The tendency in the media and the Congress has been to blame the current depression on "stupid, greedy, and reckless" bankers. I believe that that is a mistake. I know bankers. They are not stupid; most of them are smart, and many of them are brilliant. If they are "greedy," it is largely so in the sense in which most Americans (most anyone, I imagine) could be called "greedy": they like money a lot. I read somewhere recently that bankers (a word I use loosely to cover financiers in general) derive their job satisfaction entirely from their monetary compensation, unlike other workers. But that is wrong. Rich bankers derive satisfaction not only from making a lot of money but also from a sense of outsmarting competitors, and in that respect they are not unlike highly paid athletes; in both cases the money the stars are paid do not merely enhance personal welfare, but also are indicators of relative performance. Money is a scorecard of success. Richard Posner
Rudyard Kipling famously argued, If you can keep your head when all about you are losing theirs....you'll be a man. Of course, it is only in hindsight that one can be sure one is keeping one's head.
Perhaps the Bankers really are Nietzchean Supermen? Perhaps intelligence is no longer manifested by following the wisdom of Daedelus but rather by flying high like Icarus?
Then again, perhaps not.
Richard Posner, whose prose in his new book A Failure of Capitalism: The Crisis of '08 and the Descent into Depression and blog suggests a gifted and learned mind, argues the former position.
Bankers, to him, are akin to athletes richly rewarded to push the envelope- to be reckless.
I agree with the comparison, but will argue that this is NOT a sign of intelligence, but of the ignorance of youth.
When I was a bank options trader in my early 20s I chased profits as ardently I chased women- recklessly and without much thought of consequence. I was Icarus and the fear of falling was obscured by the joy of soaring.
I eventually learned that I could fall.
Our Uber-Bankers have been resistant to this lesson, ably assisted in this regard by the Cult thereof. Otherwise intelligent people cheer our Uber-Bankers on like fans in the stadium.
Mr. Posner claims to know bankers. I wonder if he knows athletes? I wonder if he has really thought through his apology for their actions?
In addition to being a banker, I've been an athlete, albeit one who was never paid. In my youth I played Ice Hockey in front of crowds of 100s and it was quite a rush. While I was never the star player when I played competitively, I know the feeling that comes from a roar of the crowd when scoring a goal or body checking an opponent into the boards. Desire for that feeling drives many athletes to actions a saner man would view as mad.
There is a term for people like this- adrenaline junkies- and while they can excite crowds of on-lookers today in much the same way Gladiators of old excited the Romans, to consider them "smart" or worse, able managers of of a vital social function seems to me a bit strange.
To wit, while we might admire the recklessness of a NASCAR driver, we wouldn't want our cab drivers to follow their lead. While we might admire the nerve of a Chuck Yeager, we don't want our commercial air pilots finding out how fast or how high a 767 can go. Should we equip all seats on commercial airlines with ejector buttons and parachutes? It would certainly extend the obligatory safety instructions- in the event the pilot decides to escape the stratosphere and fails you will be expected to hit the ejector button....please wait to deploy your chute until you are clear of all other passengers.
Banking, and finance in general, despite the efforts of CNBC et. al. is not a spectator sport.
I think the Uber-Bankers Mr. Posner glorifies are not smart, nor, in that regard at least, are those who cheer them on and apologize for their excesses as sports agents apologize for the excesses of the athletes in their "stable." They, like Icarus, don't understand that their function is to ensure a safe flight.
Sadly, they have been piloting the US$ 767 Jumbo Jet. I hope you remembered the safety instructions. The ejector button is the golden one on the right but they're not enough to go around so you might want to beat the rush.
Tuesday, May 19, 2009
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5 comments:
"They, like Icarus, don't understand that their function is to ensure a safe flight."
Showing my hand a bit, I am in my late 20s and work for a hedge fund. Any sort of tops-down socioeconomist would say I'm likely to be one of the thrill seekers to whom you allude. I can tell you that if my firm merely produces "a safe flight," our investors will gladly redeem it and offer to pay "2 and 20" to someone looking for a few more thrills.
Same thing, at least until 2007, for risk-takers and executives of banks. If Jamie Dimon announced at the end of 2006, "We had record low loan losses this year driven by record low lending growth" he would have been fired and replaced, and investors in JP Morgan stocks and bonds would likely sell their JPM assets and invest them in say, Lehman Brothers.
On some level institutional investors are supposed to be prudent. But on another they're merely reflecting the wishes of their investors. Sometimes social mood seeks high levels of risk and other times it seeks low levels of risk. We in finance are employed to allocate capital in a prudent way to seek profits, yes, but if we're not throwing off the returns our investors expect they will find somebody willing to take more risk in order to attempt to reach those goals.
Hombre,
I'm not buying what your selling. Did investors expect to lose 1/4 to 1/2 on their investments over the course of a year? Of course not. We're they generally aware of the levels of risk in the marketplace? Of course not. Why not?
Why did investors expect such a high level of return while expecting little to no risk? Who or what was it that lead them to expect such unreasonable up side for so long?
While you and your firm may have been acting responsibly, many (most?) in the industry got ahead by hiding risk from their customers and clients. This may have always happened at the margins, but the vast extent of it over the past decade has led to one of the most collasal collapses in world history (collapse still in progress).
