respectable 3.5 percent, and high-quality bonds performed well as long-term interest rates fell -- at least for those with good credit. Commodity prices continued to boom, and many foreign stock markets also did very well, particularly when viewed from America, land of the declining dollar. By and large, the customers of the big financial firms had reason to be pleased.

But not the bosses. The chief executives of Citigroup and Merrill Lynch were forced out, while Morgan Stanley's CEO will go without a bonus for the first time anyone can remember. Those three companies, and some of their competitors, had to go looking for capital infusions to make up for losses in those exotic markets that the public had been kept away from.

Most ordinary investors found out what a CDO was only when they read about the losses CDOs were bringing to the unfortunate owners.

Some of the biggest profits earlier in this decade went to those who invested in private equity firms, which could take companies private and then get their money back almost immediately, often by having the companies borrow it.
[...]