March 16, 2009

WHO’S THE BIGGER SUCKER

There is no shortage of people who ascribe to the notion that the behavior of the capital markets can be directly tied to the length of skirts, the color of clothing and numerous other mannerisms and aspects of our culture. But people who read this column often find my point of view more focused on circumstances than people when it come to looking for clues to the forces that will drive the economy. That’s because I believe in theories the focus on events like those in Steven Levitt’s book “Freakonomics”. While people make decisions that create unforeseen events to occur, I believe it is the environment that is most causal in driving those decisions. And no recent circumstance has been more evident from my perspective than the collapse of the financial service industry and questions it beckons, what does it mean for the capital markets? Well I’m here to tell you….nothing. That is nothing because for the time being the only people left standing are those that caused the problems in the first place. How do I know this? Because the New York Times said AIG is paying their structured product traders a bonus this year. I love it, a snake snitching on a rat.

I have an apology to make, I’ve always said that the people who “innovated” us into these problems are the same folks who will innovate us out, I was a little wrong. To pretend that the only resource we have to resurrect the financial services industry is to dress up the toxic assets into yet another “fixed income alternative” and sell it door to door to investors sold on the idea that they can make back their losses easily is to deny that nothing has changed. Think about it if a bond trader is told he will receive a bonus whether he screws up or not doesn’t that surely suggest that said trader will take unnecessary risks to ensure the largest bonus he can get. And if the said trader is an uber geek customarily detached from the normal social fabric of American life the risks are that much more absurd. And the carrot that lures the brokers and salesman and countless advisors to act as enablers is commissions which only serve to encourage the lions and distract the lambs.

I don’t have a problem with outsized compensation schemes. I can see where the competition is fierce to hold onto employees of superior profit generating skill. But what the banks in general and AIG specifically got into was to hire anybody who can write code in C++ in hopes of their writing the one product that no mortal could ever logically unwind let alone understand. And as long as the bonfires of the vanities still burn bright there’ll never be a shortage of buyers. Let’s face it when it become a transaction, it becomes legit as far as Wall Street is concerned. That’s what drove the mortgage frenzy that needed the support of credit that needed the insurance of a CDO that needed a sucker to buy into it. Any more of this stuff and no one will trust another financial institution in our lifetime.