No You Can't -- Why Wall Street Management Refused to Question Good Results
Satan's little helpers are alive and well. Their names are Greed and Avarice and their sins have proven deadly. Every financial institution sucked into the vortex of the economic crisis walked precisely the same road - they put unchecked and unadulterated greed ahead the interests of depositors, shareholders and the stability of the global economy. Wall Street truly turned to the dark side.
As President Elect Obama prepares to take office, global financial stability continues to go to hell in a hand basket. Jump starting the economy will only help if the financial system is properly restructured. Some say the definition of insanity is making the same mistake over and over while expecting a different result. If Obama doesn't fix what is broken in our regulatory system, it won't matter what kind of stimulus package is launched. All we will have is economic Groundhog Day over and over again.
The most important question the new administration must ask is a philosophical one - why was Wall Street management so completely unwilling to question good results? This is a misleadingly sophomoric question to ask and seductively easy to answer too quickly.
Pressure to make more money, increase shareholder value, and feed the bubble is part of the explanation. Money managers around the world violated all sense of responsible investment strategy and stayed top heavy with mortgage-backed securities because of the collective chant that the real estate market would shoot to the moon forever.
Why else was management so unwilling to question good results?
1. Because no one truly understood the devilish details of how money was being made except for the geeks making rubber band balls while they created these products.
2. Because the thinkers advising our fearless leaders were too self interested to reveal what was really going on.
3. Because regulators weren't equipped to handle the volume of new product complexity which left them unable to ask management salient questions.
4. Because Wall Street management wasn't forced to.
5. Because everyone was afraid to ask, "What if?" out loud.
How could Bernie Madoff engage in such massive criminal behavior for so long without being exposed? Let's face it, investors had plenty of warnings that his returns were too good to be true. This occurrence demonstrates that Satan's little helpers worked overtime to feed the investor's appetite for toxic products that yielded "good" returns. In this case, the toxic product was presented with the illusion of safety and security. Madoff's track record was unrealistically steady and investors went with him anyway, directly as a result of management's unwillingness to question good results.
Did due diligence red flags wave? You bet they did. Here, due diligence would have meant to verify Madoff's success using sources outside of the country club gossip flow. It would have meant analyzing historical returns by requiring independent verification apart from Madoff. It would have meant that the watchers on Wall Street would have examined the investment thesis to see if it made any legitimate business sense once it was being questionably launched on "sophisticated" investors. It would have meant that management and regulators would not have been afraid to carefully scrutinize such good results.
Responsibility for due diligence doesn't stop after the cash is invested or historical returns are tallied. Due diligence requires an ongoing, careful analysis of not only what you are investing in, but what you are hawking, depending on which side of the Street you play.
Despite national exhaustion, we face this new administration with gritty determination to keep going, even though teams of economists have analyzed the ugly data to let us know that we should be depressed for a very long time.
Do we really believe anything that anyone says anymore? Nicholas Chamfort got it right when he said, "An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living." But real time economics is people. Now we have new people with new ideas saying, "Yes we can." Well, maybe, but only if you take the proper steps to say, "No you can't " first.
Obama must restore faith in our nation's financial institutions by requiring them to start lending again or face loss of bailout funds.
Fannie and Freddie must be cleaned up, restructured and carefully monitored. If they don't function properly, nothing else will. Our unregulated, shadow banking system must be held accountable if it is to continue have such a strong hold on our economy.
Obama can help hedge funds rehabilitate themselves by strongly advising them to walk and talk like regulated entities unless and until a proper regulatory structure can be implemented. New life can be given to the capital markets if those seeking capital voluntarily include bona fide transparency and welcome scrutiny.
Technology must be used to oversee products, whether exchange traded or not, that are tied to the economy. Regulators can face the new world order if given the technological tools to monitor complex products. Obama can further empower regulators by ensuring them that funding for technologically sophisticated oversight will be a priority.
Finally, President Elect Obama should add the one phrase to his lexicon that really needs to be there -- "No you can't."
