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Indefensible Men

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From the December 2009 issue of The Baffler (no online version of this article available). For those not familiar with The Baffler, this is the revival of a magazine of business and culture edited by Thomas Frank that had previously been published from 1988 to 2007. This issue was called “Margin Call” and included articles by Matt Taibbi, Naomi Klein, Michael Lind. I believe readers will find this piece to be relevant. Enjoy!

Since inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold.

Reinhold Niebuhr, Moral Man and Immoral Society

A year on from its brush with Armageddon, the financial services industry has resumed its reckless, self-serving ways It isn’t hard to see why this has aroused simmering rage in normally complacent, pro-capitalist Main Street America. The budget commitments to salvaging the financial sector come to nearly $3 trillion, equivalent to more than $20,000 per federal income tax payer. To add insult to injury, the miscreants have also availed themselves of more welfare programs in the form of lending facilities and guarantees, totaling nearly $12 trillion, not all of which will prove to be money well spent.

Wall Street just looted the public on a massive scale. Having found this to be a wondrously lucrative exercise, it looks set to do it all over again.

These people above all were supposed to understand money, the value of it, the risks attendant with it. The industry broadly defined, even including once lowly commercial bank employees, profited handsomely as the debt bubble grew. Compensation per worker in the early 1980s was similar to that of all non-government employees. It started accelerating in 1983, and hit 181 percent of the level of private sector pay by 2007. The rewards at the top were rich indeed. The average employee at Goldman Sachs made $630,000 in 2007. That includes everyone, the receptionists, the guys in the mail room, the back office staff. Eight-figure bonuses for big producers became standard in the last cycle. And if the fourth quarter of 2009 proves as lucrative as the first three, Goldman’s bonuses for the year will exceed bubble-peak levels.

The rationale for the eye-popping rewards was simple. We lived in a Brave New World of finance, where the ability to slice, dice, repackage and sell risk led to better outcomes for all, via cheaper credit and better diversification. We have since learned that this flattering picture was a convenient cover for massive risk-taking and fraud. The industry regularly bundled complicated exposures into products and dumped them onto investors who didn’t understand them. Indeed, it has since become evident that the industry itself didn’t understand them. The supposedly sophisticated risk management techniques didn’t work so well for even the advanced practitioners, as both top investment banks and quant hedge funds hemorrhaged losses. And outside the finance arena, the wreckage is obvious: housing market plunges in the U.S., UK, Ireland, Spain, the Baltics and Australia; a steep decline in trade; a global recession with unemployment in the U.S. and elsewhere hitting highs not seen in more than 25 years, with the most accurate forecasters of the calamity intoning that the downturn will be protracted and the recovery anemic.

With economic casualties all about, thanks to baleful financial “innovations” and reckless trading bets, the tone-deafness of the former Masters of the Universe is striking. Their firms would have been reduced to sheer rubble were it not for the munificence of the taxpayer—or perhaps, more accurately, the haplessness of the official rescuers, who threw money at these players directly and indirectly, through a myriad a programs plus the brute force measure of super low interest rates, with perilous few strings attached.

Yet what is remarkable is that the widespread denunciations of excessive banking industry pay are met with incredulity and outright hostility. It’s one thing to be angry over a reversal in fortune; it’s one of the five stages of grief. But the petulance, the narcissism, the lack of any sense of proportion reveals a deep-seated pathology at work.

Exhibit A is the resignation letter of one Jake DeSantis, an executive vice president in AIG’s Financial Products unit, tendered in March 2009 as outcry over bonuses paid to executives of his firm reached a fever pitch. The New York Times ran it as an op-ed. “I am proud of everything I have done,” DeSantis wrote.

I was in no way involved in—or responsible for—the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage….

[W]e in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials.…

I take this action after 11 years of dedicated, honorable service to A.I.G. … The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses.

Anyone with an operating brain cell could shred the logic on display here. AIG had imploded, but unlike a normal failed business, it left a Chernobyl-scale steaming hulk that needed to be hermetically sealed at considerable cost to taxpayers. Employees of bankrupt enterprises seldom go about chest-beating that they did a good job, it was the guys down the hall who screwed up, so they therefore still deserve a fat bonus check. That line of reasoning is delusional, yet DeSantis had no perspective on it. And there is the self-righteous “honorable service,” which casts a well-paid job in the same terms as doing a tour of duty in the armed forces, and the hyperventilating: “proud,” “betrayed,” “unfairly persecuted,” “clearly supported.”

