Wall Street's "Uncontained Failure"

Qantas' Pilots vs. Wall Street's

Here's a thought, apropos of (almost) nothing:

The cure to our economic woes has nothing to do with finding exactly the right monetary policy, or getting the Chinese to price the Yuan "fairly," or bridging today's yawning political chasms to reach necessary compromises.

The first step is to seriously and completely address the mess (still) left over from the Crash of '08.

(Sorry, I'm not going for "The Great Recession" sobriquet. Recessions happen, like the weather; crashes have man-made causes.)

Which men? (and almost all of them were).

There's really not much mystery at this point.

"Uncontained Failure"

For those not up to speed, here's the basic narrative to date:

Wall Street's largest firms created an esoteric, unaccountable financial monster -- the likes exceeding even the excesses of the 1920's -- that made their executives (if not their shareholders) rich beyond belief.

It grew and grew and grew . . . and then it exploded.

Unfortunately, just like the A380 Qantas jet whose engine blew apart on departure from Singapore, the economy's "financial engine" explosion was an uncontained failure.

And still is.

Which means the explosion fragments and debris escaped the engine casing and compromised the rest of the structure (economy).

Wall Street Accountability

Like the exceptional Qantas pilots, this country's economic pilots now face a three-fold task:

Step 1: Assess the damage

Which instruments are still working?

Which electrical and hydraulic lines have been severed?

Does the landing gear still work?

Etc., etc.

Only once a proper inventory of the damage has been done, however hastily, can efforts turn towards devising an appropriate response.

In the case of the banks -- "stress test(s)" or not -- step #1 has yet to be tackled seriously and honestly.

Step 2: Isolate the damage

The Qantas pilots quickly shut down the exploded engine and transferred (as best they could) precious power and fuel to the remaining, viable ones.

So far, this country's leaders have done the exact opposite: focused all their attention on the doomed engine, and diverted crucial resources from the functioning engines towards the destroyed one.

Even after the travails of the last few years, the U.S. banking system numbers something like 7,000-plus banks.

The idea that there is no banking system without the Too Big To Fail Behemoths is arrogant, insulting, and blatantly wrong.

Step 3: (Re)gain control of the craft

Fortunately, the Qantas flight had two additional senior pilots on board.

We have access (still) to old hands like Paul Volcker, plus an entire, new generation of financial experts, academics, and civil servants -- just as talented and public-spirited as Volcker was when he was appointed.

Who don't work for Wall Street, and don't want to.

Put them in charge. Then listen to them. (Here's my list of luminaries, for starters: "Nine Better Choices to Investigate Wall Street").

Where the Qantas-Wall Street parallel . . . um . . . breaks down is that Wall Street's "pilots" also owned and (shoddily) ran the airline; designed the jet's defective engines (and the rest of the craft as well); and, just for insurance, paid off the safety inspectors and government regulators who oversaw them.

That nothing has happened to them -- that they remain at liberty, rich, and -- incredibly -- still in charge, suggests not just that our financial and political systems are broken, but that our legal system may be as well.

Commit Fraud, Get Free Money

Borrow at 0%, Lend at 3%, Make Billions

Is it customary, when someone is charged with fraud and awaiting trial, to leave them in possession of the victim's credit cards, and, indeed, to continue to allow them to spend and gamble the victim's money?

In the corporate arena, apparently the answer is "yes."

U.S. vs. Goldman Sachs

While the putative victims in the SEC's fraud case against Goldman Sachs are two institutional investors, the real victims are the millions of Americans who've lost their homes and jobs due to Wall Street's role in causing The Great Recession.

Yet Goldman Sachs, by virtue of its status as a "bank holding company," continues to have direct access to the Federal Reserve's discount window, where the cost of money is . . . . nothing (not coincidentally, what millions of thrifty Americans are currently earning on their hard-earned savings).

Goldman Sachs and other too big to fail banks can then take that free money and turn around and lend it back to the government -- taxpayers -- for a risk-free 3% (more if you add leverage).

How much of Goldman Sachs' just announced $3.5 billion quarterly profit was made in such a fashion?

How about, just for the sake of decorum, suspending Goldman Sachs' access to free Fed money, until it's cleared of the charges pending against it?

Vanity Fair on Goldman Sachs

Recessions Happen, Crashes Have Causes

Here are my thoughts/reactions after reading "The Bank Job: Goldman's Elite on the Crisis and Bonus Rage," by Bethany McLean in the January, 2010 issue of Vanity Fair (it's online now).

That is, once I gargled to get the bad taste out of my mouth.

