Dear Editor,
I think your editorial titled, ‘After one year’ (September 19) was crisp and solid. I now seek to add a few thoughts of my own to what has become an almost universal crisis.
This crisis is littered with villains who populate an undeniable continuum. Start with nearsighted politicians and the Community Reinvestment Act; continue with crooked lenders such as Countrywide Financial; move on to irresponsible borrowers in the form of NINJAS; and throw in out of control Wall Street institutions.
If this pantheon is inadequate, then recognize regulators, rating agencies, hedge funds, pension funds, and numerous others mesmerized and trapped by their own doing in a Madoffian scheme of truly immeasurable scale, size, and reach.
As indicated in the editorial, everyone drank at the trough and smeared their countenances (while incinerating their underwear), whether government, banking/lending sector, expert, or investor. It started out with political influence and pressure through the Community Reinvestment Act, and ended up with the law of intended consequences through bankruptcy, joblessness, severe loss of confidence, and a beginning, or reiteration, of the shifting of the balance of influence and power elsewhere.
To be sure, some tried to dodge the unleashed cruise missiles. It is why England’s SEC equivalent, the FSA tried to avoid the onrushing conflagration by refusing to approve Barclay’s overture across the pond to Lehman.
It is why the Fed forced the shotgun wedding (an abduction cum assault, really) of Bear Stearns to Chase with an insulting dowry attached. Unlike Lehman, Bear was too heavily and intricately wired to the repo markets, the hedge fund universe, and the Clearing and Settlement processes; it had the very powerful potential to bring the whole system down. Stated differently, Bear was already at the edge of the abyss, if allowed to fall over, there would be no return and it would take down the rest of its incestuously attached partners. That none was immune was reinforced by the crow eaten by the mighty Goldman Sachs, which had earlier gone on record saying that its risk management systems were robust and all encompassing. How can that be when the risks were not accurately identified, quantified, or captured?
Think of it: at the time – and even to this day – no one knows for sure, including the ISDA, how many trillions of dollars of derivatives in general, or CDS’ specifically, are floating around, or in whose hands. And remember, a tiny trillion could wreak incalculable damage on the whole system.
Further, the proprietary mathematical models developed to price obscure and exotic instruments were known at the time to have no bearing with either the marketplace or reality. Yet, these were the meaningless numbers on which the books were based, financial statements issued, and returns computed. Yes, if the time is taken many midget Madoffs will be found; in fact, they are part of the solutions offered.
In spite of the wrenching individual, national, and global trauma, the fearful darkness of the night finds itself glossed over in the forced arrival of a false new dawn. There is much happy chatter of the recession is over, meaning that the bad news is not so bad or so frequent. This is so even with seven million newly unemployed Americans whose prospects are dismal, banks shaky, and the derivatives time bomb reset and ticking. Already, the strident clamour for stringent regulation has become muted and lukewarm, as the lobbyists go to work, Wall Street resists, and the public moves forward. Already, the stage is being set for a return to the good old days.
So, America will renew its love affair with paper. As its real manufacturing base shrinks, it will invent new ways to manufacture intriguing paper that packages, prices, distributes, hedges, insures and outsources even more paper of suspect origin and dubious prospects. Remember that the CMOs of past decades were reinvented as CDOs and CLOs; MBIA was succeeded by CDS’; and the LBO had found its financial descendant in private equity.
Yes, they will all be given new labels and marketed to a waiting and forgiving world. New suckers are born every minute – or every few years apart. Welcome to the new and improved American Dream made enchanting with smoke and mirrors; a dream that ignores the ascendancy of BRIC, the savagery of yesterday, and the eastward shift in the balance of influence and power.
One year after, America is poised to look ahead. Nowhere is this more evident than in the canyons and towers of Wall Street. Get ready for tomorrow. Catastrophe insurance, anyone?
Yours faithfully,
GHK Lall
