No doubt Thomas Friedman’s own financial losses are partly behind his recent focus on the financial crisis, but however it happened, the man has seen the light. His entire column today is worth reading, but I’m going to zero in on just one point he made — that a lot of the people running the financial industry had no clue what they were doing.
Citigroup was involved in, and made money from, almost every link in that chain. And the bankâ€™s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bankâ€™s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it. …
… Also check out Michael Lewisâ€™s superb essay, â€œThe End of Wall Streetâ€™s Boom,â€ on Portfolio.com. Lewis, who first chronicled Wall Streetâ€™s excesses in â€œLiarâ€™s Poker,â€ profiles some of the decent people on Wall Street who tried to expose the credit binge â€” including Meredith Whitney, a little known banking analyst who declared, over a year ago, that â€œCitigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,â€ wrote Lewis.
â€œThis woman wasnâ€™t saying that Wall Street bankers were corrupt,â€ he added. â€œShe was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what theyâ€™d fetch in a fire sale… For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: Youâ€™re wrong. Youâ€™re still not facing up to how badly you have mismanaged your business.â€
A little further down, another hint:
Lewis continued: Eisman knew that subprime lenders could be disreputable. â€œWhat he underestimated was the total unabashed complicity of the upper class of American capitalism… â€˜We always asked the same question,â€™ says Eisman. â€˜Where are the rating agencies in all of this? And Iâ€™d always get the same reaction. It was a smirk.â€™ He called Standard & Poorâ€™s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldnâ€™t say; its model for home prices had no ability to accept a negative number. â€˜They were just assuming home prices would keep going up,â€™ Eisman says.â€
â€˜They were just assuming home prices would keep going up,â€™ Eisman says.â€ If you live long enough, you really do begin to relive the same old stuff, over and over. I remember conversations I had during the Reagan housing boom in the 1980s, in which people gushed that their homes would be worth a kazillion dollars in a few years, and I’d say, no, home prices will fall again eventually. And I’d get shocked reactions, and the gushers would say that can’t possibly happen. And within a few months, their homes were worth less than the mortgages they were carrying on them.
What in the world makes people think their home prices won’t fluctuate down as well as up? They always do. We go through at least one house price surge and drop every decade, sometimes two.
But the other part, about the stupid CEOs, deserves more comment. In the 1980s and 1990s we went through a phase in which big corporate executives were worshiped. My own experience with the godlike CEOs was that they were usually more aggressive and intimidating than they were smart or competent. They remain at the top even when their performance isn’t that great because people want to believe Daddy is in charge of things.
Which brings me to what Hilzoy wrote today.
But the people who either ran Citi into the ground or were asleep at the wheel need to go. That should be the condition of a bailout: if you turn out to need public assistance, you lose your job. No golden parachutes either.
As I’ve said before: we absolutely need to make sure that the people who run these banks do not conclude from our unwillingness to let them take down the entire financial system that it’s OK to run these risks. The best way I can think of to do that is to make sure that they, personally, pay.
I don’t think I’m saying this out of vengeance. At least, I’m trying not to. I just do not want a system in which private individuals get the rewards of excessive risk-taking and taxpayers pay the price when it all goes wrong; and I do not know how else to avoid one.
I said something similar last week. The Bush Administration’s no-strings bailouts are an outrage. Compare/contrast that to money appropriated by Congress to rebuild New Orleans and the Louisiana coast after Katrina, which had so many strings attached much of it was still sitting unused more than a year later. I’ll bet some of it is still not being used.
Now what? Righties don’t want to pay for the bailouts. Well, nobody wants to pay for the bailouts. Friedman again:
Thatâ€™s how we got here â€” a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins.
Righties don’t see the interconnectedness of things. We may not want to “reward” the auto industry, but we’ll all feel the shock waves if they fall. And with credit so tight, bankruptcy would probably not allow them to retool, as it were, and grow back.
On the whole, the Right still is in denial about what their cockamamie economic theories hath wrought. Grover Norquist claims the economy is failing because Democrats took control of Congress in 2006. The only solutions being offered by the Right are the same solutions they always offer — tax cuts, especially capital gains tax cuts (although whose got capital gains these days?), and of course blaming labor.
Stupid, stupid, stupid.