Chilling Reads

"Basically, It's Over: A Parable About How One Nation Came to Financial Ruin."

--Charles Munger; Slate (2/19/2010)

"The Fat Lady Has Sung."

--Thomas L. Friedman; The New York Times (2/20/2010)

Anyone else note the eerily similar notes struck by Thomas Friedman and Charles Munger?

If you didn't know, Munger is Warren Buffett's long-time right-hand man and sidekick at Berkshire Hathaway.

Buffett, of course, is better-known as the the Wizard of Omaha, the nation's most successful investor, and it's second-wealthiest citizen.

One last little tidbit: Edina Realty is owned by a chain of companies that ultimately are owned by . . . you guessed it!

Munger's piece is harrowing, sobering, and extremely cautionary.

The tone is leavened only a little bit when you realize the title is a play on the "mythical" country, "Basicland," that Munger describes.

Too bad there's not an easy way to dismiss Friedman's headline.

P.S.: And no, I couldn't bring myself to post this at 11:59 p.m. -- I changed it to 12:01 a.m.

How Peter Lynch Would Reform Wall Street

Too Big to Fail? Try, Too Complex to Reform

Banks are like the heart that pumps blood — credit — to our country’s corporate muscles. If that heart is malfunctioning, any recovery will be anemic. But heart surgery is a very complex thing. You wouldn’t want yours done by a plumber or a politician.

--Thomas L. Friedman, "When Economics Meets Politics"; The New York
Times (2/3/10)

Of all the canards Wall Street has sold to would-be reformers, regulators, and at least one NY Times columnist, the biggest (and most self-serving) is that it is . . . inherently complex --"a beating heart," if you will.

Because Wall Street finance is so complicated, you need a Wall Street financier to oversee it. Or lots of them.

Eventually, *Wall Street insiders (vs. public-spirited civil servants, in the Paul Volcker mold) are running the Treasury Department, policing the securities markets, and serving as senior advisors to the President.

Sound familiar?

"The Complexity Canard"

The solution to Wall Street excess only partially lies in making too-big-to-fail firms smaller.

The other piece is to make the financial system simpler ("boring," if you prefer Paul Krugman's term).

Famed investor Peter Lynch famously advised, "invest in a business that any idiot can run -- because sooner or later, any idiot probably is going to run it."

My corollary for reforming Wall Street would be:

"Design a financial system that any idiot can regulate -- because sooner or later, any idiot is probably going to regulate it."

*Of course, FDR appointed a quintessential Wall Street insider, Joseph Kennedy, to head the newly created Securities and Exchange Commission. But Kennedy wielded his power on behalf of investors, not Wall Street. Imagine that . . .

"The Market Has to Clear"

Friedman's Prescription:
'Painful and Quick' Action

Add Tom Friedman to the very short list of commentators who: a) understand what just happened in -- and to -- the global financial system; and b) actually have some sort of coherent proposal about what to do about it.

According to Friedman, we have just witnessed a "nuclear financial explosion." That's what happens "when you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up."

Friedman gets that, in the Internet age, it's all about the network. You don't save a damaged network by pouring resources into the parts that just malfunctioned. Instead, you bolster the parts that are still (relatively) strong:

Do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.

Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier . . .

This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me . . . "

--"Cars, Kabul, and Banks"; The New York Times (12/14/08).

Just one year, albeit "excruciatingly painful"? Where do I sign up??