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Tilting at Windmills

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March 20, 2009
By: Hilzoy

Mark Haines Doesn't Get It

If anyone on Wall Street is wondering: what is this "it" that we are supposed to "get"? Is it just that people are angry? Could I be one of those people who don't "get it"? If so, how would I know?, s/he could do worse than consider this YouTube of CNBC's Mark Haines interviewing Rep. Brad Sherman (D-CA) (via TPM). It's a pretty good diagnostic tool.

This is what "not getting it" looks like. At about 50 seconds in, Haines says: "You and people who share your opinions seem to feel that, you know, let's hold salaries on Wall Street to $100,000. Do you have any idea what Wall Street would look like if you did that?" If your immediate reaction is: that's telling him, Mark Haines!, then you don't get it.

A couple of years ago, it would have been hyperbole to suggest that we would all be better off if the senior executives at all our major financial firms were people picked entirely at random out of the phone book. Now, it's arguably true. People picked at random would, admittedly, be likely not to have been to business school. They might not know a lot about futures or derivatives or put options. But so what? At least they might have been more likely to know that they were clueless, and a few of them might have had the common sense to ask questions like: will housing prices really go up indefinitely?

In any case, what's the worst they could have done? Bankrupted their companies with ludicrously risky gambles that fell apart once markets went south? Destroyed trillions of dollars in value? Brought the world financial system to the brink of collapse? Left taxpayers across the globe on the hook for trillions of dollars? Bankrupted entire countries?

Oh, right.

"Getting it" means understanding that the entire story that some people on Wall Street have told themselves about why they got such obscene levels of compensation is false. As a group, they were not uniquely talented. They did not make a lot more money for their company than they earned, at least not in the long run. Their salaries were not fair compensation for the value they produced. It would not have been worse if they had been replaced by people chosen at random.

Look at the YouTube clip again. Mark Haines seems astonished and baffled by Rep. Sherman's comments. He acts as though he's dealing with some ignorant Yahoo who just doesn't see that when people on Wall Street and people on Main Street disagree, Wall Street is obviously right. That's why he takes "What do people on Main Street know about running a financial system?" to be such a killer response to Sherman.

A few years ago, it would have been a killer response. Normally, it makes sense to think that people on Wall Street know more about running a financial system than people chosen at random, just as it makes sense to think that a successful director knows more about making movies than I do. When people reach positions of prominence in a given field, it makes sense to think that their opinions about the field they work in are entitled to some deference*. It takes a lot to completely forfeit any right to that deference. But the people in the financial services industries have managed to pull it off.

And that's what Mark Haines doesn't get.

* Preemptive footnote: their opinions are entitled to "some deference", not "complete deference". Imagine me talking to a successful director about what really goes on in the movie industry: I don't think that I should slavishly abdicate my judgment just because the director is successful, but I do think that before I go spouting off, I ought to take seriously the possibility that that director might know more than I do. That's all I mean.

Hilzoy 9:42 PM Permalink | Trackbacks | Comments (52)

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Comments

Madame DeFarge saying "The Republic has no need of scientists" just before Lavoisier was guillotined. You folks are amazing. Red Guards in action. Do the financial people have to be re-educated in collective farms ?

Posted by: Mike K on March 20, 2009 at 10:08 PM | PERMALINK

Admittedly, picking people at random gets you were Iceland is today, but that's what regulation is for, and we actually had higher regulation than they did, hence less trouble. But biggies like AIG's intertoggling of debt and the million dollar salaries...

Look, if we only paid these guys $100K, what would they do? Invest more and work less? How would that hurt us, exactly? It's not like they're investing less or working much compared to the average workaday joe.

Posted by: Crissa on March 20, 2009 at 10:14 PM | PERMALINK

Mike K: I'd settle for an infusion of "common sense" for financial people. Alas, it's not something that can easily be taught.

I think the greater blame extends to the people who helped create the atmosphere in which those financial people did their wheeling and dealing. In a responsibility-free culture like our own, creating a system whereby checks and balances and rules and regulations are things to be got around rather than followed, excessive deregulation was just asking for trouble. That being said, those financial sector professionals were free agents. They have done a terrible terrible job. In my field, when you do a terrible terrible job, you get fired. These folks, instead, are being given the ultimate second chance, at taxpayer expense. It's like welfare, you know, only worse. And more expensive.

