Sunday, June 14, 2009

Fareed Zakaria with Michael Lewis

Happened upon this gem by chance, one of my favorite journalists - Fareed Zakaria had Michael Lewis, author of "Liar's Poker" and (for you baseball fans) "Moneyball". The themes are similar to what former IMF Chief Economist Simon Johnson has put forth; the idea of very similar outcomes in the US to any 3rd world country in terms of close connections between a dominant business group and government, in our case ... the financial oligarchs.

Fareed is out with a book touching on some of the themes we've discussed, but with a more positive outcome for the States than I see [Aug 19, 2008: Coming Soon: A Post American World] If unfamiliar with Zakaria here is a Daily Show video we posted last year.

Some articles and background on Fareed's recent works below

The Future of American Power; How America Can Survive the Rise of the Rest
Summary: Despite some eerie parallels between the position of the United States today and that of the British Empire a century ago, there are key differences. Britain's decline was driven by bad economics. The United States, in contrast, has the strength and dynamism to continue shaping the world -- but only if it can overcome its political dysfunction and reorient U.S. policy for a world defined by the rise of other powers.

Newsweek: The Rise of the Rest
It's true China is booming, Russia is growing more assertive, terrorism is a threat. But if America is losing the ability to dictate to this new world, it has not lost the ability to lead. American anxiety springs from something much deeper, a sense that large and disruptive forces are coursing through the world. In almost every industry, in every aspect of life, it feels like the patterns of the past are being scrambled.

As for Michael Lewis, a most excellent opinion piece we cited at the turn of the year can be found here [Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn]

The CNN video is a worthwhile 15 minutes and if your neighbor folk are not into the whole spending 30 minutes reading an article to learn what exactly is going on in America, The Atlantic: The Quiet Coup (link here) -- it probably would be ok to spend 15 minutes on the boob tube where we're naturally at home! Feel free to forward.

Michael Lewis, the former Salomon Brothers trader who wrote "Liar's Poker" about the excesses of Wall Street during the 1980s, delivered a devastating critique of the financial industry and of the government bailout today on CNN"s "Fareed Zakaria GPS."

Lewis thinks that the government's rescue efforts have only served to postpone a "day of reckoning" for Wall Street:

I think that we are in for another day of reckoning down the road. I just don't know when it is.

I think that they haven't even properly evaluated the institutions.

They haven't been honest about what these institutions have on their books. They've had phony stress tests.

So, we're in a kind of, I think, right now, in a period where there's a false sense that it's over, that the crisis is passed. I don't think the crisis is passed.

Part of the problem, Lewis argues, is that the architects of the bailout are too cozy with the banks which created the financial crisis in the first place, even speculating that Treasury Secretary Tim Geithner is already looking ahead to a cushy job in the private sector. " of the things that's odd about the current situation is that the people who created the problem are so powerful in deciding what the solution to the problem is going to be. There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me.

And it is amazing to me the degree to which, say, Goldman Sachs is intertwined with the Treasury, and how they're -- there don't seem to be any independent voices in the thick of the decision-making. The decision-making is all being done by people who one way or another might expect to make a lot of money from Goldman Sachs in the future...

So, on a grander scale, if I'm Tim Geithner and I'm the secretary of the treasury, what do you think he's going to do when he stops being secretary of the treasury? His natural next step is go work in the financial sector. I don't think he's actually thinking, "I've got to be nice to the people on Wall Street, because they're going to make me rich on the back end of it."

Further, he believes that regulation has been ineffective because the regulators are conflicted, expressing shock that this cozy connection is considered routine in Washington:

But the directors of the last three -- let's see, three of the last four or four of the last five directors of enforcement of the SEC work for big Wall Street banks now...

And you can just assume, I think, that if you're a prominent person at the SEC, your exit strategy is to get a lot of money from a Wall Street firm. And nobody says anything about it. That's the amazing thing.

It's not even thought scandalous. It's just thought normal. It's like a natural career -- a step in a financial career.

Lewis believes that two principal causes of the crisis were that the ratings agencies were weak and that credit-default swaps were unregulated.

But even if proper regulation is brought to bear on Wall Street, Lewis remains pessimistic. As "a natural cynic," he adds that really smart people in positions of privilege will find ways to get around the new rules." (as readers will know, I completely am of the same mind - the game will never change... the peasantry do not pay attention because it's too complicated)

Lewis expressed his shock at the scale of the current crisis, saying that when he wrote his book, he thought "it was the end of something," and he was determined to capture that era in print because he assumed that people 15 years later would hardly believe what had happened during that previous crisis.

"And I turned out to be completely wrong."

In fact, it was just the beginning of a long era in Wall Street, culminating in the "point of madness," as Lewis describes it, describing his experience at Salomon Brothers where revenues were increasingly being generated by risk-taking and proprietary trading.

Lewis described the internal logic at the big Wall Street firms, where top executives are pressured to make the riskiest moves because those are the ones that were generating the most money:

The logic of it, internal to the Wall Street firms, is that if I'm the CEO of Citigroup or Merrill Lynch, and the vast majority of my revenues are coming out of this subprime mortgage machine, and I just shut it down, unless I'm incredibly lucky in the timing of it, it's going to look like I've just jettisoned my single most important business. My competitors are all going to be earning fantastic returns on their capital, and I'm going to be out of it. And I'll probably be out of a job.

Meanwhile, all the guys who are going along with it are getting paid huge sums of money at the end of every year. The efficient strategy for the individual trader was to ignore his reason and participate in the madness.

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