Monday, May 31, 2010

A guest contribution

In 2003, when Bill Strauss and I started our campaign against the excessive compensation paid the managers of the Harvard Endowment, Michael Lewis was among the chorus who criticized our naive failure to understand the workings of the modern financial system. To his credit, he has since had a few eureka moments, and although he hasn't apologized, I suspect that he would if given a chance. (If anyone who reads this knows him, please pass it on.) Anyway, this rather brilliant contribution to the subject of financial reform appeared in the New York Times just the other day.

May 28, 2010
Shorting Reform
By MICHAEL LEWIS

To: Wall Street chief executives

From: Your man in Washington

Re: Embracing the status quo

Our earnings are robust, our compensation has returned to its naturally high levels and, as a result, we have very nearly regained our grip on the imaginations of the most ambitious students at the finest universities — and from that single fact many desirable outcomes follow.

Thus, we have almost fully recovered from what we have agreed to call The Great Misfortune. In the next few weeks, however, ill-informed senators will meet with ill-paid representatives to reconcile their ill-conceived financial reform bills. This process cannot and should not be stopped. The American people require at least the illusion of change. But it can be rendered harmless to our interests.

To this point, we have succeeded in keeping the public focused on the single issue that will have very little effect on how we do business: the quest to prevent taxpayer money from ever again being used to (as they put it) “bail out Wall Street.”

As we know, we never needed their money in the first place, and by the time we need it again, we’ll be long gone. If we can keep the public, and its putative representatives, fixated on the question of whether their bill does, or does not, ensure there will be no more bailouts, we may entirely avoid a discussion of our relationship to the broader society.

Working together as a team we have already suppressed debate on many dangerous ideas: that those of us deemed too big to fail are too big and should be broken up, for instance, or that credit default swaps and collateralized debt obligations and other financial inventions should simply be banned. We are now at leisure to address the few remaining threats to our way of life. To wit:

1. Washington will attempt to limit our ability to exploit the idiocy of institutional investors a k a our “customers.” The Senate appears intent on forcing our most lucrative derivatives business onto open exchanges, where investors can, for the first time, observe the prices we give them. This measure — which I’ve come to call the “Making the World Safe for Germans With Money Act” — will prove difficult to defeat. Our public strategy here, as elsewhere, must be to complicate the issue.

To the mere mention of open, public exchanges for derivatives, you should always respond, “That will destroy liquidity in these fragile and complex markets.” Most people don’t even know what “liquidity” means, or what causes it or why they actually need to have more rather than less of it — or what, even, the point is of a market that requires privacy to operate. They will assume that you must understand it better than they do. For that reason alone it is useful.

The other point you should make to our elected officials (privately, please) is that our profits function as a fixed point in an uncertain universe. If they curtail our ability to shaft German investors in one way, we will simply find some other way to do it.

Shockingly, the Senate version of the bill more or less would require us to cease to trade derivatives entirely. This unpleasant idea was introduced by Senator Blanche Lincoln of Arkansas, and it leads me to a point that is worth underscoring: We do not have a problem with the American people, we have a problem with American women. Elizabeth Warren, our TARP supervisor, continues to ask questions about what we did with our government money; Mary Schapiro has used her authority at the S.E.C. to sue Goldman Sachs. Of the four Republican senators who crossed over to vote with the Democrats, two were women — and one of the guys posed naked for Cosmopolitan magazine.

Going forward, we should discourage women from seeking higher office — or indeed, any position in which they might exert influence over our activities. More immediately, in your private conversations with Larry Summers, Tim Geithner and male Republican senators, you should simply refer to Blanche Lincoln as “unhinged.” They’ll get it.

2. Our slow cousins at Moody’s and Standard & Poor’s are likely to suffer a blow to their already lowly status. They are virtually certain to be stripped of their designation as Nationally Recognized Statistical Ratings Organizations. Whatever that means, it presents no threat to our way of life. Just the reverse: the more miserable it is to work at Moody’s, the less capable (and more manipulable) Moody’s employees will be.

The lone remaining risk to the status quo is the Franken amendment — introduced by Senator Al Franken of Minnesota — which would prevent us from personally selecting the ratings agencies that offer opinions on our offerings. It creates a board inside the Securities and Exchange Commission to assign ratings agencies, thereby removing the direct incentive the raters have to please us. (Of course, it preserves their indirect incentive: that is, that we might one day offer them jobs.)

The Franken amendment thus gums up what has been heretofore a very cleanly rigged system. In addition to encouraging public references to Stuart Smalley and Mr. Franken’s other theatrical embarrassments, we should remind our friends on Capitol Hill and in the press that “the Franken amendment will give the federal government the same control over finance it has seized in health care.”

3. There is a slight, but real, risk that public opinion will yank us in some unexpected direction. Over the past few months, a curious pattern has emerged: the more open the debate, the more radical the outcome.

In private, reasonable discussions we were able to persuade our friends in the Senate to prevent votes on amendments hostile to our interests — the worst of which, I might add, was dreamed up by yet another female senator. But the minute a vote was held, and senators sensed the cameras watching, even our friends abandoned us to the mob. All of these people are continually engaged in the same mental calculation: are the votes I might gain with this remark or this idea or this position greater than the votes I can buy with the money given to me by Wall Street firms? With each uptick in the level of public scrutiny — with every minute of televised debate — our money means less.

In the short term, we must do whatever we can to dissuade Representative Barney Frank from allowing any part of these discussions between senators and representatives to be televised. In the longer term we must return to the shadows. Do your work in private; allow your money to speak for you; and remember, the only way we’ll get the financial reform we need is if we pay for it. No one else can afford it

3 comments:

Gerald said...

Professor:

Great stuff! Good that you could reinforce this editorial here.

Isn't he wonderful.

That is why I had suggested Liar's Poker, on another of your topics, re financial reform......

All the best,
Gerald Meaders

Anonymous said...

I am curious about your ancestory as you comment on others. I find myself agreeing with the comments you make. My father also tried to teach as you do. He opened many peoples eyes before he died. Mine and my siblings especially.
Thank you.
Rita Brown

David Kaiser said...

I don't think it has to do with my ancestry exactly. I was a pretty lonely kid who discovered there was a wonderful other world out there in books. I often joke that many of my best friends are dead, and have been since before I was born. And I don't care what my contemporaries think. I've paid some prices for that, but it also allows me to write a lot of things that no one else would. It's worth it.