Saturday, October 04, 2008

The Last Three Weeks in the Financial System: Quotes & Observations

Like pretty much everyone else, I've been watching the news unfold about the financial world, and the bit of a sticky wicket they've gotten themselves (and us all) into, with the sense that I was watching an utterly surrealistic drama. Being no whiz on high finance, I’m not going to attempt any big analysis. But I still wanted to simply record a few phrases that I saved, ones that leapt off the screen as I read them, crystalizing the profound hard-to-believability of what's just gone down.

Let's hope we can look back at this, someday not too far off, and say, "Whew! Good thing we got out of that one in not too bad of a shape. Thank goodness we escaped the worst of that!" Not that I see that as exactly likely, but hey, let's be positive! : - 0

Specifically, here at last is a moment when doing business mainly by constructing all these houses of cards, trying to build prosperity and/or wealth based on no productive work, investing in mental constructs not tied to any physical correspondence, is shown as the empty and ultimately useless approach it is. Oh, and even better, done without any much regulatory oversight or, y'know, rules.

Here are some of those quotes, much of them in the carefully measured words of the New York Times, made all the more startling because the Times is not what you'd call a paper known for sensationalism.
This one was a good, nutshell explanation of why the potential collapse was so widespread:

"Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked."

Lehman Files for Bankruptcy; Merrill to Be Sold
(9/14/2008 )

"Days away from a complete meltdown of our financial system"

"As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program 'Good Morning America': 'The congressional leaders were told that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.'”

".. .a week that has shaken the core of the American financial system."
I mean, who'd-a thunk it: Lehman, Merrill, among the handful of firms that were routinely described as the very Pillars of the Financial System! This has got to be the best use of the word "incredulity" that I've ever seen.
And from MSNBC:
The "Bankruptcy of 'law of the jungle' capitalism"

"This crisis underlines the excesses and uncertainties of a casino capitalism that has only one logic — lining your pockets," said German lawmaker Martin Schulz, chairman of the Socialists in the EU assembly. "It also shows the bankruptcy of 'law of the jungle' capitalism that no longer invests in companies and job creation, but instead makes money out of money in a totally uncontrolled way."
- "U.S. gambles blamed for world’s financial crisis" (10/1)

Blunt Financial Instruments Used for the Crime (cont'd)

More memorable quotes on the last three weeks of high drama:

"The riverboat-gambling scheme of investment banking"

"As long as people are compensated hugely for taking risks with other people’s money, and do not suffer equally on the downside, then those risks will inevitably become outrageous. Whether markets are efficient or not I don’t know for sure, but I do know that if there’s a way for someone to make money at another’s expense, he will. In spades. I want out."

"These companies need to tie compensation to long- rather than short-term performance. This won’t be popular on Wall Street, but if we want to turn investment banking back to performing something useful and positive rather than some sort of riverboat-gambling scheme on which we are all unwitting participants, then there’s not much choice."

- "For Wall Street, Greed Wasn’t Good Enough"
by Paul Wilmott, founder of Wilmott, a journal of quantitative finance
NYT Op-Ed section (9/17)

Lehman's reward for failure

">> 'But things are looking up for the long-suffering employees of investment bank Lehman Brothers.'

"But wait. Wasn’t it Lehman that filed for bankruptcy just last week?

"Yes, it was.

"But as luck would have it, that sorry, sorry turn of events apparently had no effect on the $2.5 billion the bank set aside for staff bonuses. So, according to The Independent, Barclays, which is buying Lehman Brothers for $1.75 billion, plans to make good on those bonuses, though it has no obligation to do so.

"Two-and-a-half billion. Plus whatever portion of that $39 billion they were given last year. And then there are the pay and severance packages. Lehman Brothers Chairman and CEO Richard Fuld Jr. made $34 million in 2007. He also banked $490 million from selling Lehman stock.

"Such is the price of failure."

- "Lehman Brothers: $2.5 Billion for a Bankruptcy Well Done"
from Digital Daily by John Paczkowski
on All Things Digital

From 1999 to 2007, Paczkowski wrote the award-winning tech news Web log Good Morning Silicon Valley for the San Jose Mercury News

With all this about the brokers and bankers, let's not forget how this is playing out with The Rest Of Us; for example,

Tent Cities Spread In U.S. As Economy Sags
Foreclosure Crisis Blamed For Rise Of Homeless Camps In Cities

RENO, Nev., Sept. 19, 2008
"From Seattle to Athens, Ga., homeless advocacy groups and city agencies are reporting the most visible rise in homeless encampments in a generation."

"Nearly 61 percent of local and state homeless coalitions say they've experienced a rise in homelessness since the foreclosure crisis began in 2007, according to a report by the National Coalition for the Homeless. The group says the problem has worsened since the report's release in April, with foreclosures mounting, gas and food prices rising and the job market tightening."

" 'It's clear that poverty and homelessness have increased,' said Michael Stoops, acting executive director of the coalition. 'The economy is in chaos, we're in an unofficial recession and Americans are worried, from the homeless to the middle class, about their future.' "

"The phenomenon of encampments has caught advocacy groups somewhat by surprise, largely because of how quickly they have sprung up."