Monday, March 23, 2009

"Greed is Good"

Image from Wikipedia

The most recent edition of "Rolling Stone" has a quite long article about what, in the US, led to the current financial crisis. It shows also how extremely complex are the activities of the big banks and investment houses, so complex that almost none of us, the common people, can understand them; and so complex that the Wall Street conglomerates - the ones now asking for taxpayer bail-outs - were quite easily able to bamboozle the various US government watchdog agencies into allowing them to do almost what they liked.

The article says that:
"........By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future.

There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates.

By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below............".

Rolling Stone's article might best be summed up as follows: The big banks and investment houses used their legal freedoms and found legal loopholes to bet the savings of their investors at, in effect, gambling tables. And they paid for their chips, not with cash (which they didn't have), but with promissory notes. When the bets failed, they asked the American taxpayer to cover the bets - ie to pay for the chips lost.

We wouldn't have been surprised at any of what's happened since September of last year (2008), if we'd paid more attention to articles like this one in the Economist in long ago 2002, about one of the current Wall Street mendicants, American International Group (AIG).

The article included the following paragraph:
"........Part of the recent fall in AIG's share price can presumably be explained by suspicions about sophisticated but opaque forms of financial engineering.

The insurer was hit with a $69m loss linked to Enron, and it is now at the centre of a dispute over off-balance-sheet partnerships held by PNC Financial, a regional American bank.

AIG is a large and growing participant in complex derivatives markets. It says that derivatives play an important part in reducing the company's overall risk.

From the outside, all that is clear is that AIG's credit exposure to derivatives is rising, from $17 billion in 1999 to $33 billion in 2000, according to the most recent annual report. Gross exposure has grown from $435 billion to $544 billion........".
As for AIG's transparency, the article said:
"........The routine public filings that AIG posts with American regulators are widely considered to be unfathomable.

When challenged, AIG notes that it provides abundant disclosure, including 40 pages of densely written footnotes in its most recent annual report, as well as extraordinarily detailed statements with the Securities and Exchange Commission. But while the company provides great gobs of information, it is all but impossible to put them together.........".
The atmosphere inside the offices and boardrooms of AIG, as a representative Wall Street firm, is, in the Economist's piece, evocatively captured:
".........The common thread is an aggressive approach. AIG is known as an intense meritocracy, filled with people who come in early and leave late. Base pay is low, but bonuses are tied to the company's share price, which everybody at AIG seems to know at any time of the day. Every department must present an annual budget to Mr Greenberg [the chief executive] himself.

The scrutiny is brutal. Managers have been known to ask for lower spending limits—in the hope of making planned returns—only to have their requests rejected. Corporate intelligence, too, is viewed as high art. Mr Greenberg himself calls employees at every level to keep tabs on his own company.

Often, AIG appears to have better information about the workings of other companies than the companies have themselves........."
However, accusatory fingers should be pointed not at the men on Wall Street, but at the US campaign finance laws, laws now so lax that they allow the new Robber Barons to contribute such large sums to the campaign coffers of the elected - and would-be elected - representatives in the Congress, that they (the new Robber Barons) can, in effect, buy senators and congressmen.

Thus the members of Congress, beginning in the 1980s, began de-regulating the financial industry, so returning untrammelled freedom to their paymasters, the new Robber Barons, who, after all, were simply playing the game within the rules.

But the issue of mendicant executives awarding themselves luxurious bonuses, which is currently consuming the ordinary American, is not really the question, for, when compared to the total bail-out amounts, these bonuses are piffling. No, it is whether to bail-out Wall Street; or not to bail-out Wall Street. That is the question.