And it's worth pointing out that while unemployment rates within the financial sector remain comparatively low, other sectors (like construction) have taken massive hits as a direct result of these incompetents and their collective incompetence. Can you imagine what you'd feel like if you got laid off as a result of the economy tanking and through no fault of your own?

Posted by: zhak on March 20, 2009 at 10:23 PM | PERMALINK

Mike: You should note that I do not say anything in this post about what I think we should do. I only say: "getting it", in this context, means that someone on Wall Street forfeits all right to assume that s/he knows best, deserves to be paid orders of magnitude more than most Americans, etc. I do not propose to guillotine anyone.

Posted by: hilzoy on March 20, 2009 at 10:30 PM | PERMALINK

>"Do the financial people have to be re-educated in collective farms ?"

Hmmm... sounds like a pretty good idea to me.

Posted by: Buford on March 20, 2009 at 10:47 PM | PERMALINK

Do the financial people have to be re-educated in collective farms?

The "financial people" were neither morally nor professionally educated enough to prevent this catastrophe from happening while simultaneously enriching themselves from it at the expense of everyone else.

I guess what I'm try to say is: fuck you.

Also: the tendency of every age is toward robber barons and rapacious magnates and corrupt systems, because the human tendency is to greed and the arrogation of unlawful power to oneself. And every age needs to constantly reform itself away from these systems.

As a self-described student of history, you should know this. As primarily an arrogant boob with an unwarranted ego, you don't.

Posted by: trex on March 20, 2009 at 10:49 PM | PERMALINK

trex, brilliant insight. Do you people understand that the AIG financial traders who created the crisis are long gone ? The people you are vilifying are the ones who agreed to stay and clean up the mess? Also, do you know who voted for the bailout bill without reading it ? Hint, no House Republicans.

All those traders voted for your guy. Their contributions are 7 to 1 for D.

Also, your obscenity shows how much your ideas are worth.

Posted by: Mike K on March 20, 2009 at 10:54 PM | PERMALINK

Do the financial people have to be re-educated in collective farms?

No, they need to be re-educated by the so-called free market. Fired. Find a new job that pays based on "meritocracy."

Posted by: martin on March 20, 2009 at 11:00 PM | PERMALINK

"Too big to fail" is the "cannot wait for a mushroom cloud" lie of the late do-nothing Bush Presidency. Why do we believe it? It's BS. Zombie banks and companies should be forced into bankruptcy.

Posted by: Glen on March 20, 2009 at 11:03 PM | PERMALINK

Wait a minute.

You're saying that because a bunch of overpaid Wall Street meatheads screwed up the world's financial system, the answer is defer to the common sense of ordinary folks living in Hooterville?

Since when is Main Street so fucking smart? These are people who elected Bush twice. And Reagan twice. Who weren't suspicious when brokers told them that real estate prices never go down and that therefore it didn't matter what a house cost because in no time you would be able to sell it for 25% more than you paid? Who think evolution, like gravity (apparently) is just a "theory."

More regulation of the financial system? Count me in.

Investigating and punishing the crooks who got us into this mess? You bet.

But becoming a populist who yammers about the folk wisdom of the American people?

Fuck that.

Posted by: Cash on March 20, 2009 at 11:04 PM | PERMALINK

By does Obama get it?
Why does he choose as main advisors
Wall Street acolytes?
As their treatment of the bonuses issue prove they
are part of the Wall Street groupthink.
Obama needs other people to balance them.
People like Jeffrey Sachs, for example.

Posted by: Yoni on March 20, 2009 at 11:23 PM | PERMALINK

I am getting pissed off at the constant refrain that "the AIG financial traders who created the crisis are long gone".

Who says so? How do we know its true? Where did they go and what are they doing now?

In the first place, I strongly suspect that many of the people most directly responsible for the mess are still working for companies receiving bailout money.

Second, while this one division of people at AIG are the current poster boys (girls/men/women) for the mess, they are NOT the only ones that acted irresponsibly in the build-up to the meltdown. Countrywide and other lenders (mostly not regulated banks so stfu up about the CRA) committed fraud in giving out loans with no income verification and steering people who qualified for normal loans into more expensive ones, banks who knew that their mortgage portfolios weren't 100% safe used a loophole in the regulations and AIG's AAA rating to increase their leverage ratios, lots of other people throughout the financial sector cashed in while they could.

And even if many of the people affected by this tax are innocent of any wrongdoing, so what? In a company I worked for recently, even if I had top marks in the semi-annual review... even if my department had doubled or tripled the amount of business it was doing... even if the companies total revenue and profits were up over the previous year... we still didn't get a bonus if the company's performace was below the goals the management had set before the period.

