Wednesday 21 October 2009

Smart Guys, Looting

Jostling for position amongst the many explanations for the current crisis is this new one: that the finance sector started going off the rails when the smart guys turned up in Wall Street, previously the preserve of some pretty mediocre minds. (It’s an NYT subscription piece but you can see it for free via this link.)

There’s a great Dilbert cartoon where Dogbert the Evil says to the boss: I can show you how to loot this place and escape. Dogbert was clearly one of those bright fellahs. And they’ve been looting all right: US chief executives were paid 344 times the average worker's wage in 2007, against 42 times in 1980, and the bankers weren’t stinting themselves in the process.

Flippant though it sounds, I’d say this observation has some explanatory force. It is absolutely clear that Enron made a mint out of the utterly dozy utilities by being altogether smarter (not difficult) – candy from a child - and the whole Enron episode looks now like a dry run for what the Wall Street Smarts did at the expense of, well, almost everyone else, really.

What do you think ? Good explanation, or glib observation ?



Anonymous said...

Its very clever to get a Government to give you a trillion pounds because you lost at the bookies...

Steven_L said...

I must admit, I do kinda feel a bit looted, and it's probably what I'd do.

Marchamont Needham said...

I believe hanging is the traditional remedy for looters.

Starting with the one who looted our gold reserves.

Sackerson said...

Plausible, ND.

Demetrius said...

One has been muttering about Eronomics being the basis of government thinking for two or three years now. To make it more understandable for UK minds, I have also described it as Old Mother Riley Economics, that is living by taking in your own washing.

Demetrius said...

Rude word, I meant Enronomics.

Sebastian Weetabix said...

Heads they win, tails they still win - and the rest of us lose. Where are the fraud investigations? Where are the prosecutions?

Normal service in the city appears to have resumed. If something isn't done people will be hanging from lamp posts when the public has finally had enough.

Nick Drew said...

MN, SW - they do things a bit more resolutely in the USA

Demetrius - I have seen your OMR post, do you have anything more on Enron Economics to point us to ?

I have wrested with this meself - see one of my very first blogposts and question to all & sundry raised on other blogs - and am vaguely minded to set out my Enron thesis at some length. Trouble is, it would indeed be some length ...

Old BE said...

ND you are highlighting the difference between doing the "right" thing and doing the "legal" thing. When the law becomes so complex, of course there are going to by smart guys who find the flaws and run with them. In the absence of some sense of "moral" framework in business/politics where people don't care who they hurt as long as they don't end up in jail then it's going to happen over and again.

Nick Drew said...

BE - oh yes, I'm in no doubt it's inevitable, but as a conservative (= realistic abt human nature) I want that built into regulatory thinking & practice

incidentally I also positively want the bright guys fully involved, because they see clever things - & I don't just mean loopholes 'flaws', though that's part of it - that need to be seen, & understood, & put to profitable use


(1) transparency
(2) intelligent rules
(3) retribution for transgressors

but certainly NOT a ban on derivatives, or structured products, or OTC trading, or any of that luddite nonsense

Old BE said...

You won't hear any disagreement from me on that!!

Anonymous said...

Anyone remember about 20 years, ago, Nick Leeson, and the bank (Barings) he bought down because the management did not understand what he was doing (that was their excuse) all this fiasco seems to have happened multiplied by ten thousand over the past few years, Barings was left to sink by the conservative government, all this seems to an addtion to the old saying, the bank lends me £10000 and I worry, the bank lends me £100million the bak worries, the bank lends & borrows £10billion the government worries.

Demetrius said...

Nick, thank you. As well as the OMR post elements of Enronomics are found in (longish) posts on Sunday 22 February "Stanford Madoff Ponzi Brown" which is my submission to the OECD on High Net Worth Individuals and Saturday 14 February "Economic Theory of the Day".

dearieme said...

CEOs and the like have been pillaging the shareholders for years. The proposition that much senior management has been intellectually mediocre (and therefore vulnerable to sharp cookies) doesn't seem implausible to anyone who's met some of them, remembers them from university days, or even reads their occasional public pronouncements.

Anonymous said...

Look, I don't mix with these business types, and so any view I have is pure prejudice. But I suspect that there is nowadays less moral censure in the air than there used to be. They have courses on "business ethics" in business schools; I don't deny that questions can arise that would require the best skills of a mediaeval casuist, but mostly one would think it's a matter of straightforward honesty and decency that any well-brought-up child could manage. The effect of such training will be to produce people who think of right and wrong as matters of conforming to the regulations.

measured said...

