Here’s a link to Greg Smith’s buzz-making NYT Op-Ed, Why I Am Leaving Goldman Sachs. It deserves to be read as an insider’s critique and to establish context for the buzz it is generating. Smith’s criticisms conform with my view of Goldman but I claim no special insights about the frim. From what I’ve come to understand about its culture I know I wouldn’t fit there, but that’s not saying much–I don’t fit the culture of many employers and institutions. It’s difficult to credit a 180-degree cultural shift in just over a decade. I expect the changes Smith relates are not solely Goldman’s. He is not the same person at 33 that he was at 21–who is?–but his Op-Ed presents Goldman as the only variable. But even if one does not take his words as gospel or question the wisdom of tossing them over his shoulder as he walks out the door they have as Judge Grant liked to say, thrown the cat among the pigeons.
Later this week my real estate law class turns to the topic of real estate finance, from which it is a brief stroll–maybe even a short stumble–to sub-prime mortgages, collapse of the housing market, the worldwide recession, Wall Street malfeasance, borrower irresponsibility, mortgage broker greed, and all the other stuff that dominated the news a few years ago, but now is fading into the mists. (Charles Ferguson’s remarks during his Academy Award acceptance speech for Inside Job show he hasn’t forgotten.) A blessing of living in the information age is–duh–that there is lots of information. A lot of crap, but a lot of gold–books like The Big Short by Michael Lewis, House of Cards by William D. Cohan, Too Big to Fail by Andrew Ross Sorkin, articles (all from Vanity Fair) like Michael Lewis’s Wall Street on the Tundra, The Man Who Crashed the World, and Beware of Greeks Bearing Bonds (the subject doesn’t matter–Lewis is always worth reading), and podcasts. Two, from This American Life, present clear and interesting overviews of sub-prime mortgage generation and securitization and their relationship to the capital markets: The Giant Pool of Money, originally aired 9 May 09, and Return to the Giant Pool of Money, originally aired 25 Sep 09.
And videos. A student recommended this terrific 11-minute animated explanation of the origins of the credit crisis. As the accompanying notes acknowledge it leaves out a few things, but that’s a quibble. It’s remarkably clear and concise.
Of course, headlines like this, from today’s Wall Street Journal, fuel the belief that TARP and the stimulus were unnecessary: Wall Street Pay: A Record $144 Billion Whatever financial and legal rationales support this record compensation, it proves Wall Street is tone-deaf.
The Troubled Asset Relief Program — TARP — expired yesterday, having cost nowhere close to its original sticker price of $700 billion. (See, e.g., TARP Bailout to Cost Less Than Once Anticipated) $700 billion was a guesstimate born of political expedience, more than the $500 billion Treasury officials targeted in their initial bailout plans but less than $1 trillion, which Treasury officials feared might be required to slow the economy’s September 2008 death spiral. As the NYTimes reports in the linked article, taxpayers may even make money of the deal. Maybe.
Remember September 2008? 25 months ago? The government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy, AIG and Merrill Lynch were going down, Morgan Stanley and Goldman feared they were days away from collapse? Wall Street had gone off the rails and crashed into the world economy like the train in The Fugitive? No? Apparently you are not alone:
Fewer than three in 10 Americans say they believe [TARP] was necessary “to prevent the financial industry from failing and drastically hurting the U.S. economy,” according to a poll in July for Bloomberg News. (NYTimes)
I understand the rage against Wall Street’s excesses, but denying that the U.S. and world economy were hanging by a thread in fall 2008 ignores the facts. Which brings to mind Derek Bok’s quote: If you think education is expensive, try ignorance. The gleeful embrace of ignorance is the political Special of the Season; look no farther than Sarah Palin and the Tea Party’s enthusiastic embrace of Christine O’Donnell, the Republican nominee for Governor of Delaware. Rage against Wall Street, rage against TARP, rage against Obama’s stimulus package brought us the Tea Party, a “populist” movement financed by billionaires. If you deny the existence of evolution, it’s easy to deny the plain truth about the need for TARP.
Recipe for Disaster: The Formula That Killed Wall Street, is the tale of the Gaussian copula function. The Gaussian copula function, which determines correlation between “disparate events,” allowed the CDO and credit default swap markets to believe that they correctly priced the risks in complex financial instruments. The “simple and elegant mathematical formula” was too simple and elegant for the real world, or perhaps the problem was that its simplicity beguiled the market into relying on it too much. But “[t]he relationship between two assets can never be captured by a single scalar quality.” It’s an informative and revealing article, well worth the time.
Every year many of our most accomplished students, with the highest GPAs and academic honors, take jobs in finance. Jobs on Wall Street have been the college carousel’s gold ring. They carried the most prestige and paid the highest salaries–two ways of saying the same thing. Our students’ entry-level salaries were not high in Wall Street terms; they were merely a taste of what was to come. It was accepted wisdom that people on Wall Street deserved obscene amounts of money because they worked long hours and were just plain smarter than everyone else. They earned what the market said they were worth, and the market was always right.
Can anyone say that today with a straight face? Wall Street’s best and brightest have wreaked economic carnage. The arrogance, greed, short-sightedness, and blind failure of Wall Street’s leaders to understand simple tenets of risk managment created the most cataclysmic loss of wealth in history. Everyone is suffering because of their mistakes. The market has repudiated every justification for their outsized compensation. Whatever financial genius they possessed individually, they were not smart. A smart creature does not gorge itself until it dies. A boss used to say “pigs get fat, hogs get slaughtered.” Wall Street was dominated by hogs, but we’re the ones being slaughtered.
How else can one respond to the $4 billion in bonuses paid by John A. Thain, former head of Merril Lynch, before it was acquired by Bank of America? Merrill, recall, was on death’s door when Bank of America acquired it. Another few days and it would joined Lehman Brothers in the financial afterlife. It had failed. Bank of America has received billions in taxpayer bailout money to absorb Merrill’s losses and its own losses. Merrill paid these bonuses with our money. As Merrill was sinking John Thain spent $1 million in office renovations, including two chairs for $87k and a $1,400 wastebasket. This is one of the Wall Street geniuses who received hundreds of millions in compensation because that’s what you have to pay to get talent like his.
Disgusting. Incomprehensibly arrogant. Unfathomably stupid. I second Mauren Dowd: “How are these ruthless, careless ghouls who murdered the economy still walking around (not to mention that sociopathic sadist Bernie Madoff?) — and not as perps? Bring on the shackles. Let the show trials begin.”
As an icon of expertise, as an example of American genius, as a symbol of the wisdom of markets, Wall Street is dead. It self-devoured. It’s highly-compensated leaders deserve our scorn and contempt.