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I think the personal calculation of the management of the big Wall Street broker/dealers was something like this: What we're doing probably won't blow up in the next five years, and in five years I'll have saved enough that my family & I can live in luxury indefinitely. After that, who cares?
You are a breath of fresh air in our dismal times. Thank you for doing your homework. Responsibilty starts at home, not In the other guys field. I did my part with junk and stuff, clear up past my eyeballs. Now I get to pay the fiddler. Its not fun, Its not easy. If we dont get out of the rut in the road it will never change, I am responsible, for my part, of spend, spend, spend. Obama makes me proud to be an American, I was impressed with his blantant honesty, about our financial troubles. Thanks again.
I disagree that the cause of this crisis was simply greed. Firstly, it was the internal pressures of the Wall Street firms to push things as far as possible within the lax regulatory environment that continues to exist. Secondly, there were the external pressures from the government (both sides of the aisle) and public to make home ownership as easy as possible. Even if it were possible to fix greed, doing so would not solve this problem or prevent a recurrence.
The problem is that ALL of the CEO and wall street types secretly believe that they are shams. What do they actually DO that causes them to be worth seven or eight figure salaries? Do they have some truly one in a million physical skill like an NBA player? Do they have some super secret knowledge that any other of the hundreds of thousands of business school graduates churned out each year have? No. They have sold others on the supposed extra 'value' of their forseeing what will bring the best results in the future when they have no more idea of what will really happen in the future than anybody else and they know it.
Most of the high flying funds and fund managers simply had a lucky year one. It is really easy to have great 5, 10, and lifetime performances if your year one was lucky...it is just compounding. The ones that weren't lucky year one...get merged into the ones that did.
So that's why Wall Street Management won't step in on someone like Madoff, because they secretly feel a bit like frauds themselves.
WHY would Wall Street Management question good results? They know they got them through scamming the American people, and they know that unless you're Bernie Madoff, not only will you get away with it, you'll get a bailoout from the government. There is no accountability or transparancy on Wall Street, and until that happens, this con game will continue to be allowed to be treated as legitimate.
None of these people were working for the public, and none of them were responsible for financial stability. (Okay, people like Paulson were, on paper, working for the public, but they weren't really.)
Greed is only part of the equation. Sloth is also a factor.
You are correct in pointing out that due diligence does not stop once an investor has given money to a fund. There is a need for constant monitoring and hedge fund investing becomes a game of transparency balancing. Investor's will always want more transparency and hedge funds will want to give less.
Even if hedge funds become formally regulated again, the need for investor due diligence will not disappear, and that it the new Obama regime should structure any regulation in such a way that the fiduciaries (i.e. - private banker, fund of hedge funds etc.) advising investor are required to perform a minimum level of due diligence - both investment related and non-investment related (i.e. - operational due diligence)
It’s Greed pure and simple. The problem is most of us have this attribute. When we are making money, we put our head in the sand and when we lose money, the Ivory tower is not far away. Isn’t this just an ethics problem and when was the last time anyone took an ethics course?
There are certainly many ethics problems in this crisis as well. But if by 'greed' you mean putting your head in the sand when you're making money and hiding someplace when you lose money, then I agree that the reason is greed pure and simple.
But that's fortunately not an ethics problem. It is the problem that if you ignore risk, prices will not reflect risk, hence a bubble will form and eventually burst. This is why finance requires to analyze risk. Too many participants in the mortgage sector did not do that.
The good news is that it doesn't require ethics and morals to fix it. All it takes is for investors and stockholders of banks to show the management the door. That's all.
Is it greed and avarice? Is it the people running the system? Or is it the system?
'1. Because no one truly understood the devilish details of how money was being made except for the geeks making rubber band balls while they created these products.
2. Because the thinkers advising our fearless leaders were too self interested to reveal what was really going on.'
If your solution to the crisis is geek-bashing without separating the wheat from the chaff, then my guess is that
No, you can't.
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