If capital is limited, you will safeguard it. If it is plentiful, margins fall so you leverage.

What they have to realise is that barriers to entry, which are rising, leave existing banks protected and complacent. So before transparency & retribution, let's create tiers for size in terms of net assets and encourage small agency businesses, be eagle eyed on medium sized institutions and cooperate/fleece the big boys, with possibly a return to Glass - Steagall for the largest wholesale firms if it can be agreed internationally.

PS Measured is quite prepared to be Governor(ess) of the Bank.

OldSouth said...

Bright, yes.

Well-trained, in a perverse sort of way, definitely.

Amoral, absolutely.

Every person I have had the displeasure of working with who sports an MBA or finance degree shares these traits:

Glib, well versed in jargon that means nothing if actually analyzed; convincing to the point of bullying; not competent at actually understanding or producing the product that gets sold, or the purchaser who makes use of it; and utterly narcissistic.

The only value that controls behaviour is how big the number is on the bottom line at close of current quarter.

I swore them off, and two things happened:

1. Life immediately got better--I sleep at night, my work gets done, and home life improved dramatically.

2. My bottom line (as in dollars!) began to show improvement. I only work with people who know what they are doing, and aren't out to rape both the investors and their colleagues. And none of them holds an MBfrigginA.

There is only one of these clowns left in my world, and I have no control over his presence. But I have learned to cut through his BS like a knife through butter, and discovered just how loathed he is by everyone else in his organization.

It's just a matter of time now...

Anonymous said...

ND:- so

(1) transparency
(2) intelligent rules
(3) retribution for transgressors

but certainly NOT a ban on derivatives, or structured products, or OTC trading, or any of that luddite nonsense


How does that reconcile with continuing OTC derivatives or structured products?


Derivative were the trigger for last years collapse, and the reason for Libor nose-bleed levels, (no-one knew WTF was happening because they weren't transparent!!!!!), and the reason for non-lending.

The kick back now is that derivatives are the only decent profit creating fraud that banks currently have, precisely because they are fraudulent, with no possibility of fair price discovery by all parties. Look at the details of GS, JPM, latest filings, and compare with (relatively) non-casino banks.

Banks must be restrained, Glass Steagall must be brought back, and the current transaction-dense structure of western financial life be altered in order to reduce the level of tolls extracted, before any meaningful recovery of western economies can take place.

Even in the mid 90s, before the tech boom, the perpetrators realised that derivatives were the only viable profit centre left. They must be protected at all costs, and that cost will be the end of western life as we know it within the next few years. This happens (and theory says it must), towards the end of EVERY failing fiat system that has been consistently debauched by its major players.

Dearieme is correct, all the senior players knew exactly what they were doing. The push for Chinese investment was engineered by these players for that reason, - - they had murdered the west.

This first class exposure of the real criminals says it all from a technical stand point. It does not attempt to go behind the motivation to find the conductor of the orchestra. Watch and learn

Nick Drew said...

Banks must be restrained - Agreed

Glass Steagall must be brought back - Maybe

the current transaction-dense structure of western financial life be altered - Agreed

to reduce the level of tolls extracted - Agreed

all the senior players knew exactly what they were doing - not all, but certainly many

so we're debating means, not ends. I know the CFTC**-vs-OTC debate well, a major early clash was Enron's lobbying (via the Phil & Wendy Gramm double-act) to keep OTC gas transactions out of the CFTC's purview ...

But 'good' OTC deals have an important role to play for end-users. If you force them onto exchanges (a) you force them into standardised instruments, which may not cut it (b) you move into a world of cash margin which - of course - is the whole point, but which isn't a panacea and can kill some 'sensible' transactions stone dead

My own preference - and it's not without its problems - is to encourage (but not force) formal clearing of OTC transactions involving end-users, by making it as easy & cheap as possible. This means having a mechanism external to the CH for deconstructing the OTC deals into components, in cases where the CH cries 'non-standard' and whacks on a ludicrous margin. Because - let's not forget - the exchanges & CH's are looking at this as a massive business opportunity of their own ...

(**Haven't watched the movie: hard to get started when it describes the CFTC as 'an obscure regulatory agency'...)