Sunday, May 22, 2011

Too Big for Blame


I'm rather excited for HBO's Too Big to Fail on Monday. I read the book by the same name - I don't actually know if the movie is based off the book, but it covers the same material (except with a cast of the super-rich that we all know, rather than the CEOs that they are portraying). I feel like I should re-read it, but there is no way that I would finish it by tomorrow. Regardless, I probably should read it again to try to gain a better understanding a really pick out key points, having a better understanding of the conclusion. Mary has taken time off of read the Song of Fire and Ice series that we were reading to watch Game of Thrones on HBO and I am midway through book four, so I'm a few seasons ahead anyway. Still, I'm a little disappointed in my self that I would get exited about a dramatization, but here were are and as much as I can criticize myself for anticipating a television program, I am nevertheless and it is pointless to deny it.

Cousin's Friend's Brother's Stock Broker's Aunt's Hairdresser

On the bright side, I hope that my recognition of the actors will help me keep track of the players during the event. I am not plugged into the financial industry. My father may be able to recite the names of the CEO's of Goldman Sachs and AIG or the Deputy Secretary of the Treasury off the top of his head, but I cannot. Too Big to Fail the book, as much as it relayed the facts of the financial crisis and the efforts undertaken to preserve the companies, it is also a drama about the individuals involved. It is not a simple dry recitation of facts and events. Much to the dismay of the political science realist in me, the companies were not treated as black boxes or billiard balls. Lehman Brothers did not take x-action to preserve itself, but rather Dick Fuld chose x-action because he was a flawed human being and mistakenly believe y. That makes the book easier to read on the one-hand in that it is not a textbook, but, on the other, made it difficult to keep track of who was whom.

Alice's Restaurant

I told you that story to tell you this one and to bring us to the title of the blogpost. There is an awful lot of blame flying around. Perhaps it's human to do so, but I find such generalities to be sloppy. I think part of the problem is that it really validates so many conspiracy theories, at least in appearances. Quite literally, a bunch of rich men in suits got together in a room and made massive changes to the banking system during a time when a great deal of wealth disappeared and the economy plunged in magnitude comparable only to the Great Depression. Billions of tax payer dollars were suddenly plunged into the banking system through TARP, while many Americans faced lost jobs and pay freezes. To make matters worse, the banking system appears to have recovered with banks making money hand-over-fist again while the rest of the economy still struggles.
The last bit was intentional. Ben Bernake was a champion of the idea that the lack of credit, rather than the stock market crash, was what had truly caused the Great Depression. The idea was, and is, that the economy would not recover until the banks were healthy again. Lower and middle class Americans reeled at the notion that a collapse of Morgan Stanley or a similar financial company, with which they had no direct contact and no real knowledge, could mean that they would be unable to pick-up a paycheck on Friday, but that was the case. So many companies operated on short-term loans to meet the day-to-day operations of their businesses, including payroll, that if banks stopped "rolling paper" or processing these loans, that large and completely healthy business would be forced to close their doors and not pay their workers. The banks would not stop giving the loans because they themselves were unhealthy, but rather because the public would believe that they might be unhealthy. The run on the bank would not the traditional kind that we all saw in Mary Poppins, with account holders shouting at teller windows, instead it would be investors, hedge funds, and other banks that would fear for their money and withdraw it. The increased demand for cash on hand, coupled with the uncertainty of what their outstanding assets were really worth and short-selling depreciating what worth they thought they did have, would, and did, make banks incredibly tight-fisted (yes, I'm simplifying in the interest of time and space). The banks had to do well, to restore confidence and reduce the strain on their assets and make them more willing to lend. It worked, although there was nevertheless, considerably less credit available. But most of us don't see that on a daily basis. Sure, we're still getting a paycheck, at a reduced or static amount, whereas the bankers, who need a massive emergency loan, are now just fine and dandy, diving into their Scrooge McDuck-style money vaults.
But weren't these bankers to blame? Where's the accountability? Lehmann went under, to be sure, but most of the players in Too Big to Fail are still wealthy beyond our wildest dreams and making even more money, bonus caps be damned. Or could it be the short-sellers' fault. After all, when everything was collapsing and people were trying to desperately hold together these companies whose failing was a danger to the entire system, brokers were short-selling stocks, trying to get as much as they could while actively undermining the efforts to salvage the companies. It could be that large amounts of the problem lay with Llyod Blankfein, CEO of Goldman Sachs. Throughout the crisis, Goldman Sachs was dismissive of the danger to itself and played brinksmanship games to avoid contributing to the solution, all the while trying to wrangle an advantage for itself as it's competitors neared collapse. Such ruthlessness was not new to Goldman Sachs, they seized every advantage, quasi-legal or otherwise, during the collapse of Long Term Capital Management in 2000. However, the entire systems appears to have been built on a foundation of sand, Alan Greenspan's reputation has been dragged through the mud. After all, he failed to control the housing bubble and allowed the incredibly loose credit to continue. His successor certainly failed to see it coming. Ben Bernake, after all, said a few years before that such a thing could never happen and may have been singularly unprepared for the crisis.

And Your Winner (Loser) Is. . .

Blame is great and sometimes people need to be held responsible. I for one, am offended that Donald Trump can even get a credit card, let alone a business loan since, although he makes a lot of money, it seems just a matter of time before he loses it all and pays pennies for the dollars he's taken. But this was a massive crisis involving a massive system. I do not believe that there was a single moment of decision that caused the crisis. There were lots of mistakes, some of them were sins of ignorance, some of arrogance, and some of greed. However, my understanding is that is was so big and took place through such a variety of facets in the financial industry and took place so quickly, that no one knew what they were in and how deep until it was over. During the crisis, I was working at Barnes and Noble. They sent out a message to the staff, telling us not to worry because the company had strong and secure lines of credit. I have no insider knowledge of B&N's finances, but color me skeptical that GE, McDonald's, and the companies of some of the richest men in country almost lost their credit, but B&N was going to be okay. It could have been something said to placate us, or it may have been entirely true, but I get the impression it was symptomatic of the perception at the time - no one knew quite how serious it was and that is was something that was happening to everyone else, but not to us.
The failing companies themselves probably were not in such dire straights. Rather it was that a perfect storm rolled very quickly out of total calm and they were unprepared to weather it. The fall of Lehmann Brothers never seemed inevitable, they were constantly on the cusp - if they could just survive another few days then things would calm down and the company could rebuild and reform. It was the speed of the crisis and the panic (and perhaps some ideological decisions by the government) that killed Lehmann.
Nor do I think it fair to blame the Fed chairmen. The entire system probably needs reform (and certainly has not been), but their was no architect of the current financial system. It has evolved on the basis of need and opportunity and it has massive expanded. Much like the defense acquisitions process, I am doubtful that any single individual can understand everything that is happening at a given moment.
This is roughly my conclusion. There were bad decisions and they should be studied and avoided in the future. There was poor judgement and I would hope that they are held responsible for that poor judgement as any worker would be. The system is capable of catastrophic failure and, as currently structured, may tend in that direct, in which case the system needs reform. But trying to pin it on an individual is not only a waste of time, but counter-productive to reforms that need to be made.

I've mentioned HBO a couple times. They're not paying me. Not that I would object, I need the money. But they're not. They just have a couple programs I want to see or watch.