
The End of the Financial World as We Know It - tortilla
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?_r=1
======
mhartl
_These oligopolies [the rating agencies], which are actually sanctioned by the
S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls
here and there. In pursuit of their own short-term earnings, they did exactly
the opposite of what they were meant to do: rather than expose financial risk
they systematically disguised it._

We've heard a lot in recent months about how the current crisis proves that
"unfettered capitalism" doesn't work and that libertarian political philosophy
is (intellectually) bankrupt. Libertarians, we are told, are running scared.

The quote above is one small example of why this claim is rubbish. The banking
and financial sectors have been heavily regulated for at least 70 years; this
has created the kind of cartel virtually impossible to form in a free market.
And what happened to the SEC is so common it has a name: _regulatory capture_
, the capture of the regulatory agency by the special interests of the
industry being regulated.

There's plenty of blame to go around: the global financial crisis has many
causes. _Laissez-faire_ capitalism isn't one of them.

~~~
davidw
Really, really, really _real_ free markets never seem to exist, though. So the
whole "if only" game doesn't seem like a worthwhile one to me - if there's a
failure, it's never, ever, about the market actually failing, it's that it
just wasn't free _enough_?

Sorry, back to the drawing board then, and design a system that works in the
real world. It's probably not too far off from what we have now, and should be
reasonably free, no doubt about that, but it should be designed to muddle
along with the muddly creatures that comprise its actors, rather than some
sort of idealized system that will never come to fruition. Those apes tend to
have both collectivist and individualistic tendencies, and ignoring one in
favor of the other is a bad idea.

~~~
Prrometheus
I think the discussion is getting lost here. We recognize that the current
system is a partially-free, but heavily-regulated structure. Now the question
is, what were the weaknesses in the system? What were the points of failure?

Leftists are saying that the problem was that the system was too free.
Libertarians are saying that the main problem lies with the corruption and
inefficiency of regulation. Neither point is trivial, neither point can be
dismissed as ideological rhetoric.

There are those libertarians who will always blame the government for every
problem until we live under Rothbardian anarchy. You may think that position
is idiotic, and you are welcome to do so. However, the leftists who blame
every problem on "the unfettered free market" sound equally idiotic to my ears
in a world with regulatory agencies with multi-billion dollar budgets and
hundreds of thousands of pages of rules controlling trillions of dollars of
capital every day.

So, don't dismiss all claims of misregulation even if some of the critics are
unhinged. After all, if something is wrong there, we would expect it to have
large effects. My old firm spent at least a seven-figure number each year to
comply with regulatory rules, and it wasn't very large.

~~~
davidw
Oh, I agree completely that some on the left make plenty of bad statements of
their own and are altogether too ready to blame markets for various things.
I'm sort of a centrist and believe that many things need to be worked out by
trial and error. This means that people basically need to be free to _try_ ,
but that, in some cases, _errors_ also need to be dealt with, and sometimes,
the government is the most efficient way to deal with them. Often, local
governments are preferable to farther away/bigger ones, but some issues are
also dealt with best on a larger scale.

~~~
Prrometheus
I think a major problem is that governments are large, monopolistic, and tend
to copy each other. How do you know what really works if you don't have
different models to look at?

We see some competition between governments in areas like the European Union
that have free trade and free movement. This has resulted in tax rates being
lowered and business being liberalized across the EU. However, the European
Union cooperates on some things, such as financial regulation, so we won't see
any competition between different models there.

I think the US is much too large in terms of people, GDP, and land area to be
efficiently governed by one entity. The law is crusted over with special
interest regulation and really needs a rethinking. However, I doubt that is
likely to change any time soon.

And I agree with you that trial and error is a good way of proceeding. The
problem is that the visibility and the severity of an error are not always
correlated. It is easy to fix visible problems but not get closer to an
efficient model.

~~~
davidw
> tend to copy each other

Sure. We've found a model that works pretty well, and a whole lot better than
various recent experiments, so it's a fairly safe bet. Who wouldn't want to
copy that?

> US is much too large in terms

Difficult to say. It's not run worse than plenty of smaller countries, and has
one huge advantage: it's an ironclad free trade area.

------
davi
Article summarized by this quote from it:

"... nothing has been done to change that, or any of the other bad incentives
that led us here in the first place."

The headline is a little misleading.

------
ctkrohn
<i>Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley
O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince
III, Citigroup’s chief executive, may have paid themselves humongous sums of
money at the end of each year, as a result of the bond market bonanza. But if
any one of them had set himself up as a whistleblower had stood up and said
"this business is irresponsible and we are not going to participate in it," he
would probably have been fired. Not immediately, perhaps. But a few quarters
of earnings that lagged behind those of every other Wall Street firm would
invite outrage from subordinates, who would flee for other, less responsible
firms, and from shareholders, who would call for his resignation. Eventually
he’d be replaced by someone willing to make money from the credit bubble.</i>

And yet that's exactly what upper management at Goldman and JPMorgan did.
Goldman never bought massive quantities of ABS CDOs for portfolio. Chase never
originated a single option ARM. Not all of Wall Street was so cravenly focused
on short-term profits.

~~~
bilbo0s
Is this a joke?

Uhh ... you do realize Blythe basically INVENTED the CDS right?

Maybe I am misunderstanding what you are trying to say, but ALL of the big
investment firms were in on this. In fact, the system would not have failed if
any one of the investment banks had not played their role.

If you are a quant we can get into arguing the fatal flaw of uncleared
counterparties. But from my perspective when everyone is a counterparty, and
EVERYONE was, there is nowhere to run when things go bad.

