Archive for the ‘Wall Street’ Category

Bigness

An Old Notion Relevant Again

On the downhill side of the Gilded Age in American political and business life – that would have been in the late 1800′s – progressive reformers from Theodore Roosevelt to Woodrow Wilson to Louis Brandeis found fault with the idea and reality of a concentration of economic power.

Brandeis, a great legal advocate before he went on the U.S. Supreme Court in 1916, described the threat of economic concentration by a single, simple word “bigness.” Brandeis entitled one of his greatest works, published in 1913, Other People’s Money and one chapter in that book was called “The Curse of Bigness.”

“Size, we are told, is not a crime,” Brandeis wrote, “But size may, at least, become noxious by reason of the means through which it was attained or the uses to which it is put. And it is size attained by combination, instead of natural growth, which has contributed so largely to our financial concentration.”

Today it is almost an article of faith that “bigger is better,” but the early 20th Century focus on means and uses of economic concentration are just as relevant today as when Woodrow Wilson was in the White House.

Our political and regulatory system seems unable to address the “too big to fail” syndrome and the human abuses that can follow. Much of corporate America seems one big merger followed by another and meanwhile, Walmart, one of the biggest of the bigs, seems to be engulfed by a major foreign bribery scandal in Mexico, Rupert Murdoch’s vast media empire is now defending its political clout in Great Britain as Murdoch execs fend off criminal charges for violating privacy. Criminal charges have been leveled against a BP engineer involved in the Gulf oil spill. You could go on, but the situation is clear – too big to fail can also be too good to be true.

Idaho Sen. Frank Church – he served in the Senate from 1957-1981 – is remembered today primarily for his headline generating investigation of the Central Intelligence Agency in the 1970′s, but Church always considered another of his Senate investigations equally, if not more, important. As chairman of a subcommittee on multinational corporations in 1973, Church delved deeply into the practices, some of them corrupt, of some of the biggest, most powerful companies in the world.

Church’s work cast light on International Telephone & Telegraph’s involvement in the fall and murder of Chilean President Salvador Allende and Lockheed was exposed for its role in a bribery scandal in Japan. Lockheed’s CEO at the time admitted to spending millions on bribes to foreign officials and a Japanese prime minister went to jail in the resulting scandal. The entire chain of events led to passage of the Foreign Corrupt Practices Act in 1977, the U.S. law that Walmart may find itself on the wrong side of today.

Frank Church discovered in that long ago investigation that human nature, driven by an imperative to constantly expand and concentrate economic power has its dark side. In such a world corners get trimmed, ends justify means and we experience an Enron or we end up bailing out a financial institution that can only justify its continued existence because it’s too big to fail.

A thinking man’s conservative, New York Times columnist David Brooks, had a fascinating column this week in which, in a way, he came at this bigness issue from a novel angle. Brooks’ point was that a blind focus on destroying the competition – Brandeis might have termed it how businesses become always bigger – is the flip side of a lack of innovation. When the focus is on constantly and relentlessly growing, creativity goes begging. The need to be bigger inevitably trumps everything, including finding a better way to make a widget.

Brandeis argued a hundred years ago – his was the age of Standard Oil and the House of Morgan – that eventually bigness, that which “is attendant of excessive size,” is inefficient. Eventually, he wrote, “Decentralization will begin. The liberated smaller units will find no difficulty in financing their needs without bowing the knee to money lords. And a long step will have been taken toward attainment of the New Freedom [a reference to Wilson-era reforms in banking and business.]

It may well be in this age of globalization with a bank in Rhode Island tied to the fate of a housing development in Ireland that there is no going back from bigness, but there may be more than nostalgia in longing for a simpler, smaller time.

Frank Church, a liberal Democrat, helped expose the evils of bigness and concentrated power in the 1970′s, just as his role model in the Senate, William E. Borah, had done in the 1930′s. Borah, a Republican progressive, hated bigness, monopoly and concentration of power. He championed small business and decentralization and once said, “When you have destroyed small business, you have destroyed our towns and our country life, and you have guaranteed and made permanent the concentration of economic power, [which in turn ensures] the concentration of political power.  Monopoly and bureaucracy are twin whelps from the same kennel.”

I don’t know about you, but I long for a political leader willing to call bluff on concentrated power. Bigger isn’t always better, it may just be bigger.

 

Margin Call

We Never Learn

One particularly chilling scene in the outstanding new film Margin Call takes place when the CEO of a big banking house, played with cool detachment by Jeremy Irons, recounts the cyclical nature of the financial markets. As he ticks off the years when markets have tanked, including 1929, he calmly suggests it is just the way things work in the rarefied world of high, high finance. The biggest, toughest, most ruthless survive, he says.  It’s just the way the world works.

The movie, featuring a terrific cast including Kevin Spacey and Demi Moore, is an examination of one day in the life of a big Wall Street firm that finally must come to grips with its reckless speculation in the type of complicated financial instruments that even the big boss doesn’t understand. (In another great scene, the CEO interrupts a junior risk analyst to tell him that he doesn’t understand this esoteric, but widely profitable financial stuff, but to explain it so he can.)

