So Jimmy Cayne was playing in a bridge tournament while Bear Stearns was going down the tubes. And now, two dollar bills are taped to his offices to make fun of the fact that the stock price has fallen to $2. In bridge, one player is always sitting on the sidelines and is called the "dummy."
Who's the real dummy in this game? Rumor has it that Cayne just completed buying his $25mm apartment in the Plaza in NYC so he must have his own rainy day fund. The federal government is using taxpayer funds to bail out Bear Stearns. Foreigners are buying so much of our financial companies that they feel it necessary to reassure us that they will not dictate policy. We, the taxpayers, are the dummy.
The genesis of the credit crisis goes something like this:
1. Create a climate in which people live beyond their means (advertise the good life, publicize celebrity excesses, make borrowing cheap): buy houses they can't afford and take stock market risks with their life savings -- and maybe buy with borrowed money.
2. Couple this with lenders eager and able to provide mortgages and debt to people who cannot afford them (charge upfront fees so lucrative that risk managers have no voice or are even fired, bundle the mortgages and sell the bundles so the lenders no longer feel responsible for their inherent flaws.)
3. Create complex derivatives that, though few understand them, can be sold into Main Street portfolios as well as held by sophisticated investors and encourage borrowing to buy the risky securities; and don't forget to include investments in shares of the companies raking in the profits from the scheme.
So when there is a hiccup in the housing market and prices stop rising -- as inevitably happens -- the house of cards collapses. The "dominos" are legion: homeowners get evicted, small investors get wiped out, tens of thousands of lower level workers in the financial industries get laid off and small businesses everywhere suffer as well. And CEOs who have failed to protect both the financial capital and the human capital walk away with giant severance packages. And we the taxpayers pay the bill. Déjà vu all over again. Just like last time with Long Term Capital and the dozens of times before that, only this time it is multiplied by thousands.
But these are just the mechanics. The root cause is greed gone wild -- with neither a sense of ethics and responsibility by the professional managers and boards of directors; and no institutional memory of the last time this happened. The rot goes beyond the financial industry. Think meat, imports from China, telemarketing and more. Whether it is by omission or commission it is still rot.
The accounting and audit industry failed to clean itself up and found itself with a much stronger involvement of the regulators. The financial industry may soon see itself with a new regulator: the IPA (Investor Protection Agency) or CPA (Consumer Protection Agency) -- with real teeth for enforcement. With an election not far off, this is not such a crazy idea any more and with each new regulation the law of unintended consequences always results in results we don't want as well as results we do.
I confess my bias -- I coach business owners and CEOs week in and week out. These are good men and women who are appalled by the behavior of their counterparts who besmirch the title and the position. It is time that the engine of this economy -- the small business owner and entrepreneur -- began to be a lot more vocal about the bad guys and more proactive about teaching the next generation the role of values. And it is time that the club of CEOs of large corporations used their power to restore values and trust before we see the government step in.