Could you clarify what you mean for me please?

Incidentally, the quote is correct, the heads of everyone from Bear to Goldman
would have been summarily dismissed if they had failed to play their roles.
All because of the 'innovation' of one, as it turns out, not so bright quant
at JPMorgan. Astounding isn't it?

~~~
ctkrohn
I wasn't talking about CDS, and I am aware that Blythe Masters is credited
with inventing the CDS while at JPM. I think it's still too early to tell if
CDS are good or bad on the whole. Ultimately, they're just insurance
contracts, which have been around for hundreds of years. But that's another
discussion.

I'm talking specifically about subprime. JPM and Goldman explicitly decided at
the very highest levels of management to remain uninvolved in certain areas of
the subprime mortgage market. Chase did originate subprime loans, but it did
not securitize them and for a long time, did not make a market in subprime
bonds. Chase also stayed away from certain areas of alt-A lending, in
particular option ARMs, which have become one of the most toxic forms of
mortgage debt. Also, JPM didn't purchase billions upon billions of subprime
bonds and subprime-backed CDOs, like Merrill, UBS, Citi, and other banks did.
That's why JPM has taken "only" $6bn in writedowns over the past 18 months,
vs. over $30bn each for Citi, Merrill, and UBS. And yet Jamie Dimon remained
CEO of JPM through the mortgage lending boom, despite staying away from its
most lucrative areas.

You might find the following article interesting:
[http://money.cnn.com/2008/08/29/news/companies/tully_jpmorga...](http://money.cnn.com/2008/08/29/news/companies/tully_jpmorgan.fortune/index.htm)

------
lowkey
What an incredible year and a great article.

It's hard to imagine a scenario where 12 months ago I would have imagined an
editorial in the New York Times with the title, "The End of the Financial
World As We Know It."

~~~
thomasmallen
It's called "yellow journalism." This crap sells right now, and the major news
outlets are all over it. Remember all of the "dirty bomb" fearmongering a few
years ago?

~~~
mtw
you need this kind of articles to change the system, make sure senators or
entrepreneurs see the problem and act upon it.

~~~
thomasmallen
Hyperbole and invective are the domains of politicians who use them to great
effect. No need for it in a balanced press (wishful thinking).

------
jderick
It seems clear to me the SEC has failed as an institution. I tend to agree
with the author that the revolving door policy whereby ex-regulators become
bankers for the banks they were previously regulating is no longer acceptable.

------
fallentimes
No matter what the government (or anyone) does, the same process will repeat
itself over and over again.

<http://en.wikipedia.org/wiki/Tulip_mania>

~~~
bwd
Actually, I think a slightly different process will appear each time.
Different enough that people will not recognize it for what it is except in
hindsight. Since regulation is most effective as a reaction to a problem,
perhaps we should accept that there is very little we can do to stop these
sorts of things and concentrate on preparing ourselves to weather the storms
when they appear.

~~~
fallentimes
The best indicator? _"This time it's different."_

-1980's Leverage Buyout Craze (RJR Nabisco) coupled with junk bonds

-Dotcom Bust

-Day trading

-Too much leverage (Long Term Capital Management and repeated today)

-Mortgage back securities

-People making 50k per year buying 500k homes

------
tortilla
continued at: How to Repair a Broken Financial World
[http://www.nytimes.com/2009/01/04/opinion/04lewiseinhornb.ht...](http://www.nytimes.com/2009/01/04/opinion/04lewiseinhornb.html)

------
ashu
So, apparently (according to the article), the bond raters are paid by the
bond issuers. How in the world is that not a conflict of interest? There must
be some "pro" for the financial world being this way?

~~~
chubbard
I completely agree. How can anyone look at this fact and not see it as totally
undermining the intent of bond raters?

------
kuniklo
Phase 4, "Winter":
[http://en.wikipedia.org/wiki/Decline_of_the_West#Phases_of_r...](http://en.wikipedia.org/wiki/Decline_of_the_West#Phases_of_rise_and_decline)

------
jhancock
article summary: the world is full of sheeple.

------
pclark
It's the end of the world as we know it.

God bless REM

------
swombat
Flagged, not hacker news.

~~~
pg
I thought this paragraph in the guidelines was clear enough, but I've added
another sentence to make it more explicit:

"Please don't submit comments complaining that a submission is inappropriate
for the site. If you think something is spam or egregiously offtopic, you can
flag it by going to its page and clicking on the "flag" link. (Not all users
will see this; there is a karma threshold.) If you flag something, please
don't also comment that you did."

<http://ycombinator.com/newsguidelines.html>

~~~
swombat
Funny. Most of the time when I make this comment I get 5+ upvotes just for it,
because I generally make it quite accurately on articles that are judged not
desirable by others too (and the article is usually killed soon after).

I'll refrain from making it in the future if it hurts your HN experience, so
this will be my last comment on the topic.

I still maintain that this article is irrelevant to this site, btw. This is
reddit/r/business material - i.e. grandiose, inflammatory politico-financial
opinion pieces that will result in no significant change of anything
whatsoever, but get lots of upvotes and a plethora of comments that look like
they make a lot of sense (until you read the response to each comment and find
that someone else is making just as much sense with the exactly opposite
view).

Imho, this is a fantastic waste of this site - and I shall continue to flag
this kind material whenever I find it.

Edit: I'll just add that on occasion even this kind of post that you appear to
dislike does generate a useful outcome, e.g.:
<http://news.ycombinator.com/item?id=417744>

