New Orleans In the small shelf of books I have on the ways and means of the Great Recession, how the crash came to occur, and what it means for the future, there is a 360 degree circle of finger pointing, blame, and shame. As William Cowan astutely argues in How We Got the Crash Wrong in the June issue of The Atlantic, there were many more engineers on this train wreck than leverage, subprimes, and credit derivative swaps. First on the list at the black heart of the entire system was pure and simple greed.
Cowan, a columnist for Bloomberg, spends so much space saying “I told you so” and citing friends and associates that agree with him that the story of Wall Street and banks being overleveraged was inaccurate, largely because being overleveraged is commonplace that he almost swallows what arguably is his main point about incentives. The fact that being overleveraged was standard operating procedure year after year, decade after decade, said to me that these are very lucky gamblers playing high stakes with a dumb as a post house where they are creating the odds. Certainly it does not seem like the way to roll.
Cowan’s best point on the real trigger for the recession is essentially that the system of individual incentives and rewards with little personal, individual risk, was so pervasive that people in the financial system were encouraged to take crazy risks regardless of the consequences since there was no real accountability for the consequences and huge rewards for the bettors. Greed might have been good for the gamblers, as the hyper capitalists, Ayn Rand-ers assert, but once it permeated the entire system, then the prison was being run by the inmates!
At ACORN in the middle years of the first decade of the 21st century we saw this negotiating with subprime companies who relied on broker networks where people were paid based on production, giving them an incentive to fabricate loans for the quick buck, and further poisoning their cherished “risk” algorithms by creating a managerial class whose pay was also based on the production underneath them which effectively eliminated any real supervision or incentive NOT to move the good and the garbage through the so-called system. Cowan makes the same case for Wall Street and its fund managers who no longer had their own skin in the game and every financial reason to put our skins on their wall.
The story of Boaz Weinstein and his Saba hedge fund leading the charge to take down the JP Morgan “whale” and inflict $3 billion and rising in losses to the bank and its arrogant management that ran in the Times was like reading a case study from Gamblers Anonymous. Having lost billions for Deutsche Bank, crawled back on his horse, he is on a winning streak now, but it is clear that “winter is coming.” Greed may be a business model, but there is no credibility anywhere in Wall Street that they can regulate their own industry or that they have incentives to not make the same mistakes.
As long as compensation skyrockets, the 1% becomes more refined, and it’s all about the money, and politicians of both parties given the cost of campaigns are patsies at the feet of financiers, we have to have real government regulation, because this whole system is totally out of whack and still heading for more crashes into the wall.