I caught the final episode of Money Power and Wall Street on Frontline last night (thanks to my DVR). If you missed it you can watch it on the PBS website.
Overall, I thought it was pretty good. The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits. In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.
I was actually pretty surprised at how naive some of the buyers of these swaps were. Basically they were swapping a higher fixed rate for a lower variable rate. This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof. In my opinion, municipalities have no business swapping fixed payments for variable rates. In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today". That's not the job of local government. Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.
The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time. In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.
Going forward, it was clear that nothing has really changed. The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.
Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking. I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail. Finally, I think investment banks should go back to being organized as partnerships and not as corporations. Under the partnership model, the partners were always on the hook for the risks taken by the bank.
I have zero confidence in any of these things happening however.