The SEC’s decision to file civil-fraud charges against Goldman Sachs over one of the synthetic securities the investment bank issued during the subprime-mortgage bubble has generated major headlines, roiled the stock market, and otherwise created a flurry of shock and awe from Wall Street to Washington, DC. What I find surprising, though, is how surprised people seem to be by the charges. We still can’t seem to come to terms with just how badly so many “blue-chip” institutions behaved over the last few years, and how easily so many high-profile executives got caught up in the speculative frenzy to turn a quick buck (or, in this case, a quick billion).
I might have been surprised, too, had I not just finished Michael Lewis’s remarkable new book, The Big Short. This account of the subprime-mortgage fiasco, the small band of eccentrics who made billions betting against it, and the army of highly educated, well-dressed, overpaid investment bankers who engaged in a march of folly to the very end, left me angry, shaken, and depressed. It was as if I were reading a bigger, badder account of all the financial booms and busts that had come before–from the junk-bond craze to the LBO wave to the Internet bubble.
As I read the last page and sighed, one question nagged at me: How is it that so many allegedly brilliant people (just ask the folks at Goldman, they’ll tell you how smart they are) never seem to learn? Why do the self-satisfied “lords of finance” keep making the same self-inflicted mistakes, whether they are matters of bad judgment, fraudulent conduct, or outright criminality?
I woke up the next morning, checked out The New York Times, and saw a different version of the same story played out yet again! A front-page article explored how the much-celebrated phenomenon of micro-lending, offering small loans to individuals and entrepreneurs in the poorest countries as a way to lift them from poverty, is facing a global backlash. Muhammad Yunus, the Bangladeshi economist who won the Nobel Peace Prize in 2006 for his work in the field, was watching in horror as powerful, hungry, often-reckless banks were rushing in to generate big profits from an idea they either didn’t understand or didn’t care about. “We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,” Professor Yunus fumed. “Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of people.”
People overlook all sorts of warning signs as long as they are making money, even if they know that everything is based on false data. Deep down, they know they are walking on a bed of hot coals, hoping they make it across before the heat hits their feet. They know the risk is idiotic. Paradoxically, they often believe they are smarter than everyone else because they also seem to subscribe to the “Greater idiot” theory. “There is always a greater idiot who will buy this from me.”
And that is what makes them smarter, as long as they successfully get out early enough. They know they are smart because only an idiot would have bought what they had to sell. Read anything about credit default swaps and you will understand. Let’s see – totally unregulated derivatives whose total value is about 10 times the entire GDP of the ENTIRE world.
I guess we were idiots to allow this to happen. They were smarter than we were because they got away with it. So much of the financial industry is really run by scam artists.
The scammers do not really create anything substantial, sustainable or of real intrinsic value. They move money around, essentially using variations on the Ponzi scheme, getting more people to invest capital with the knowledge that the financiers will get out before the crash happens.
The article mentions Buffett’s 3 I’s – innovators create opportunities that are copied by imitators, followed by the idiots, who only want to leverage the opportunity to make scads of money.
Now, the idiots have found out that they do not even need to worry about the crash. Because their government surrogates will bail them out, allow them to keep their bonuses and never punish them.
Maybe some of them are realizing that view may not be totally correct. Maybe the people they have always thought were idiots will finally show some smarts.
I hope so. Otherwise, why in the world would we allow them to continue doing this with no real regulation? Only one reason I can think of – we are hopelessly idiotic.