In the end, the firm decides to unload its entire cache of toxic assets as fast as possible, settling for pennies on the dollar in order to save the firm and peddle, as Spacey’s character says, goods that they know are absolutely worthless. We are left to believe that the firm does survive, because as Irons’ character says at one point, there are three ways to make money in his business: be first, be smarter or cheat. He convinces himself that he is being first and smart - dumping the toxic investments before the markets wise up – but, of course, he is really cheating. We last see the self assured, but completely unself aware CEO lunching alone, enjoying undoubtedly an expensive bottle of wine, in the Executive Dining Room.

Lehman Brothers wasn’t so lucky. Writing in The New Yorker, film critic David Denby said Margin Call is the best film ever made about Wall Street. And Jake Bernstein, a reporter who won the Pulitzer Prize for exposing Wall Street practices that helped fuel the current economic mess, says the filmmaker J.C  Chandor actually doesn’t tell as corrupt a story as played out in real life. Bernstein does note that the CEO character in the film is named Tuld. Lehman’s CEO was Dick Fuld, a man that TIME has suggested should be remembered as one to blame for the current mess.

Chandor is “mining deeper truths than the intricacies of credit default swaps,” Bernstein wrote in a review of the film. “The societal costs of high finance, the power of self-rationalization, and the easy embrace of personal corruption is his terrain.”

Margin Call gets high marks not only for the superb cast and believable script, but, as Bernstein suggests, for the larger points it makes, including that the people who work on Wall Street, at least most of them, are decent, striving, ambitious and incredibly competitive. All the stuff of success in business. What is missing is any sense of proportion; any real self reflection. These folks convince themselves that what they do and how they do it is necessary and that they are worth the million dollar bonuses that they are promised for deceiving their customers. This lack of self awareness is at the center of the film and at the heart of the continuing utilization of massive Wall Street salaries and bonuses derived from essentially creating nothing but a market for investment vehicles even the CEO’s don’t understand.

Also near the heart of the Wall Street-inspired economic crisis that is soon to extend into its fifth year are two elements that history has repeatedly shown are always at the core of a crisis of capitalism: vast money and vast inattention; inattention by both the financial players benefitting from the “system” and the sleepy regulators who always seem a day late. In the end unbelievable risk is tolerated long past the point of reason and ethics and personal values are corrupted because the money is so incredibly appealing. And, as one character in the film notes, the firm should be able to dump its steamy mass of worthless, well, investments because the “feds” won’t wake up until it’s too late to act.  This level of inattention really is art imitating life.

The Hollywood press is abuzz with the notion that the Occupy movement will push Margin Call into serious Academy Award contention. Maybe. Hollywood is often as clueless about the real America as Wall Street, still as Denby wrote, “If Wall Street executives find themselves at a loss to understand what the protesters outside are getting at, they could do worse than watch this movie for a few clues. “

I came away from watching Margin Call thinking again that of the many, many tragedies in the current economic meltdown the one with potentially the most lasting consequence has been the abject failure of the current political class to explain what really happened, why it happened and to hold anyone accountable. Already what “reforms” were put in place in the wake of the Lehman collapse, the TARP bailout, etc. are having their hard edges sanded away. Gretchen Morgenson, another of the journalists who understands more about the ways of Wall Street than most members of Congress, reports, for example, that efforts to create greater transparency in the shadowy derivatives market are currently under attack in Washington. In other words, the people who helped bring about the current economic meltdown are resisting efforts to change their behavior. Self reflection works about as well on Wall Street as self policing.

“Wall Street,” Morgenson observes, “loves to do business in the shadows. Sunshine, after all, is bad for profits.” She quotes the great Wall Street investigator of the 1930′s, Ferdinand Pecora, as saying that then, as now, pitch darkness was the bankers’ stoutest ally.

Here is the real and lasting threat of the real life margin call we continjue to deal with every day: No real and comprehensive Congressional investigations have been done. No candidate for president – in either party – has offered a coherent explanation about what happened in 2008 and earlier. Americans across the specturm from the Tea Party to Occupy Wall Street are mad, and for some good reason, but not out of any comprehensive factual notion of what they should be mad about. Our political system has not, perhaps because of its own vested interest in the essential status quo, offered taxpayers and investors of the nation the explanation that is needed in order to try and correct a system that still presents tremendous risk to the national and world economy.

When members of Congress can speculate and personally benefit from insider information as CBS recently reported several members, including the House Speaker and Minority Leader, have there isn’t much Congressional incentive to crack down on the many, many abuses on Wall Street and in the financial markets.

So, we have once again set ourselves up to experience the obvious consequences of the cyclical nature of the way markets work. What goes up must come down. To the buyer beware. The markets self correct, even if there is a tad bit of economic dislocation associated with the correction. This hard time too will pass, as the Jeremy Irons character says in the movie, and we will go back to making money – by being first, being smarter or cheating. The old ways of money and inattention win again and always.