One. If your agenda is to rebut the (now widely held) notion that Goldman Sachs exerts altogether too much influence over U.S. fiscal and monetary policy -- with highly placed alumni in (or heading!) virtually every significant regulatory or policy-setting body (Treasury, Federal Reserve, New York Fed, Securities & Exchange Commission, Commodity Futures Trading Commission, the New York Stock Exchange, etc.) -- you might want to commission an article written by someone . . . OTHER THAN A FORMER GOLDMAN SACHS EMPLOYEE! (true -- McLean used to be an analyst there).

Two. Give McLean her due: she knows what makes these guys tick (or at least sounds like she does).

According to her, senior Goldman Sachs executives actually feel they're underpaid.

Why is that?

Not because their frame of reference is the millions of Americans who've lost their homes (due in good measure to a credit bubble Goldman Sachs helped inflate -- and profited from hugely).

Nor is it the tens of millions of Americans on food stamps, in the toughest economy since The Great Depression.

(Sorry, I'm not buying "The Great Recession." I prefer "The Crash of '08." Recessions happen, like the weather. By contrast, crashes have causes (and perpetrators, and abettors, and . .)

"Goldman Pay Offensive'

Rather, Goldman Sachs' senior executives feel that getting anywhere from $20 million to more than triple that, apiece(!), this year -- this year, 2009 -- is defensible, appropriate, and even justified because . . . the biggest hedge fund guys are making $500 million or even $5 billion apiece. This year.

The really rich part? (sorry, bad pun)

In many cases, they made those billions by shorting -- betting against -- the housing market.

Need to cancel lunch yet?

P.S.: For a second this morning, I thought it must be April Fool's Day, or that I grabbed the wrong newspaper (The Onion, maybe, instead of The Wall Street Journal); after all, the headline read "Goldman Pay Offensive."

Well, not exactly. I have (very) mild dyslexia, and in my quick-browse mode transposed the actual headline:

"Goldman Seizes the Offensive on Pay"

"The Biggest Loser"

Revisionist History

As historians know full well, Presidential reputations sometimes take decades to settle out, experiencing ups and downs in the meantime.

For example, Harry Truman left office in 1953 quite unpopular.

Over time, though, his stock gradually rose as society came to appreciate -- after the fact -- his straight-talking populism, common sense, and decency.

It also helped that, unlike contemporaries, later generations were less inclined to see him in FDR's (enormous) shadow.

Ironically, Truman's successor, Dwight D. Eisenhower, was another politician who left office under appreciated.

Viewed through the prism of the tumultuous '60's and turbulent '70's, the relatively placid '50's that Eisenhower presided over could easily inspire nostalgia a generation later. The nation's top general in World War II, his prescient valedictory warning about the "military-industrial complex" has also endeared him to posterity.

Finally, later generations, who only caught glimpses of JFK's charisma on movie reels, were more inclined to focus on JFK's substance and record (promising but incomplete) rather than his style (dazzling).

Today's Crop of Leaders

So, roughly two years into what appears to be shaping up as The Great Recession, how do today's leaders and recent-leaders fare?

Using a scale of minus-100 (-100) to plus-100 (+100), here's my take on the shifts to date:

Paul Volcker. Then: 50; Now: 100. Net gain: +50. Steered the country through the last comparable mess in the early '80's. Never worked for Goldman Sachs -- or aspired to. None of this would have happened on his watch. Tall Paul, indeed.

Alan Greenspan: Then: 90; Now: -75. Net loss: -165 (sets "the Biggest Loser" bar for a long time). "The maestro" now "the charlatan." Every one of his major tenets and policies have now been discredited if not repudiated, i.e., : 1) markets are self-regulating; 2) the Fed's job is to mitigate the damage from bubbles, not identify and prevent them; 3) financial actors pursue self-preservation above all other goals (wrong! they chase short-term profits and maximum compensation); and 4) excessively accommodative monetary policies don't risk liquidity traps (wrong! they do -- and we're clearly in one now).

Bill Clinton: Then: 40. Now: 10. Net loss: -30. The "Party Hearty" President from Arkansas (by way of Yale and Oxford). If the 1990's were the 1920's redux, that makes Clinton this era's Coolidge -- a feel good, go-with-the-flow leader whose lieutenants (Rubin, Summers, et al) did everything they could to keep the party going.

Ronald Reagan: Then: 60. Now: 40. Net loss: -20. Yeah, he gets splattered by this, too. Conservatives' darling, he pushed the pendulum rightward at a time when there was a strong case for it (sorry, liberals, but the Great Society overshot, and Carter never measured up). Unfortunately, the pendulum . . . kept going.

