Michael Lewis – The End of the Financial World as We Know It.

Good article in yesterday’s Times by Michael Lewis on the state of Wall Street, its players and its regulators. It’s long but well worth reading in its entirety. Here are just a few of his observations:

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many. ….

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

2 Comments

Filed under Uncategorized

2 responses to “Michael Lewis – The End of the Financial World as We Know It.

  1. Towny

    And this from Mike Lewis:

    “Rather than tackle the source of the problem, the people running the bailout desperately want to re-inflate the credit bubble, prop up the stock market, and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.” In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them. This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.”

    Terrified is an understatement.

    Our financial and corporate institutions are facing an ethical crisis’ of the MOST serious proportion. Whether its rating frauds, accounting scandals, management back-dating to steal from their partners, the list is endless. When AG’s like Spitzer must step in to do the work that the SEC refuses to do, we are at our end.

    And rest of the world is catching on.

    Anybody know how many foreign stocks have divested from US exchanges in the past 5 years?

    The international financial community wont touch any US financial product’s for a long time to come. Our institutions have proven time and time again, they cannot be trusted.

    I’d never thought I’d say this but Lewis is correct in that financial institutions like Citi should receive no assistance and fold. The Asians or Russians or Gulf states who would buy our financial institutions could’nt do a worse job that has already been done.

    Bottom line: Without a massive, continuous, Federal Govt leverage fueling, -at half a point intrest- we have no economy. I predict that , without massive fundamental changes in the way we do business, the American economy will never stand on its own again. Heck, Great Britain is mostly a welfare state in its own right. Betcha dollars to donuts that within 3 years, the cruxt of Obamas stimulus package is directed at building public housing.

  2. greenmtnpunter

    Hate to keep getting political but Lewis notably skates over the Fannie/Freddie fiasco and it’s key role in launching the domino effect on so many others in the game. But most notably it omits the fatal linkage with Democrats in Congress including Obama and CT’s distinguished U.S. Senator, Chris Dodd.

    Nor when the topic turns to political influence does Lewis mention that Wall St has become a dutiful subsidiary of the Democrat Party as shown by their contributions during the last cycle. Lewis is spinning for Democrats and setting up the Bush Administration to take the entire hit- do you really think the NY Times would print this piece if he weren’t?

    Just as the Times did a week or so ago in a page 1 feature blaming the Fannie/Freddie meltdown on the Bush Administration; in this piece the Times omitted all of the well known facts which are exculpatory for the Bushies and Republicans in Congress. The Times’ credibility is slim to none when “reporting” about issues where Democrats are highly vulnerable.

    Still waiting for the unbiased big picture view of the financial debacle. One thing we can be sure of: It won’t be printed in the NY Times.