 

Accountability

On Wall Street and the NCAA

The nation’s political chattering classes have had plenty to chatter about over the last couple of weeks – debt ceilings, riots in London, The Gang of 12, Rick Perry, European sovereign debt, S&P credit ratings and whether Barack Obama can become relevant again.

Lyndon Johnson once reportedly switched off the television in the Oval Office after watching the revered and legendary CBS anchorman Walter Cronkite tell the country that the war in Vietnam was unwinnable. “Well,” LBJ said to no one in particular, “If I’ve lost Walter, I’ve lost the country.”

A voice of the inside the beltway progressives, the talented and occasionally snarky Maureen Dowd, isn’t Uncle Walter, but she writes like Obama may have lost her. What Dowd writes has a canary in the coal mine feel about it.

“Faced with a country keening for reassurance and reinvention, Obama seems at a loss,” Dowd wrote this week in the New York Times. “Regarding his political skills, he turns out to be the odd case of a pragmatist who can’t learn from his mistakes and adapt.

“Many of his Democratic supporters [in Iowa], who once waited hours in line just to catch a glimpse of The One, are disillusioned.”

Emory University psychologist Drew Westen, a sometimes “message guru” for Democrats, offered an even more scathing critique of the President’s failures in a highly commented upon Times Op-Ed piece on August 7.

Rather than name names and hold accountable those responsible for the continuing economic mess, Westen said, Obama has utterly failed to address the fundamental need for a president – any president – to be the national narrative setter; to tell a story about what’s gone wrong, how it can be fixed and how the bad guys responsible will be held to account.

In contrast, for example, with Franklin Roosevelt’s full throated condemnation of Wall Street and greedy business leaders as the villains of the original Great Depression, Westen say Obama punted from the first day of his administration. Said Westen, “When faced with the greatest economic crisis, the greatest levels of economic inequality, and the greatest levels of corporate influence on politics since the Depression, Barack Obama stared into the eyes of history and chose to avert his gaze.”

Obama, Westen said, can’t bring himself to assemble the suspects in a political line-up and identify the bad guy(s).

He’s got a point. With this morning’s headlines comparing the economic roller coaster ride of the last few days to the awful days in the fall of 2008, I’m hard pressed to think of anyone in a position of authority and power who has been held accountable for the jobs lost, the mortgages foreclosed and the lives uprooted.

Standard & Poors, by all accounts, totally missed the risks of the subprime mortgage meltdown in the last decade when it should have been front and center judging and publicly reporting such risks to the economy. Now S&P’s nameless suits downgrade sovereign debt in high-minded tones, while appearing on the Sunday talk shows lecturing Washington’s leaders on political responsibility. The ratings agency, meanwhile, lobbies Congress not to require that it report “significant errors” in its own performance.

Tim Geithner, the Treasury Secretary, who was at the New York Fed when the economy’s foundation began to crumble, apparently wants to leave his job as more folks call for his head, but Obama has begged him to stay. George W. in back on the ranch and the big Wall Street banks roll on, while the Congress systematically weakens the Dodd-Frank legislation and prevents the appointment of a tough consumer advocate.

Accountability is obviously on an extended summer vacation in the Hamptons.

Contrast the macro-world’s lack of accountability on the economy and little things like jobs and mortgages with the penalties for screwing up in college athletics. Boise State University’s long-time athletic director was fired yesterday by the school’s president in advance of the anticipated sanctions that will be leveled against the school for a variety of infractions involving college sports.

Some boosters immediately questioned the decision to fire a 30-year employee and there will be the predictable second guessing of Boise State President Bob Kustra. But as more of the story comes out, give the one-time politician turned college president this much: the new to the big-time Bronco athletic program is facing its first real big-time challenge with the anticipated NCAA sanctions and Kustra’s personnel action just set the standard for compliance at BSU for the foreseeable future. Good, bad or indifferent that is accountability.

The Ohio State University arguably took too long to fire its slippery football coach, but it happened. It’s now reported the school has paid just south of a million bucks to unravel what went wrong with the Ohio State football program.

In a perfect world there are no mistakes. No one needs to stand and take responsibility and be held accountable. But there is a real world out there that is messy and requires accountability. Particularly in a representative democracy, beset with deep economic, social and political problems, accountability has never been more required.

The British poet, essayist, humorist, and much more Dr. Samuel Johnson famously said “When a man knows he is to be hanged…it concentrates his mind wonderfully.” He might also have said it concentrates the mind of those who observe the hanging.

Accountability is not about grudges or getting even and it’s certainly not about shifting the blame. It is about understanding what when wrong and who was responsible, all in the interest of corrective action.

Dr. Johnson also wisely said “hell is paved with good intentions,” which is another way of saying good intentions don’t mend a broken economy or straighten out college athletics. Accountability isn’t the whole answer, but it is a pretty good start.