There was an excellent book about the culture of Wall Street a few years ago called Liars Poker. I have a copy. The author has now written a piece explaining the current financial meltdown. I think it is as good as we will see for a while.
I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.
Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.
He finally wondered if it would ever come to an end.
Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.
Read the rest. His conclusion ?
This was what they had been waiting for: total collapse. “The investment-banking industry is fucked,” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how fucked they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy shit, I’m wrong!’?” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.
It’s going to get worse.
There was an interesting story in the Wall Street Journal yesterday (NOvember 24) on the bear raid on Morgan Stanley last September. It seems to have been started by false rumors but the nature of the market today allowed the rest. This article comments on the atmosphere that allows such behavior. The market is only peripherally about investment anymore. Mostly it is about predatory money making. I guess that is capitalism but it is not anything I want to be involved with. The consequences of such behavior will be the destruction of capitalism unless we are very lucky.
Tags: CDO, investment banks, Liars Poker, Morgan-Stanley, sub-prime, Wall Street
Extinct? Not with friends in high places. Just lying low, working on the next iteration. Insider buying in selected industries is higher than 2002, actually as high as about any time in history. But the finance boys will be a lot less ostentatious this go around, though. My guess is that someone will concoct some bizarro scheme to seal off the toxic derivatives without really doing anything about them. With this new administration hooking up a new Treasury Sec with the same old Fed boys it portends some strange twists on that old game of playing the suckers.
Japan’s been carrying similar toxic bad bank debt for almost 15 years now, so it’s not like it’s not been done before. If I ever had the inclination to put together a financial tome, I’d title it Gloom and Boom. Mass psychology would underpin most of it, naturally. This time around we’re getting a real black Clinton. It’s just that this time, he’s been handed a basket case rather than an economy ready to rumble. For all of us in the cheap seats, this is going to be one helluva of a show.
Allan, All I want to see is enough recovery so I can sell my house in California before the state goes BK. Then I can hunker down in Tucson and watch Obama trash the economy. I do worry a bit about my air conditioning. Tucson in summer without A/C is not fun. The good news is that we have those Navajo coal fired power plants not far away.
Solar power and peltier effect coolers, Dr. K. But make sure you have plenty of ammo.
I know. I remember that last survivalist flurry in the 70s. At one point, I had my boat stocked with canned goods. I figured I could get going on an hour’s notice. I’m not so spry anymore but maybe it would be a good bolt hole. I see a lot of people taking off for years. More than I have ever seen before. Lots of them with kids. It’s sort of home schooling afloat.
Then you need good weaponry from the pirates!
Excuse me, privateers!
Ask the Somalis or Indonesians….
But it is still better than running dry land, I would imagine.
There are Mexican pirates and there have been a few incidents. One of the boats in the Baja Ha Ha, which started three weeks ago with over 300 boats, reported that it and two other boats were buzzed by French helicopters. That was south of Cabo. What are French helicopters doing there ? Hmmm
I would love to be there. Maybe when Annie is out of college. Not too many 80 year olds going cruising.
>>>>What are French helicopters doing there ?
The French navy sends regular patrols to Clipperton Island. I suppose they wander close to fantasize about getting their old colony back, especially now that it is going down the tubes. Maybe get in on some of the current looting.
It’s going to get worse.
It is indeed.
Good luck bailing on your home in CA. The main difference between CA and the feds is that CA can’t print money. CA’s entitlements from decades of solid Democratic control make the federal excesses seem parsimonious. I expect to take a big loss on my CA properties but I like the weather. It’s just the price to live here.
Janszen at itulip.com has a great piece on “buy and hold” financial planners and the investment bank business. Hell, I was sucked into the herd too. At least until last spring.
I’ve held onto the house until my daughter finished high school. We have a home in Arizona, too. I’m resigned to hanging onto it until the market improves. In the early 1990s, the California real estate recession took five years to recover. This world-wide recession is much worse so it’s hard to know what will happen. As you point out, California has good weather and the local economy is good so we may be able to get out in a year or two. Fortunately, the house is modest. I got burned on expensive homes in the past so that is not an issue this time.
I’ve held onto the house until my daughter finished high school.
My brother is in the same boat. His last daugther graduates this year and he now has negative equity. He had nearly 200k equity but he’s in a badly hit area of Florida. At least he doesn’t have a toxic mortgage.