SMART ENOUGH TO TAKE EVERYONE FOR EVERYTHING THEY'VE GOT

Written by Jim McGrath Tuesday, 20 October 2009 15:20

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Commenting on the N. Y. Times Op-Ed, Wall Street Smarts, NEVER AGAIN should be our cry, and the reason is obvious. All industries and human behavior need some form of restraint, from the food industry and pharmaceuticals to controlled substances and public parking.  Contrary to the conclusions one must draw from the claims of free-market philosophy about human nature, business men and entrepreneurs  do not divest themselves of greed and sefishness and become self-regulating, honest and forthright.  Especially not with what we have seen involving investors' money.  Are we to believe them? In effect they are saying that power corrupts, and absolute power corrupts absolutely, except for businessmen and women in free enterprise?  And so we businesses and markets must be free from regulation and restraint?   Rather we should say, Freedom? Nay, licentiousness, in the name is free enterprise!  Theirs is a perversion of the true definition.  These financial giants are in essence claiming that free enterprise means to do with your money what we will, damn the long term consequences, any responsibility, and what good sense dictates.  Then dress it up in fancy gimmicks like tranches, collateralized debt obligations, credit default swaps, quant funds, etc., etc., as a disguise to fool the public.

Thus, rather than submit to the restrained form of common sense capitalism dictated by established statute, that has been ignored  since the Reagan Regression and repealed in various forms by politicians sycophant to corporate interests (and campaign funds), we are currently witnessing its natural conclusion, the current perfect storm factors: lack of regulation, pay for failure, investment in junk bonds and high risk assets by the tonnage, and bonuses that reward short term profit at the expense of everyone else, and now of the economy, allowing these unregulated businessmen to abandon any pretense of  fiduciary responsibility for the unfettered pursuit of greed, true to human nature. 

We must regulate this form of insanity, or at least limit potential harm to the money, savings and investments of others. It is a restraint arguably more needed than regulating  many things, at least for our financial safety. Consider the insanity that engendered securitized obligations (mortgages, credit card debt, student loans, or whatver): no honest financial innovation -- instead, a world of chicanery where the fastest computers known to man literally took hours to slice and dice debt into different securitized instruments, or tranches, to resell to a duped world.  All under the pretense that such wide dissemination would spread risk and make worthless assets safe to invest in. No wonder some corporate heads, bank presidents, Bernanke, the Fed and many experts were baffled by what these "whiz kids" did.  

They surely were smart: smart enough to fool the investing classes and themselves, touting this snake oil as a cure for good, common business sense and we are smarting from it.  If I remember my high school history,  borrowing 10 to 1 on the margin was a major cause of the depression. Don't you think these MBAs and business gurus knew their massive leveraging on a 40 to 1 margin and worse would be disastrous?  They had to. They were smart, alright.  And in the end, this sort of con game is sheer stupidity, for as anyone can see it leads to ruin.  And downfall.  Ask the CEOs and brokers who are winding up in trouble and downsized to ice cream trucks and baristas.  For a humorous, though too kind view, see the NY Times Op-Ed , WALL STREET SMARTS by Calvin Trillin, or click at: http://www.nytimes.com/2009/10/14/opinion/14trillin.html

WALL STREET SMARTS

by Calvin Trillin, NY Times, Oct. 13, 2009

"IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence."

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend. "But I have to buy you a drink to hear it?" I asked.

"Absolutely not," he said. "I can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening."

He did indeed look capable of buying his own drinks - one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late '50s or early '60s - a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts.

"O.K.," I said. "Let's hear it."       

"The financial system nearly collapsed," he said, "because smart guys had started working on Wall Street." He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over.

"But weren't there smart guys on Wall Street in the first place?" I asked.

He looked at me the way a mathematics teacher might look at a child who, despite heroic efforts by the teacher, seemed incapable of learning the most rudimentary principles of long division.

"You are either a lot younger than you look or you don't have much of a memory," he said. "One of the speakers at my 25th reunion said that, according to a survey he had done of those attending, income was now precisely in inverse proportion to academic standing in the class, and that was partly because everyone in the lower third of the class had become a Wall Street millionaire."

I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge - earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks.

"That actually sounds more or less accurate," I said.

"Of course it's accurate," he said. "Don't get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren't really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn't feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht."

"So what happened?"

"I told you what happened. Smart guys started going to Wall Street."

"Why?"

"I thought you'd never ask," he said, making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini.

"Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they'd have so much money they could then become professors or legal-services lawyers or whatever they'd wanted to be in the first place.

That's when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That's when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds."

"But you still haven't told me how that brought on the financial crisis."

"Did you ever hear the word ‘derivatives'?" he said. "Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn't have done the math."

"Why do I get the feeling that there's one more step in this scenario?" I said.

"Because there is," he said. "When the smart guys started this business of securitizing things that didn't even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn't have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness."

"So having smart guys there almost caused Wall Street to collapse."

"You got it," he said. "It took you awhile, but you got it."

The theory sounded too simple to be true, but right offhand I couldn't find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. "I think I need a drink," I said.

He nodded at my glass and made another one of those eyebrow gestures to the bartender. "Please," he said. "Allow me."