Let the Heads Roll
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Judgments: Opinions on the news.
Let the Heads Roll
It's time for some market accountability.
By Michael Lewis
Posted Wednesday, September 17, 2008 - 9:21am
With Lehman Brothers Holdings Inc. collapsing, and Merrill Lynch & Co. surrendering, and all hell breaking loose in the financial markets, Bloomberg News sent reporters out to gather some impressions from ordinary non- financial Americans.
Many had no idea what any of it meant but few were happy about it. They sensed they'd just been handed the role of the little fat kid in the game of crack the whip, who, at the start of the game, feels nothing at all but then suddenly finds himself launched headfirst into the neighbor's bushes.
They hadn't suffered yet but were preparing to, and they were perplexed by their inability to figure out who had the idea for this game.
``If I knew more I could find someone to blame,'' said Linda Burke, a 57-year-old service consultant at AT&T in Atlanta, speaking, no doubt, for the American people.
She'll probably never get her hands on the real villains of this piece. They're obscure; their crimes are hard to understand. Who inside Wall Street dreamed up the first subprime-mortgage- backed mezzanine CDO and allowed BBB credit to be laundered through the credit-rating companies and come out the other end as AAA? Who inside the credit-rating companies made the decision to rubber stamp the paper? Who inside Lehman Brothers—and at all the other Wall Street firms—fought to get into the business over the objections of saner traders?
This is a pleasant side-effect of Wall Street's complexity. Not only does it enable the firms to hide the risks they run; it allows the people who make fortunes, while at the same time helping destroy vast amounts of capital, to remain essentially unknown to the wider public.
SEC Chairman Christopher Cox
Comments
The blame game
Quoth Mr. Lewis: "Christopher Cox. He's the chairman of the Securities and Exchange Commission, and so has the job of regulating these companies that helped make it possible for every poor American to get a mortgage and are now, as a result, falling apart." Yes, Mr. Lewis, but if you are going to write this you also have to ask who gave Cox this mandate and why it was given to him. The answer is that for the past couple of decades there has been a policy in this country, supported by Democrats and Republicans alike, and with the blessing of Alan Greenspan and the Federal Reserve, to "give everybody a share of the American dream," with a special emphasis on racial minorities. The concrete result of this essentially political initiative (perhaps, without anybody coming out and saying so, intended as some scheme of reparation for past injustices) is that the bar for getting a mortgage was progressively lowered, mortgages were being given to increasingly more marginal customers according to progressively dodgier arrangements such as balloon payment schemes, and more and more bad paper was being written. Benevolent-sounding public policy therefore became a rationalization for unsound banking practices which have had the blessing and encouragement of the government under Clinton and Bush alike. At the same time, increasingly, mortgages themselves became a commodity to be sold, so that the lender originally writing the mortgage didn't have to worry about how well the loan really was, as long as he could unload it on somebody else before any bad consequences set in. For a long while this all had the effect of driving up the value of real estate to absurdly unprecedented levels and everybody pretended not to notice that the entire banking system had come to rely on inadequately secured collateral. Until the bubble burst. Now pundits such as yourself are howling for the heads of the technicians such as Cox who implemented this policy, without paying any attention to the policymakers who issued them their marching orders, or to the political assumptions that have driven these policies. We aren't going to get very far in getting out of this banking mess, or preventing another one in the future, if we limit ourselves to the Coxes of this world. Why shoot the monkey and let the organ grinder get away scot free?
Send them to the guillotine
It should be AGAINST THE LAW for the chief officers of publicly-traded corporations to receive BONUSES when those same corporations have been LOSING their financial health and asking for government bailouts under the administrations of those same chief officers . . . all while shareholders and employees are being SCREWED. Executive bonuses under those circumstances are a moral abomination.
Aren't we supposed to have laws AGAINST deceptive trade practices? Isn't there supposed to be government oversight and PROSECUTION to prevent not ONLY criminal, but also, GROSSLY IRRESPONSIBLE trade practices which manifestly amount to GROSS NEGLIGENCE, and which therefore endanger the rights and property of the innocent? If and when these executive crooks can be successfully prosecuted, why isn't every piece of property, and every cent they have, CONFISCATED to compensate their victims?
In mainland China, there have been several cases in which the chief officers of Chinese enterprises have been EXECUTED for corrupt financial practices. Perhaps it is time for some draconian discipline in THIS country.
