Thursday, January 14, 2010

The Rainmakers

I wanted to review Wall Street Revalued: Imperfect Markets and Inept Central Bankers by Andrew Smithers for this posting, but found the book to be aimed at academic economists and the before mentioned central bankers, so I've decided to skip it. However, Mr. Smithers does make an interesting point in his introduction: "It has been well remarked that the most successful sellers of snake oil believe wholeheartedly in the virtues of their product, and in recent times bankers became the quintessential sellers of snake oil...Human nature doesn't change quickly, and people respond to opportunities and incentives. Bankers and other financiers will always hang themselves, and us with them, if provided with sufficient rope.". Well we gave the bankers enough rope when we repealed the Glass-Steagall Act and sure enough they hung us out to dry. As the old adage goes, when you are up to your ass in alligators, it is difficult to remember that your initial objective was to drain the swamp.

This week some of the masters of the universe were on display in front of the new Financial Crisis Inquiry Commission in Washington. Market mavens Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America all testified about their roles in the financial crisis. According to the New York Times: "Commission members repeatedly brought up the consequences of the downturn for the American people. Nearly seven million Americans have lost their jobs in the downturn, and 17.3 percent remain unemployed or underemployed. More than two million families have lost their homes to foreclosure in the last three years and households have seen $13 trillion in wealth evaporate.". Make no mistake about it, the financiers were grilled, especially Mr. Blankfein and rightfully so. I'm not suggesting draconian measures for these heavy hitters, but they should be held accountable for their actions, or the actions of the companies they represent. After all, they get paid tens of millions of dollars to take the heat.

The Financial Crisis Inquiry Commission Chairman Phil Angelides is now the cop on the beat and I believe he and the committee members did a good job of getting an apology from the bankers, but I feel an apology is just not enough. There is something inherently wrong with the system and changes must be made. What was most disappointing to me was the fact the smartest people from the best American business schools couldn't see what was very obvious, not only in hindsight, but from a forward looking perspective the way that people like John Paulson who made a killing betting against the housing market did. The Financial Crisis Inquiry Commission will be ongoing for the next year and we will be monitoring its recommendations to the president. Outlandish bonuses were paid out in the financial services industry in 2009 and this has got to stop. I know you can't take steps backward with an interdependent global financial system, but banks should be banks and not casinos.