What is so fucking special about these people that they deserve to get total compensation that is 5, 10 and sometimes 20 times the national median income and to continue getting that even as their companies get flushed down the sewers?

Posted by: tanstaafl on March 20, 2009 at 11:25 PM | PERMALINK

Not necessarily Hooterville. Maybe a random selection is taking the idea a bit too far, but the germ of the idea is right: you could interview the tens of thousands of people that would line up for $100k/year to fiddle with a financial institution and easily emerge with some highly qualified people. Certainly you could easily select people who would far out-perform the AIGFP porkers, and who would remain perfectly happy receiving a 10% bonus (that would be a mere $10k) ONLY for excellent performance and zip for poor performance.

Posted by: klevenstein on March 20, 2009 at 11:30 PM | PERMALINK

Wow, I must have been really unclear with this one. For what it's worth, I am not actually proposing that we replace Wall Street people with people chosen from the phone book. I just think that if we had had randomly chosen people running Wall Street, it could hardly have been worse. The point of that is to say: the people on Wall Street need to get over the idea that they got all this money because they in some way deserved it.

But saying that randomly chosen people would not have been worse does not mean that I think we shouldn't try to do a whole lot better.

Posted by: hilzoy on March 20, 2009 at 11:46 PM | PERMALINK

klevenstein,

Are you so down on expertise that you would apply your solution to doctors, lawyers, engineers and others who, when they're good make lots of money, and when they're bad, really hurt the public?

I want my experts/specialists to be good, hard-working and properly motivated. And properly punished when they screw up.

That includes people in finance.

Re-regulating the financial system will fix all that ails us.

If we get the regulation right, Wall Street can pay itself what it wants.

Pay is now an issue only because the wrongdoers have yet to be punished (hell, they're still on the payroll) and because we taxpayers own the banks. And we have a right to limit Wall Street pay in the same way we limit civil service pay.

Posted by: Cash on March 20, 2009 at 11:50 PM | PERMALINK

Only 10% of those AIG needed to retain through 2008 to 'understand' the products which took AIG down are 'gone'.

That's hardly long-gone. And each in that division which has cost this nation a trillion dollars got paid out of money we used to pay AIG's creditors more than a quarter million apiece on average.

That's the balance sheet we're looking at: The people who cost this country a trillion dollars were paid out of this nation's coffers a quarter million apiece.

Posted by: Crissa on March 21, 2009 at 12:03 AM | PERMALINK

Hilz -

Please... user-pic

All this populist yapping may be satisfying, and as much as the next guy I'd love to see all of these CEO's in handcuffs, but let's not be stupid: Mark Haines is right.

Yes, Wall Street CEO's don't need to make tens of $millions per year, but $250K for overseeing firms of this size is ridiculous.

Sherman's cute quips, implying that any man on the street can run a bank, are as idiotic as anything out of the mouth of Michelle Bachmann or Eric Cantor. I mean, c'mon, this is the typical Repub response: that any dimwit can run FEMA, that being a hockey mom makes one qualified to be hold the nuclear codes, etc.

Posted by: mars on March 21, 2009 at 12:05 AM | PERMALINK

Mike K: thank you for the Lavoisier example. I think it is a good metaphor. What makes it even worse, if Wikipedia is correct, it wasn't Madame deFarge, but the judge who said: "The Republic needs neither scientists nor chemists; the course of justice can not be delayed."

Hilzoy: "The point of that is to say: the people on Wall Street need to get over the idea that they got all this money because they in some way deserved it.
I agree, but the problem is people like Sherman seem to think your next statement provides guidance. As I commented on Obsidian Wings

Hilzoy: "It would not have been worse if they had been replaced by people chosen at random."

Hilzoy, I think your last statement is true in one sense and almost irrelevant in providing guidance as to what should be done now and by whom.

In 1983 an Air Canada Boeing 767 left Montreal without sufficient fuel due (says Wikedia) "to a chain of minor human errors which combined to defeat built-in safeguards",including a mathematical error on the part of the flight crew. The plane ran out of fuel at 41,000 feet. Now it is true that if you had randomly selected any passenger to take the throttle before takeoff, "it would not have been worse". In all likelihood the plane would never have got off the ground. The passengers would all have been better off. But, to amplify the metaphor,at 41,000 feet Americans are eager- not only to order the flight crew out of the cockpit, but also to question any flight crew.

