Friday, October 3, 2008

The Dog That Didn't Bark

What do the denizens of the New York financial world have to say about the financial crisis? What is their take on the world that is crumbling around them?

Yesterday my friend AM was telling me about some conversations he had had with friends and acquaintances who were part of that world.

He had been struck by what he was hearing, but especially by what he had not been hearing.

What was he hearing? No one could have foreseen this. Only a perfect storm could have beaten our trades. No one could have done anything about it. It was completely out of our hands.

What was he not hearing? Any recognition that anyone was at fault, that anyone had made a mistake, that anyone had been wrong.

AM was not begrudging anyone his or her success, but noted that they were earning large bonuses for being stewards of the financial system. And there, they had completely fallen down on the job.

He attributed it to a simple failure to understand the reality of markets. As smart and as rich as they were, how could they not know that you do not make grossly outsized returns on capital year after year without their being a reckoning?

In the end they were simply shifting the blame... to God. So much for the new vogue of atheism.

Anyway, no one apologized because no one did anything wrong. Perhaps no one committed a crime, but surely people had failed. They had failed themselves, they had failed the financial system, they had failed the country, and so on. And no one, up to now, has stepped forward to apologize.

To use the trope from Arthur Conan Doyle's "Silver Blaze": apology was the dog that didn't bark.

Look at it mathematically: the cry of public outrage at the behavior of Wall Street bankers is inversely proportional to the willingness of these people to accept responsibility for their business.

It's all about balance. The outcry was so strong because the apologies are weak to non-existent.

Of course, no single person is totally responsible.

Among those who have failed are Richard Fuld of Lehman Brothers; James Cayne of Bear Stearns; and Stanley O'Neal of Merrill Lynch.

Surely, Franklin Raines and James Johnson of Fannie Mae bear a large portion of the blame, as do those members of Congress and the executive branch who mandated a trillion dollars worth of sub-prime loans and protected Fannie and Freddie from oversight and regulation.

Many will say that Alan Greenspan bears responsibility for flooding the monetary system with liquidity. And others would place blame on the policies of the Clinton and Bush administrations.

More recently, an offhand remark by Charles Schumer provoked a run on Indymac bank, and a more recent remark by Harry Reid caused collapse of insurance company stocks. Were either of them responsible for the consequences of their actions? Not at all... it would have happened anyway.

As for the larger point about whether anyone could have foreseen this, surely James Grant of "Grant's Interest Rate Observer" and Nouriel Roubini of NYU were surely prescient. No one may have been listening; no one may have had the character to do something to pre-empt the crisis, but the warnings were out there.

When we make it all an act of God we are saying that we want to wash out hands of the whole matter. If you think that human beings did nothing to get us into this, then you are also saying that they can do nothing to get us out of it. It is an ultimate counsel of despair.

Or else, they believe that since God got us into this, God will get us out of it. As for the humbled former masters of the universe: they are out playing golf.

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