Monday, September 22, 2008

Financial mess

I can't say that I've ever really understood what it is that investment bankers do all day, and the continuing meltdown of the US economy seems to confirm that investment bankers don't really understand what they do all day either. I'm having a hard time coming up with an appropriate analogy to other professions. I mean, is this like firefighters suddenly realizing, oops, we shouldn't douse fires with kerosene? Like chefs finding out that arsenic is a poor food additive? Like baseball managers reserving their very best relief pitcher for three run leads with only three outs to go? (oh, wait...)

Problems abound here. In general, it seems like we're going down a path of privatizing gain but publicizing risk. I really hope that Democrats in Congress grow a set and reject the proposal sent to them on Friday. Let's see... there's a crisis, Bush says something needs to be done now, and tries to bully Congress into agreeing... nah, we've tried that, doesn't work. Oh, and the Bush Administration has been particularly bad about accurately estimating the cost of any and everything they've proposed -- their tax cuts, the prescription drug benefit, the Iraq war -- so while 700 billion is the overnight-consensus cost, I don't think we should be surprised if it is in fact much higher. 700 billion is a lot of money. For comparison's sake, the Iraq War, after 6 years, has totaled about 500 billion.

Goldman Sachs and Morgan Stanley decided last night to become "bank holding companies" instead of investment banks, which means, at least theoretically, they'll be subject to tighter regulation and have less freedom to screw up. Call me a cynic, but twenty years from now when this mess has sorted itself out and Wall Street is back to its old self -- in other words, when GS and MS have ridden out the storm -- they'll ask for and be granted a reversion to the old rules and no one will say boo.

Michael Lewis, the author of Moneyball, wrote the book Liar's Poker in 1986, chronicling his time at Salomon Brothers at the precise time that mortgages became the trade-able commodity that they are today, ultimately creating this mess. Highly recommended, and remember, this is not a work of fiction, this is what investment bankers were actually like (at least in the mid-80s... I'm sure they're not nearly the same type of alpha male jackasses today...) Of course, this doesn't mean that every person who works in the finance industry is to blame for this -- my guess is the Warren Buffets and Peter Lynchs of the world didn't have their heads up their billion dollar asses. But it does mean that, as an industry, someone needs to watch the store.

More on this soon...