I don't get CNBC and have never heard Mark Haines, but I certainly would share the perspective that Sherman is a dangerously ignorant yahoo. He's found his scapegoat. He'd rather argue from a vast fund of ignorance.

As I said in my prior comment - i think the underlying issue is hubris. It would be nice to see some humility on the part of Wall Street, but to suggest that, as Sherman did, all AIG knows is how to destroy, is untrue and counterproductive to getting a solution.

Apparently 20 arrogant people at AIG FP caused the problem. Not the several hundred left behind mopping up the mess. And given that Nick Leeson single handedly destroyed Barings bank in 1995 through derivative trades i don't doubt a few people could have caused all the trouble at AIG.

In midair I'd much rather have an experienced pilot - even the one who caused the problem, but better other experienced pilots- rather than ranters from Main Street,to get me out of the mess.

Fortunately, like your Captain Sullenberger, the pilot of the "Gimli glider" was an experienced glider pilot, and brought the plane in safely.

Rather than ranting, inciting mobs and behaving in a McCarthyesque fashion, would that your politicians would provide a little moral leadership, conduct a sober investigation, try to facilitate a soft landing rather than witchhunting.

The problem with witchhunting is that many innocent people suffered. Query whether any guilty ones ever did!!

Posted by: Johnny Canuck on March 21, 2009 at 12:07 AM | PERMALINK

For the record, Sherman said that the executives of those firms that take TARP money should get the same compensation as the President of the United States, which is 500K. That's not inherently unreasonable.

Now, the argument against that is that people should be paid their marginal worth, and there is no reason to set an arbitrary limit at 500K for a monetized industry. The question is whether there is any evidence that the Masters of the Universe actually have such marginal value. Robert Shiller and George Akerlof argue in their new book that there is virtually no evidence for it. Essentially, finance CEOs are setting their own compensation. In other words, it's not about marginal productivity; it's about looting. If companies are taking TARP money, then that's at least a plausible argument that their worth isn't very much.

Mike K's original comment compared Lavoisier to Vikram Pandit; suffice it to say, I think that 200 years from now, few will mention the two in the same breath. More importantly, finance "expertise" is not in the universe as scientific "expertise." The use of computer modelling in the financial services industry only serves to obscure the fact that finance is nowhere close to a science. One interesting project for future intellectual historians will be why economics achieved such massive prestige when virtually none of its predictions came true.

Posted by: Jonathan Zasloff on March 21, 2009 at 12:22 AM | PERMALINK

Why aren't all the wall street bonuses simply recalculated with "profits" based on the reality of current prices. The fact is the "profits" on which the bonuses were paid were phantom and those that accepted them knew or should have known it. It was fraud, pure and simple.

Maybe the NY AG can charge everyone that got a bonus back to 2003 with fraud and offer a plea deal if they confess and return any assets these bums have left up to the amount of bullshit based bonuses they got. Otherwise, they can lawyer up and buckle in for a long hard road in court with the only defense of they were too stupid to understand what was going on.

Oh, and those that fraudulently took out mortgages on main street should get the same treatment.

Posted by: Steve on March 21, 2009 at 12:24 AM | PERMALINK

Oh, I think that Iceland basically proves it the other way, too. Our huge million dollar brains didn't get suckered any less than the random blokes out of the Iceland phonebook, either.

Posted by: Crissa on March 21, 2009 at 12:29 AM | PERMALINK

"Are you so down on expertise that you would apply your solution to doctors, lawyers, engineers"...

Apparently, you missed my point that, in fact many highly competent professionals go to work and are well-motivated DESPITE the fact that they are, for the most part, paid $100k/year or less.

Thus, you could theoretically hire your highly competent people at a MUCH LOWER COST than is presently customary in these financial giants.

If you can save your company a few million dollars a year without sacrificing quality, then what's the problem.

Oh, I forgot, there are some people too greedy to even consider doing a good job for a paltry $100k/year... and that's exactly one of the greatest problems with our present culture.

Think about this: There are developing countries where a new well for irrigating crops, a modest schoolhouse and an inexpensive teacher would boost the local economic productivity over the next decade by a hundred-fold. You could provide several thousand of these setups for a small fraction of the TARP funds. If several of our recent enterprising financial wizards applied their bonus $ to situations like these in an intelligent manner, and if they convinced a few other venture-capitalists to join them, they could probably lift a few million people out of poverty AND make a profit doing it.