You may be able to legitimately hide behind the "We did what our investors demanded", but only if you were vigilant about warning of the high levels of risk and impending collapse and were able to adaquately protect your clients. The vast majority of the industry was too busy blowing up the bubble, pocketing their bonuses and not worrying about the investor or what tomorrow may bring.
M_Biz, all I'll say about my firm is we were down small last year and are now back above our high water mark. I'm a pretty bearish/cynical guy by nature but I'm proud of the job we've done at managing risk.
As far as the financial services industry not warning its clients, I'll agree that many are culpable but at the end of the day people believe what they want to believe. In early 2006 I moved all my money into cash and bought a little physical gold. I implored my friends who owned houses to sell them. I tried my hardest to keep other friends from buying. The result? All three friends bought houses. They're all now significantly underwater.
I can tell you right now, and being a reader of this blog you're likely to agree, that the actions the Fed/treasury are taking right now will eventually lead to some combination of much higher inflation, a much lower dollar, and/or much higher interest rates down the road. The Fed now holds over $1 trillion worth of long-term treasuries, agencies, and mortgage-backed securities, and they're buying tens of billions more every week. If and when they ever sell them, what will that do to the treasury/mortgage markets?
I believe that human nature is a constant. The innate "greed" within people is a constant. So the question is what changes occur that allow those forces of greed to express themselves in such an awful way. My conclusion is it's government intervention -- FDIC insurance, Greenspan's bailouts, record low Fed Funds rates, and encouraging the growth of exotic mortgages allowed greed to run amok AND made people think there was less risk in the system. If those were the problem, then my answer is the solution is eliminating them. But try convincing people that what officials should do is eliminating FDIC insurance and central banking and see what kind of looks people give you.
Hombre, Congrats on your performance. In the spirit of disclosure, and so you won't write this off as sour grapes, I got out of equities when the DJIA was at 13,500. I have been riding the golden chariot since then to good result. That said, gross injustice still works me to a lather even if I dodged the bullets of the FIREing squad. (forgive the pun)
I think hedge funds are the only genuinely good model left in the FIRE industry. You are paid for performance and since managers generally have a lot of skin in the game you lose big if your fund does. Fine, but don't white wash the industry by saying things that may be true for you but are false for the vast majority of the industry such as "we were just doing what investors wanted".
In reality the vast majority of the FIRE industry was involved in some level of irresponsible, unethical or outright fraudulent activities to make a buck. No one cared what would happen when the music stopped because it kept the bonuses rolling in.
I do agree with your comment about greed being innate and is expressed in reaction to circumstances. However, this expression is in the form of free choice and the innateness does not absolve the greedy from the responsibility of their actions. There are many that act nobly and resist the temptation to rape and plunder
It is laughable to blame government for this problem when it was only doing what the financial golden boys asked of it, deregulate, bail me out, deregulate some more, bail me out again, block consumer protections so we can continue to dupe and entrap the unwashed, oops! bail me out again!
While I would probably agree on 98% of what you have to say about the current crisis, you are far too easy on your FIRE brethren. You should not feel guilty for misdeeds that were not your own, but you should be honest about the misdeeds of others in your industry. Honesty is the only path to healing the broken system.
My only defense in not pointing the finger stronger in the direction of others in this industry is because I don't know any of them and I don't know how big the problem was. I've been at my current shop for several years and before this was not in the financial services industry. I don't work in the northeast, so I'm not caught up in the Wall Street life. I have spoken to traders at the shops that blew up and they're just as angry, if not more so, at the people who blew up the system as any of us are (since the losses in 2007+ have come out of their pockets directly). Quoting a fixed income trader at a "TARP bank", "A dozen guys on the mortgage desk cost this firm $10 billion." It sounds like this was the case at AIG as well. Madoff, if we take him at his word, was one man responsible for billions in losses. I think the vast majority of people on Wall Street were just going about their business and very few acted in a way that I would describe as unethical. For every predatory lender who stuck an uneducated borrower into a home he couldn't afford I think there were dozens who really believed that San Bernardino houses should go for $500,000 and that bank CDS should trade basically flat to LIBOR. We got involved in credit default swaps in 2006 and I remember thinking Merrill Lynch could widen out from 35bps to maybe 60 or 70bps and how wild a ride that would be. And I was bearish at the time!
"It is laughable to blame government for this problem when it was only doing what the financial golden boys asked of it, deregulate, bail me out, deregulate some more, bail me out again, block consumer protections so we can continue to dupe and entrap the unwashed, oops! bail me out again!"
You and I agree here. I guess I just see this as the natural progression of democratic government -- one that caters to the interests of the powerful.
Is it reasonable to expect 1) the system to "heal" (as opposed to just postponing the day of reckoning as Greenspan did in 2001) or for 2) people to actively change the system in a way that didn't always benefit the banks?
Most would call me a cynic or pessimist for holding this view, but I think the only way to save the system is first to destroy it -- until major fiat currencies go bust I unfortunately don't see any permanent solutions to the problem. The nature of democracy opposes it too strongly because it means punishing the current generation to benefit the future ones.
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