"In the Beginning"... just kidding.
Wall Street brokerage houses cannot make money in perfectly transparent and liquid markets. The reason is simple: Liquid and transparent markets do NOT NEED A MARKET MAKER for the most part; they need technology that links buyers and sellers together and a mechanism to "clear" the trades (clear means guaranteeing payment and/or delivery. In my 2 decades + in financial services, a time in which I was CEO of a NASD Member Broker/Dealer for over a decade, I was NEVER stiffed, renegged, DK'd on a trade by an industry participant. NEVER. Rather remarkable when you consider the fact that every thing is done over the phone without lawyers and contracts. Notice that I qualified this statement. Members of the general public would, on occasion, enter into a trade that they did not honor. From my perspective, Wall Street's word of honor was of more value than the public's).
Goldman Sachs cannot make money providing services in the equity market as an "Agent"... what little is to be made, will be made by the exchanges. Sure, Goldman et al can sell their research... but not for much. Same with the Treasury market. Too liquid, too transparent. What these firms NEED to do, if they want to make outsized returns, is CREATE illiquid and non-transparent markets where the market NEEDS them to "make a market" in the security. The more complex and opaque, the better for the market maker.
Mortgage backed securities, and before them "Junk Bonds", were an excellent vehicle for this... and CDS's were a taylor made, heaven sent product. One of the smartest guys on Wall Street, ME, could not make hay out of the stock market as an agent OR a principal. In an illiquid and opaque market where I was the "Axe" and the "Hose"? My dog would be able to print money ALL DAY LONG.
One of the primary reasons Hedge Funds came into existence and their numbers have exploded... and the number of Broker/Dealers shrinks year after year... is that people with real talent left brokerages where they were nothing more than agents to become hedge funds where they could participate in the profits (the other reason is that much of the onerous, even silly, regulation cannot be inflicted upon them in these organizations).
In the end, people have rightly asked if all of this paper shuffling has been a benefit for our society. Good question. The U.S.'s primary export is the US$ and the financial services that arise from that export paradigm. What happens when that is taken away from us and we are all forced to work in real production jobs for much less compensation?
I think the question is moot. Resource constraints in general, and energy in particular, will dictate the end game.
Of course, there is another issue. As we all witnessed with AIG, any big player in the CDS market that is unable to honor its side of the trade can send the entire system into collapse. Given that, and the fact that the CDS market has not been able to demonstrate just how important it is to the capital formation process, it is reasonable to question everything about this market.