On the other hand, Reagan's resolve and optimism were a welcome tonic after Carter's malaise. He also gets much credit for the demise of the Soviet Union ("a good thing," as Martha Stewart would say).

Bonus question: if Reagan had been President 20 years later, would he have recognized the financial excesses, and shifted course? (He did finally fire Don Regan, formerly head of Merrill Lynch, but mostly because he was a jerk, not over policy disagreements).

Herbert Hoover: Then: -90. Now: -40. Net gain: +50. OK, he screwed it up. But it was harder to get right than we thought. At least his Treasury Secretary did what he thought was best for the country, not his own pocket or Goldman Sachs'.

FDR: Then: +70. Now: +90. Net gain: +20. Another beneficiary of "it was harder to get right than we thought." They were lucky to have him (and where's ours??)

George W. Bush: Who?

Name Games, Cont.

'Non-Distressed,' 'Unforced,' 'Optional'

A continuing thread on this blog has been the so-far lurching efforts to label key features of today's economic landscape ("We Have Some With Ham, Too")

So, while it's certainly not a household term yet, "The Great Recession" looks increasingly likely to be what we collectively call what's happened the last two years or so (vs. the more unwieldy, "The Worst Recession Since the 1930's").

On the real estate front, the industry still hasn't agreed what to call a "normal" sale.

Of course, until recently, that's what the vast majority of residential housing transactions were.

However, the last year or so -- longer in places like AZ, FL, and So. CA -- the market has been dominated by so-called lender-mediated sales.

These include both foreclosures, where the bank has title, and short sales, where the homeowner still has title, but needs the bank to reduce the mortgage balance to be able to sell (in the majority of cases, the bank(s) refuse, and home progresses to foreclosure).

Locally, Realtors have been using the term "traditional" sale to describe a plain vanilla deal with no lender in the mix.

Elsewhere, popular synonyms include "non-distressed," "unforced," and "optional" sales.

You can see why there's no consensus yet . . .

Name that Crash

"The Great . . . [Something]"

As the evolving financial crisis ratchets up a notch -- or two -- so is the gravity of the names being tossed out as would-be labels.

So far, the leading candidate is probably "The Crash of 2008."

However, just in the last few days, a new slew of contenders have made their appearance -- many of which now contain the adjective "Great."

Roughly in order of popularity in the blogosphere (subjectively judged by me), they are:

1. The Great Recession

2. The Discontinuity

3. The Great Disruption

Hopefully, there won't be need for even more portentous names any time soon . . .

Recession "Name Game"

"The Little Depression"? "The Great Recession"?

Think of [the U.S. economy today] as Alien in reverse: lurking inside a dysfunctional, steroid-stuffed "monster economy" is a healthy, sustainable, and yes, market-driven one struggling to get out -- albeit a smaller, slower-growing, and certainly simpler and more transparent economy.

--"Financial Crash Instructions"; City Lakes Blog (12/12/2008)

Up until the 1940's, World War I wasn't known as "World War I," it was simply "The Great War."

Similarly, we call what happened in the 1930's "The Great Depression" because there's never been a sequel. At least not yet.

The latest batch of economic numbers, for the fourth quarter of 2008, show economic activity falling off the proverbial cliff. Consumption, production, home sales, car sales, retail sales -- you name it -- all showed declines not witnessed since . . . yup . . The Great Depression.

What we're experiencing now may very well qualify as "The Little Depression." Or, as Barron's Alan Abelson proposes, "The Not-So-Great Depression."

If it persists, with economic activity continuing in free fall and unemployment rising well above 10%, it may qualify for another, more ominous name.

Alternative Scenario

Personally, I doubt that that will happen, if for no other reason than life today is so different than the 1930's.

Namely, it's much faster and interconnected, thanks to technology.

Even if the banking system is in worse shape than is now feared -- and the fears are pretty high -- it's hard to imagine modern day Americans raised on PC's, microwaves, ATM's, instant messaging, etc. tolerating that degree of economic dislocation that long.

Policymakers also have Japan's "Lost Decade" (in the '90's, following the Nikkei's crash) to serve as a case study in what not to do.

When a PC crashes, you "re-boot." Yes, you may lose a lot of data, and it's a big headache, but it's not life-altering (usually!).

Similarly, when an over-leveraged, unstable financial system crashes, the solution is to replace it with . . . one's that better-designed (and to minimize the fallout from the crash).

When President Obama says the country will ultimately emerge stronger from this period . . . I think he's absolutely right.