So, where are these wizards? Lying around on their yachts getting drunk. Your Utopian meritocracy is somewhat appealing (in a very narrow sense), but it seems a much farther-fetched fantasy than my Millennium Goals, when you get right down to it.

I'm not "down on expertise". I make a living on it, but my individual income is about $100k/year, and I'm comfortable with it. I wouldn't produce any better if you paid me a guaranteed $million/year. I'd try to use it to help some people out, because it's way more than I need to be comfortable.

It's about trying to raise our world up away from culture of greed and stupid selfishness to something better... and I'm not alone. Look it up.

Posted by: klevenstein on March 21, 2009 at 12:42 AM | PERMALINK

Whatever happened to the madness of crowds?

Anybody who responded morally and "appropriately" to the financial system would have been out on their asses... and some of them were, in fact, fired, because they were being cautious and hedging their bets while their less responsible or ignorant companions were doubling their money every six months.

Sure there is a lot if individual culpability, but i think that's missing a big part of the problem.

Posted by: inkadu on March 21, 2009 at 12:45 AM | PERMALINK

Why do financial professionals have to be coddled and treated with kids gloves? Unlike a lot of other workers in the country, these people still have their jobs, even though AIG failed and had to be rescued. That ought to be bonus enough.
Agreeing to stay and clean up one's messes used to be considered honoring one's duties and responsibilities. Now it's perceived as being unreasonably put upon. What the hell is wrong with people?!!! Is there some kind of financial Stockholm syndrome operating in the country?

Posted by: Varecia on March 21, 2009 at 12:52 AM | PERMALINK

"Sure there is a lot if individual culpability, but i think that's missing a big part of the problem."

Exactly.

It is missing the fact that, without a system that constrains them with regulations that have teeth, people are going to exploit fraudulent opportunities to get more money.

Posted by: klevenstein on March 21, 2009 at 12:55 AM | PERMALINK

When it comes to the defense they proffer; 'needing' those bonus $$ because they are the only ones who can unwind those deals. II don't believe it for a second.

It would not surprise me that if the Treasury department was to run an ad that they're hiring qualified financial people (CPA & Finance MBA caliber) to help figure out this mess; there would be a plenty of applicants, especially when stating that the starting salary is $150,000. (that is per year - not per month)

That would be a very nice salary for a decent day's work for a lot of people. Only greedy people seemed to have entered the financial world at that high level. They got their degrees in finance not because of their love for numbers and finance in general, but because popular charts for annual potential income showed that it was the fasted ticket to becoming a millionaire.

Unlike actually going to school for almost a decade to become a doctor, or an architect, or a research scientist who help cure diseases - you know, like people who actually contribute to society.

No disrespect to all the other hard working people who contribute to the economy; I was merely mentioning professions that take many years of schooling but don't earn you millions a few years out of school.

Posted by: bruno on March 21, 2009 at 1:17 AM | PERMALINK

klevenstein: "...It is missing the fact that, without a system that constrains them with regulations that have teeth, people are going to exploit fraudulent opportunities to get more money."

You forget the part where they'll get a lot of people to either feel sorry for them because they're just so under-appreciated, or stand by in impotent and fearful awe because they're just so dang *special.*

Johnny Canuck: "...Apparently 20 arrogant people at AIG FP caused the problem. Not the several hundred left behind mopping up the mess. And given that Nick Leeson single handedly destroyed Barings bank in 1995 through derivative trades i don't doubt a few people could have caused all the trouble at AIG..."

And if things had turned out differently would these several hundred people be distancing themselves from success?


Posted by: Varecia on March 21, 2009 at 1:41 AM | PERMALINK

Economic theory posits greater quantity will be supplied at a higher price (cp).

This holds for any product...including bullshit and the salaries of the Masters of the Universe. So if we shift the demand curve we will get less BS at a lower price (cp).

QED

Posted by: bobbyp on March 21, 2009 at 1:41 AM | PERMALINK

Undoubtedly the are thousands of well qualified people who can run successful banks and insurance companies in the US because that is WHAT THEY ARE DOING RIGHT NOW. There are thousands of banks and insurance companies that ARE NOT IN TROUBLE.

The problem isn't how you get these people in a position to run the AIG and the failed mega banks, the problem is how you BREAKUP AND SELL the healthy pieces of the failed companies to the good companies. And that is what the government bailout is DESIGNED to prevent.

The answer is bankruptcy. It's not new, it's not flashy, it's not easy, it's not painless, but it works.

