If you want to understand the mess that we are in - if you want to see that there is no quick fix - if you need to have a great story teller make it all clear for you - then please read Michael Lewis' brilliant article on what happened to Wall Street - "The End" - published in Portfolio.com.
Michael Lewis wrote a seminal book on Wall Street - Liars Poker. He could see back in the 1980's that the Street was a Potemkin Village.
Lewis remains a great writer - his book on Baseball, Moneyball, is a classic. I am not even a sports fan. Lewis can and does find a way to use story to explain complex things in a compelling way.
His new article The End, shows how it was possible for some to see while the majority just got caught up in the game.
It shows that no bailout will work so long as the culture of Wall Street allows people to play with OTHER PEOPLE'S MONEY. He is clear about the root cause - the corporatization of Wall Street.
This is what has to end. The only way to contain risk is to put the risk into play with the risk taker.
The piece ends with Lewis having lunch with John Gutfreund, the former CEO of Salomon Brothers, whose career had been ruined by Lewis's book - an irony in itself.
From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.
No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.
No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?
Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.
So my take on what must happen is this: no regulation can make the risk taking work until the risk takers take the risk.
So long as the risk takers take the risks with our money and take the profits themselves, we are in shit.
The proper balance has to be restored. Until then - we are still in systemic trouble. There is evidence available right now - AIG
