Saturday, March 19, 2011
The parable of the blind men and the elephant.
I didn't intend to make a study of the reports of the causes of the financial meltdown. It happened incrementally, with some very intentional steps and others less so.
First and most intentionally, I bought and read Michael Lewis' The Big Short, which I reviewed earlier this month. Next, I rented Charles Ferguson's Inside Job based on several people's recommendations and a sense of duty to watch a few of the Oscar winning and nominated documentaries.
There are major differences between The Big Short and Inside Job. First and most obvious, it's a book versus a movie. It's easier for Lewis in his book to spend more time explaining some tricky ideas. The two of the main weapons of mass destriction, the Credit Default Swap (CDS) and Collateralized Debt Obligation (CDO), definitely qualify as tricky ideas, intentionally designed by mathematicians and lawyers to be very hard to understand.
Alliances of mathematicians and lawyers. Even I shudder at the thought, and I'm supposed to understand half of that pretty well.
The second big difference between The Big Short and Inside Job is worm's eye vs. bird's eye. Lewis talked mainly to small players who figured out how to make a profit but had zero power to stop the avalanche. Ferguson got some interviews with the big fish, though there are a lot of times the caption "xxx refused to be interviewed for this film" appears. Glenn Hubbard (no relation), the genius who engineered the Bush tax cuts, is cheerful through most of the questions until he is asked to take some responsibility for the carnage, and there is some talking head from the Business Roundtable, a pleasant sounding name for an evil lobbying group created by the ass covering buffoons who got us into this mess. Almost all of the people who sit in front of the camera and tell the truth are not Americans, people from the governments of Iceland and Singapore and France who got taken for a nasty ride and admit their foolishness and a little of their culpability but make compelling cases that they were among the fleeced and not among the fleecers.
I recommend both the book and the film, so I don't want to give all the juicy bits away. There are parts of the colossal mess that are covered by both. A very fair question is "Where were the regulators?", and both The Big Short and Inside Job have plenty of scorn to heap upon Moody's, Fitch and S&P. One thing both the movie and book agree upon is that it was in the financial interests of the rating agencies to give high marks to repackaged crap. A company would pay a set price to Moody's to rate a CDO, but if it wasn't the highest rating available, maybe that company would ask S&P to rate the next one.
The book goes into more detail than the film on this topic, as was the case regularly when they overlapped. Since the end of the Cold War, a lot of young people good at applied math would go into financial engineering rather than weapons engineering because that was obviously where the money was. Lewis puts forward the thesis in The Big Short that if a young person was going into the field for a big payday (and why else?), then the really good financial engineers (known as quants) would be at the companies giving million dollar bonuses and the second string would be at the ratings agencies who would pay mere hundreds of thousands in salary.
To use a March Madness analogy, it was like a Number 1 seed vs. a Number 16. There was effectively no chance the big money would lose.
To give a point to the film, an excellent point was made in Inside Job as to why the massive financial bailout was voted through in the fall of 2008 by both Republicans and Democrats, an event that was the last nail in McCain's grotesquely mismanaged campaign, doomed to lose six weeks before a vote was cast.
Simply put, the world runs on credit. Sadly then and frighteningly still true today, it's way too much credit, with the big financial players massively over-leveraged, sometimes in the range of 30 to 1 or even 40 to 1 when measuring obligations in the markets compared to cash on hand. While this was a zero-sum game, which means if Company X loses $50 billion, somebody else makes $50 billion, several of these companies were on the hook for more money than they had, so Company X could lose everything, say $30 billion, and others would have $20 billion less than they expected. While all of these were flat out gambling losses, it meant that the people who lent to legitimate businesses had no money to lend. The scary and completely plausible scenario was that airlines would cease to function, because they are constantly borrowing to buy that day's fuel allotment.
No financial service industry, no planes in the air.
Like... oh, nowish.
No James Bond villain ever made a better blackmail threat.
Add to this mix a talk I heard on the broadcast from The Commonwealth Club by Phil Angelides, the former California state treasurer and failed Democratic nominee for the governorship who was appointed to the blue ribbon government panel investigating the financial meltdown. This was the least intentional step in my search for knowledge, as I was driving down to Santa Cruz and the broadcast came on the radio in my dad's truck.
Yes, my father is a Republican who listens to NPR. I may have to report him to the proper authorities.
The panel was set up after the 2008 elections where the Republicans deservedly got their heads handed to them, so the Dems got six members and the Republicans four. Angelides plays the good boss in this talk, lauding his staff for long hours and excellent work, several of whom are in the audience and mentioned by name. But he doesn't deny the obvious, that this was an investigation done on the cheap by government standards, spending less than $10 million before issuing their report. This is a tiny fraction of the money Ken Starr spent looking for presidential blowjobs, and that total has to be adjusted for inflation. To compare it to another financial investigation from this era, the man charged with looking into the wrongdoing of Bernie Madoff has already spent $200 million.
Charles Ferguson was in the audience at the Commonwealth Club after giving a talk earlier in the week on the same subject, and he was one of many who sent in questions as to why the government hasn't seen fit to prosecute anyone involved in the fiasco. Angelides correctly points out that it wasn't his commission's task to put people in jail, and notes that after the most recent though much smaller similar meltdown, the S&L crisis of the late 1980s, over 1,000 people were sent to jail, including CEOs. As of this writing, there has not been a single person convicted for any wrongdoing. I don't even know of any big wig who has been indicted.
Instead of chiding the judicial system, let me pick up a few sturdy bricks and throw them at the Republican nominees to this committee. Before the final panel released their report, three of the Republican nominees got together to write a rebuttal and the fourth wrote his own separate rebuttal.
Their conclusions were as predictable as the dawn. It was not the fault of their paymasters, the American corporations. It was the crazy Asian investors who had so much cash. It was the semi-government agencies like Freddie Mac and Fannie Mae. No more regulation is needed. No one is criminally culpable.
I'm not sure if it's actually detectable in my writing, but I'm trying to cut down on the addictive drug of vitriol. I actually understand and agree with some of the underlying points of conservatism, but there is really no one in power making those points. The modern "conservative" movement is a loose coalition of fucking morons who think the world is 6,000 years old and fucking thieves who think a CEO making 6,000 times more than the average employee is perfectly acceptable if the market will bear it.
Ah, that first sip of vitriol! It still goes down smooth.
I don't agree with The Tea Party, but from what I see, it's largely a Revolt of the Morons. If these idiot dogs will go for the throats of their moneyed masters, there will be a blood bath and every fatality is a blessing on humanity. As Neils Bohr or Yogi Berra said, prediction is hard, especially about the future, but I could see an internecine fight like this changing the political power structure in this country. I wish I could be optimistic about the future, but watching the Obama administration, I think the people with money will just let the Republicans wither and buy more Democrats. Watching people in the streets in Wisconsin gives me some hope.
While I see change in the political world as a distinct possibility, sadly there is no political will to force change in the unregulated markets created by the eager-beaver quants on Wall Street, whom I will immodestly call my evil twins. Human greed focused by human intelligence is the most destructive power on earth, and even 9.1 earthquakes pale in comparison.