Posted by: Glen on March 21, 2009 at 1:42 AM | PERMALINK

I started to comment that I think the populist flogging of AIG is dangerous. I just don't have much trust in the judgement of mobs. Then I read this by Joe Nocera and I trust the judgement of the mob even less.

I happen to "get it" and I still think Brad Sherman came off like an idiot in the video. I understand why people are angry. I just don't think that they acting in their own best interest.

Posted by: AK Liberal on March 21, 2009 at 1:45 AM | PERMALINK

Mars:" Sherman's cute quips, implying that any man on the street can run a bank, are as idiotic as anything out of the mouth of Michelle Bachmann or Eric Cantor."

I watched the Liddy hearings. Much to my amazement, I thought Bachmann was asking reasonable questions. I'm not sure whether this reflects how bad the others were, or whether she has a competent staff who prepared her questions. Certainly she sounded much more reasonable than Sherman did in his rant.

Posted by: Johnny Canuck on March 21, 2009 at 1:45 AM | PERMALINK

".....but $250K for overseeing firms of this size is ridiculous."

It's nice to see the labor theory of value is not yet dead. How very Marxist of you.

But really, there are hundreds of thousands of smart people with fairly sophisticated understanding of finance and/or business that would leap at the chance to do this kind of work where you get no blame for your mistakes, no punishment, and $250k/yr. to boot.

Probably millions of them in India. But we can't speak of that. That would be competition.

Posted by: bobbyp on March 21, 2009 at 1:47 AM | PERMALINK

Normally, it makes sense to think that people on Wall Street know more about running a financial system

No, they know more about how to game a financial system.

The people who ostensibly know how to run an economy would be in the government.

A successful director may know more about how to make a movie than you do, but he doesn't know more about what you want to see in a movie than you do, and that is really what buys the ticket. A really successful director has a sure touch with the real world and the movie world, but on Wall Street, their idea of the real world is a puff piece on CNBC.

Is there some financial wizard who is the equivalent of Steven Spielberg, or are they all easily convinced that any amount of money siphoned out among themselves really helps?

Corporations exist only in the way we allow them to exist, for a collective good, for the benefit of society as a whole, not for those few who get into the executive suite.

There is no recognition of this anywhere in the corporate world.

Posted by: alan on March 21, 2009 at 2:09 AM | PERMALINK

"The Republic has no need of scientists"

While in our case the Republic has no need of parasites.

Posted by: alan on March 21, 2009 at 2:11 AM | PERMALINK

Do the financial people have to be re-educated in collective farms ?

No, the guillotine would be good enough, thanks

PS
Madame DeFarge was a fictional character, as was the Scarlet Pimpernel


citoyens, forment vos battalions

Posted by: jefft452 on March 21, 2009 at 2:27 AM | PERMALINK

I have read any accounts of any number of Wall Streeters talking about working hundred hour weeks just to enjoy their bonus at the end of the year. I have worked as an engineer in startups were extreme hours were required, and I can tell you this is not the preferred mode of operation. People working anything over about 60 hours tend to be overstressed, tired, and prone to bad decision making. Wall Street would have been smart to hire twice as many people and pay them half as much.

Posted by: J. Frank Parnell on March 21, 2009 at 2:42 AM | PERMALINK

Jefft452: Madame deFarge, may be Dickens, but according to Wikepedia it was the judge at the very real trial of Levoisier who said: "The Republic needs neither scientists nor chemists; the course of justice can not be delayed."

AK Liberal: Thank you for the reference to Nocera's article- I think the term economic arsonists very appropriate for Congressmen. Of course no one will ever hold them accountable for inciting the mob.

Posted by: Johnny Canuck on March 21, 2009 at 3:18 AM | PERMALINK

The experts at AIG and the experts at the bond rating agencies evidently either didn't understand the concepts of correlated risk and wrong-way risk, or they didn't care.

This is either ignorance or fraud.

If it's ignorance, these "Masters of the Universe" are worth nothing; if it's fraud, they should be in jail.

As with Bush and 9/11, the eerily familar excuse is, "Who could have predicted...?"

As with Bush and 9/11, there were many people predicting, and warning, and running around with their hair metaphorically on fire - who were ignored.

The truth is: the people who are running our lives are not worthy of it.

Posted by: TheWesson on March 21, 2009 at 3:35 AM | PERMALINK

One thing people on Main Street know is that in order to keep your job you have to produce results. No one knows this better than America's teachers.

