So I’ve been reading Andrew Sorkin’s book “Too Big to Fail” about the 2008 financial crisis. I have never been one to find the world of high finance to be particularly interesting, so wasn’t expecting much. But I picked up the book because I wanted to understand and analyze what were the root causes for the near financial collapse. I have not yet finished it, but overall, it’s been incredibly interesting and enlightening. It reads less like a vanilla financial statement and more like a spicy, saucy soap opera. There are so many characters whose choices affect each other in myriad ways. A theme I’ve deduced from the book overall is the profound impact of human hubris, particularly from otherwise smart individuals with a past history of “success”. This hubris, combined with strong egos and aggressive, stubborn personalities, ultimately lead to the events we experienced in 2008.
One thing I found fascinating was just how…shall we say “creative” the top financial firms were in both creating “wealth” as well as preserving that wealth and their own financial well-being.
For example, when Bear Sterns tanked in early 2008, the other big investment banking firms could see the proverbial writing was on the wall. When the federal government concluded that to allow the big firms to collapse of their own accord, in a harsh acting out of the survival of the fittest paradigm, it was deemed they were “too big to fail”. But as investment banks, Goldman Sachs and Morgan Stanley were not banks and therefore were not protected by the FDIC. The solution? No problem: On September 21, 2008, both Goldman and Morgan just file your firm as a traditional “bank holding company” and suddenly you’re eligible for the now-infamous “bailout” money. As Goldman CEO Lloyd Blankfein put it so cryptically, “…our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” Hmmm. Full prudential supervision. Access to permanent liquidity and funding? Sounds like a pretty good deal to me. Especially when you get to receive $12.9 billion from AIG counterparty payments via the Federal Reserve and then another $10 billion in TARP funds for “Troubled Asset Relief”. Wait, “troubled asset relief”? They’re getting $13+10 billion, for christ sake, “troubled asset” seems a bit of an understatement.
So basically Goldman Sachs just changed their as a bank holding company and thus qualified for federal bailout money?
In all, Goldman misled and even flat-out lied to its investors and profited from the collapse of the mortgage market. And how were they punished for this injustice? A congressional investigation that amounted to essentially a slap on the wrist, and a soft one at that. The motif at play here is the same that has recurred throughout history, which is that crime pays and money talks. If you are wealthy enough, you have enough power, even implicitly, to change your environment to suit your self-preservation. Goldman Sachs and Morgan Stanley shouldn’t even exist now. They should have been wiped out in the 2008 crisis, like the dinosaurs, in a fit of financial and Darwinian natural selection. The question is “Why didn’t they die off?” The answer is because had the US government allowed such massive institutions to fail, the natural way that the free market would dictate in such a scenario, the American economy would have truly collapsed. This is scary of course, but even more troubling is that our financial system is predicated upon such a shaky foundation that a few financial institutions are so incredibly powerful/valuable that their continued existence supersedes prudent fiscal policy.
To put it in perspective, if I, as a single investor, made some (in hindsight of course) poor investment choices and lost 95% of my net worth, the US government would give absolutely zero shits and I would essentially be told, “Tough. Deal with it. No excuses, blah blah blah…” and similar rhetoric. That is because my demise would be inconsequential to the overall global system. But if a massive firm like JP Morgan Chase, Citigroup, Bank of America, Morgan Stanley, or Goldman Sachs were to deteriorate, they would suffer zero consequences. What precedent does this establish in similar future situations? Simply: that if you are big enough and important enough, there is no penalty or ill consequences for taking exorbitant risks, since the federal government has gottcha covered. So risk away, rich man! You are protected.
datacyclist 