If I tried to rob a 7/11 of petty cash, even using only my hidden finger as a "weapon", I would likely get at least 12 years in the slammer. Yet, executive crooks of major corporations have, and can, walk away with MILLIONS in BONUSES after bankrupting their companies and ruining the financial lives of THOUSANDS of innocent people. THAT is NOT true free-enterprise, since the leaders of TRUE free-enterprises are solely responsible for their own mistakes. THAT is government-subsidized, and government-protected, crony capitalism. It corrupts the very name of a true free-market requiring PERSONAL responsibility.
fundamental flaw of stock market and fallacy of human nature
I think the mess we have today is the result of fundamental flaw of stock market and human nature. As we all know the purpose of stock market to for people to buy a piece of ownership of the company that makes money. Everyone buys stock to make money. The more profit the company makes, the more people want to buy its stock. Therefore, the raise of its stock value. Since the performance of CEO tights to the value of the company stock value. This in terms translate to higher salary for its CEO.
The problem is that most of times the current value of the stock only takes account of "current" financial situation of that company. the prospectus is great, but, who cares about the future plan when the stock is under performed and the CEO explains that it is temporary and for the good of the company. Who can believe what that CEO says when stock holders are losing money on that company's stock. Then there is a group of finance people who estimate the future value of profit that translates to per stock price. I think those people should be arrested for ruining people's financial lives. I don't know how they do this kind of estimation. I don't think this estimation provides any value in the financial health of stock market now and the future. We all know that the value of the stock always goes down when the public company does not make that estimation. Since how long CEOs of public companies stay in the job depends on the value of their company stocks. It is not surprising that those CEOs first priority is to at least meet that estimation, so they can continue earning millions of dollars.
When it comes the time CEOs at the cross road where they have to choose between short terms profit and long terms company pain which possibly get themselves fired years down the road, or miss estimation for right reason, thus lower stock value, regardless of that reason, and ultimately have themselves fired soon. It is understandable that those CEOs will take the latter road. after all, selfishly they have to maximize their earnings.
It is just human nature. It is known in psychology community that when we think about money, the part of the brain that invoke the great feeling of having lots of money is the same place when we think about sex. By human evolution, we can't think rationally when that part of the brain is very active.
When they know that they can make a killing selling subprime- mortgage, many investment bankers are seeing green. When they see more and more people making millions, they lose the reason to think logically. They have to dive in to make money immediately, otherwise, they will miss the estimation and will lose their jobs. This is what we call "Damned if you do and damned if you don't." As for those who speak against subprime mortgage, those green eyes monsters think those people want to chop down their money tree. so they ostracize them. Now everything is crushing down on them. the companies they manage are going to or are already dead, dying or being bought. They are or are going to be fired, but there is a good chance that they can take home millions from their severance packages. How screw up the stock market is that? the person screw up the company gets to make alot of money when they are fired, whereas regular workers have to worry about running out of money.
To make sure it does not happen again, 1. we need to make sure the people in gov't institution that supervise the financial regulation does not benefit in anyway in stock market. They have to be prevented from seeing green now and the future. They have to be big brothers for those investment bankers, not their friends. 2. there should be a law that will revoke the severance package in the events that the company goes under. 3. For god sakes, stop doing estimation on how much the public company will make in the future. when it is time to choose long terms and short terms, CEOs will choose according to how long they can stay in their jobs, as oppose to what is good for the companies in the long run.
Accountability Means Transparency
I have no issue with what Mr. Lewis says. But I have some big issues with what he leaves out.
Sure the chairman of the SEC and the CEOs are to blame. But what about the efforts of the US government to deregulate this industry? Remember, the rules we put in place after 1929 to keep this from happening? Yes, those -- the ones we've been dismantling, because it's sooo hard to make a $53 million bonus unless you ease the rules, and because hey, housing prices will go up forever (unless, of course, they don't).
What about everyone who lobbied for less regulation? Or the politicians who caved in? Or for that matter, the financial writers who get dazzled by $53 million bonuses and forget their history?
Look at the other recent train wreck that happened this week (in Los Angeles): the failure analysis of that is going to include not just driver error, but all the other conditions that could have contributed to the crash.
Similarly, there's been a pretty loud chorus for some time arguing that in the case of the sub-prime crisis, merely playing Three Card Monty with the risk doesn't make it go away. The better solution is not to blindly trust the good judgment of a handful of hyper-competitive CEOs, but to put rules in place to prevent the illegal game in the first place.
The sub-headline to this article is "It's time for some market responsibility," but if this mess teaches us anything, it's that the market is clearly incapable of being responsible for itself.
Accountability
Bravo, Mr. Lewis!
However, we must still try to ferret out the individuals responsible for this mess, including those in the federal government. Having lived and worked through the mutual fund debacle, I've seen how widely failure affects communities. Four years later, can't tell you how glad I am to be out of the financial industry.
What I'd like to know is where the money's coming from for all these bailouts. Taxes, obviously. Perhaps it's all that money we've put into taxable-upon-retirement funds. The rate for taxation has not yet been determined. Hopefully someone will have the foresight to enact legislation to protect those funds.
The ceos whose salaries are $10+ million would be a great source for such monies. Better yet, let's use that money for retraining the innocents. A bit of justice after all.