If investors had to keep improving year after year like America's teachers there would be a lot more turnover on Wall Street. Mind you, teachers have to improve the long-term performance of their students. If they don't it's the teachers, not the students, who get fired.

We license investors in order to help our country create wealth. Investors have failed us for a variety of reasons. They need to be held accountable, just like the people whose pensions they oversee.

Posted by: pj in jesusland on March 21, 2009 at 5:10 AM | PERMALINK

Hilzoy,

You've managed to give an effective liberal reply to Buckley's snide remark:

I'd rather entrust the government of the United States to the first 400 people listed in the Boston telephone directory than to the faculty of Harvard University.
William F. Buckley, Jr.

Posted by: Steve J. on March 21, 2009 at 5:36 AM | PERMALINK

I do not propose to guillotine anyone.
Posted by: hilzoy on March 20, 2009 at 10:30 PM

Let's not be hasty!
:-)

Posted by: Steve J. on March 21, 2009 at 5:37 AM | PERMALINK

Mark Haines doesn't get it all. You're partially there but certainly not there completely. First, no one could have run Wall Street worse than those in charge. Every randomly chosen individual not from that culture would have been better. Second, the real question is not who should run Wall Street, but why there should be Wall Street in the first place.

Posted by: d4winds on March 21, 2009 at 7:13 AM | PERMALINK

Mike K, the Book says:

The high priests of Mural Strait had told their awestruck disciples in learned fraternities like Gamma-Nu-Beta-Gamma, and through them the nether folks who toiled in the fields, that they were in communication with the gods of eternal profit. They had hissed at the skeptics to get out of their way because only they knew the sacred rituals to assuage the furor of these gods and if they weren't given a free hand, the sun would disappear and an evil darkness would settle over the land.

Turned out these high priests were just shouting into the wind. And when the wind got tired of the ceaseless clamor, yelling and flailing, and blew down the temple the high priests had built with the help of their disciples, all that was left was a pile of shards as the world had never seen it before.

And the folks in the fields saw that the high priests were charlatans and that the disciples were pleasure boys and a great anger came over them.

Unfortunately, this is where the historic record found on clay fragments ends. The rest is lost in the mystery of ancient times. So we do not know the fate of the high priests, whether they were stoned, thrown to the lions or abandoned in the desert with one goatskin of water. Neither do we know what happened to the disciples.

Those were the days of the Book, what would be the fate of these people today?

Posted by: SRW1 on March 21, 2009 at 7:30 AM | PERMALINK

Alright, the previous post was just 'l'art pour l'art, but I though our amateur historian on this board might be susceptible to that approach.

The thing about 'getting it' in my eyes is that the causes of the current situation in the financial markets are based on what somebody else already identified, namely ignorance and fraud.

The guys who committed fraud should go to jail (and yes, that is a form of re-education, although it is usually called 're-socialization').

The ignorance part needs to be solved with far more rigorous oversight, on the part of society as well as on the part of company owners .

The ignorance part also proves that the higher echelons of Wall Street companies were not the geniuses they claimed to be, i.e. they were not worth the money they took home in wheelbarrows.

The human species supposedly possesses intelligence. If that still is so, we should continue to try to learn from past mistakes. Society, via Congress, should take remedial action in terms of general oversight mechanisms and company owners (I am looking at you, shareholders) should take a firmer control of company managements and company boards, especially remuneration committees. To allow this 'I scratch your back, you scratch my back' is just stupid.

Posted by: SRW1 on March 21, 2009 at 8:15 AM | PERMALINK

hilzoy @ 11:46 pm - I read your post, inferring likeness to your implied argument. No one need quote Madam DeFarge in response to your observations. Such readers missed the point!

The CEOs and financial leaders of our nation, in the words of former President Bush (a person I mostly disagree with) who in a moment of unguarded honesty noted - wall street got drunk and now we are dealing with their hangovers!

I read your post as a proclamation not to replace these execs with random people, but rather the execs who were making the rules about debt swap and future derivatives up as they were going along were by all accounts fools and idiots whose worth and jobs could easily be filled with random people if we accept such utter failure! Nothing more, just the fact that in the past eight years the execs over on the famous money making boulevard have been abject failures!

And the implication that you want the executives reeducated on collective farms is shear poppycock! I think you are with me, I just want to see them all fired and replaced with people who honor rules and decency instead of greed and distrust. The take away I got from your post is for all the posturing and positioning of blame, just fire the asses of the top decision-makiers on Wall St. because simply by their decisions these past eight years, they deserve to be fired, if not pilloried! -Kevo

p.s. - let the reservations for crowbar hotel start to be taken!

Posted by: kevo on March 21, 2009 at 10:22 AM | PERMALINK

Corporations are owned by shareholders. The shareholders ostensibly have the power to control compensation and to sack directors. Unfortunately, these rights have been diluted so much that the officers and directors typically do what they please - including looting assets that belong to all of the shareholders.

Posted by: greenjeans on March 21, 2009 at 10:33 AM | PERMALINK

That's why he takes "What do people on Main Street know about running a financial system?" to be such a killer response to Sherman.
-----------------------
This is the 'killer quote', indeed. It seems evident that Haines' "Wall Street" financial professionals have had issues at running their financial systems, which opens two possibilities to me. Either they are inept/corrupt or the financial system has been so convolutedly designed, nobody can manage it, which brings us back to competence. Before starting my small busines, I worked on 'Main Street' for several decades. I've had the pleasure of knowing and working with some very capable CFO's. They managed the financial system to keep their respective companies well-funded and profitable.

Posted by: Ken on March 21, 2009 at 11:09 AM | PERMALINK

Mark Haines appeared to be intoxicated.

Posted by: steelhead on March 21, 2009 at 2:19 PM | PERMALINK

I was purposely mixing metaphors by using Madame DeFarge instead of the real name of the revolutionary judge,Fouquier-Tinville. There might still be time for some of you to get a tour ticket so you can really whip yourselves into hysteria.

The basic issues go far beyond AIG and the other funds that dealt in CDO and CDS instruments. There are the rating agencies, for example, that are at least as culpable but have somehow avoided blame. Then, of course, there is the political class that many of you are determined to avoid criticism of.

Posted by: Mike K on March 21, 2009 at 2:39 PM | PERMALINK
Fortunately, like your Captain Sullenberger, the pilot of the "Gimli glider" was an experienced glider pilot, and brought the plane in safely.

So much for the idea that expertise needs to cost millions of dollars per year.

Posted by: tb on March 21, 2009 at 2:41 PM | PERMALINK

A successful movie director is successful because a lot of people bought tickets to see his or her movies. "Bought" past tense, cash in the bank.

One does not get to be a successful movie director by thinking up a valuation model which spits out a large value for the movie one directed. One doesn't get to be a successful director because other directors on a compensation committee say you are.

One doesn't even get to be a successful director because investors are willing to pay a lot for shares of your film (that's how you get to be a director, and if the film flops you get to be an ex director)

Of course if you mean artistically successful not commercially successful -- never mind. Beauty is in the eye of the beholder, just like the value of a CDO.

By the way, I know even less about Hollywood than about Wall Street, but I do know enough to see that people with boundless self confidence and good spin get a chance there, but that if they lose mere tens of billions for their financial backers, they don't get a do over.

Posted by: Robert Waldmann on March 21, 2009 at 4:00 PM | PERMALINK

Here's the kicker: you don't need these people to run a financial system in the sense that it is typically understood, namely allocating capital, facilitating business through the flow of credit and passing money to the places where it will earn the most in the next few milliseconds. The trillions of dollars that these clowns were passing around are called derivatives for a reason: they're not necessary to the functioning of any market actual human beings participate in.

Derivatives help increase liquidity, they let people doing actual buying and selling hedge risks, they even provide (potentially) additional pricing information about certain kinds of unlikely events. Properly used, they improve the effectiveness and efficiency of real markets. But all that implies that derivative markets, which have their proper function at the margin of events, should be a tiny fraction of the size of the real markets from which they derive. Instead, thanks to the miracle of leverage and a huge willingness to make bets they couldn't cover, the jerkwads known as Masters of the Universe inflated the derivatives market into the high trillions and made it the tail that wagged the dog (read, for just one example, the stories about investment bankers clamoring for more mortgages to be written so that they could make underwriting profits by turning them into fancily-tranched securities).

What that means, in turn, is that we don't need most of these people, any more than (at reasonable demand levels) we need all the people who until fairly recently made automobiles. For another anecdotal but useful measure, consider the number of shares traded daily on the NYSE: it's increased by a factor of about 3000 in the past 25 years. Are stock prices that much more reflective of actual corporate prospects? Is capital that much more efficiently allocated? Hardly. But a lot of people in the financial industry are taking a much bigger cut of the real economy.

Posted by: paul on March 21, 2009 at 9:45 PM | PERMALINK




 

 

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