And to confirm the yawning perception gap, the letter was uniformly vilified in the Times’ comment section, but DeSantis’s colleagues gave him a standing ovation when he came to the office.

The New York press has served as an occasional outlet for this type of self-righteous venting. Some sightings from New York Magazine:

[I]f someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco…?

I’m attached to my BlackBerry. … I get calls at two in the morning. … That costs money. If they keep compensation capped, I don’t know how the deals get done.

It never seems to occur to them, as Clemenceau once said, that the graveyards are full of indispensable men. So if the cohort with glittering resumes no longer deems the pay on offer sufficiently motivating for them to get out of bed, guess what? People with less illustrious pedigrees will gladly take their places.

And the New York Times has itemized how the math of a successful banker lifestyle (kids in private school, Upper East Side co-op, summer house in Hamptons) simply doesn’t work on $500,000 a year. Of course, it omitted to point out that outsized securities industry pay was precisely what escalated the costs of what was once a mere upper-middle-class New York City lifestyle to a level most people would deem stratospheric.

Although the word “entitlement” fits, it’s been used so frequently as to have become inadequate to capture the preening self-regard, the obliviousness to the damage that high-flying finance has inflicted on the real economy, the learned blindness to vital considerations in the pay equation. Getting an education, or even hard work, does not guarantee outcomes. One of the basic precepts of finance is that of a risk-return tradeoff: high potential payoff investments come with greater downside.

But how did that evolve into the current belief system among the incumbents, that Wall Street was a sure ride, a guaranteed “heads I win, tails you lose” bet? The industry has seen substantial setbacks—the end of fixed commissions in 1975, which led to business failures and industry consolidation, followed by years of stagflation, punitive to financial assets and securities industry earnings; the aftermath of savings and loan crisis, which saw employment in mergers and acquisitions contract by 75 percent; the dot-com bust, which saw headhunters inundated with resumes of former high fliers. Those who still had jobs were grateful be employed, even if simultaneously unhappy find themselves diligently tilling soil in a drought year, certain to reap a meager harvest.

But you never heard any caviling about how awful it was to have gone, say, from making $2 or $3 million to a mere $400,000 (notice how much lower the prevailing peak numbers were in recent cycles). And if you were having trouble paying your expenses, that was clearly bad planning. Everyone knew the business was volatile. Indeed, the skimpy salaries once served as a reminder that nothing was guaranteed.

So why the unseemly whining? It’s a symptom of longstanding pathologies in the industry that were once narrowly useful but which have gotten wildly out of hand.

It wasn’t always that way. I worked for a few years in the early 1980s in investment banking at Goldman Sachs, and later in the decade starting up the M&A business for a Japanese bank, then the second largest in the world, in that brief window when the island nation seemed to be buying up America. I have continued to consult to the industry.

Unfortunately, it isn’t hard to see how those on the investment banking meal ticket come to have an unduly high opinion of their worth.

Wall Street jobs have long been the prime objective at the top of the MBA food chain, and that has always been a function of the money. Aside from looking for people who are well groomed, articulate and reasonably numerate (image is important, given the fees charged to corporate clients), firms screen job candidates for money orientation and what is politely called drive. At Goldman, the word “aggressive” was used frequently a term of approbation.

But the firms are white-collar sweatshops with glamorous trappings. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme and unrelenting time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have many bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The sense of urgency is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. On a quick run home en route to the airport after an all-nighter, a co-worker tried to shower fully clothed.

A setting that would seem to reward, nay require, cutting corners has another striking feature: intolerance for error. A computation mistake or a typo in a client document is a career-limiting event. Minor miscues undercut the notion that your firm can execute the more complex and risky elements correctly

And the dynamic doesn’t change much over the course of one’s career. The drill of being a medical resident (or pre-Iraq, a tour of duty) has a known endpoint. But investment bankers have signed a Faustian contract: You have no right to personal boundaries. The business says how high to jump, and you are expected to deliver. Yes, more senior people have more dignity, but the idea that your needs are second to those of the business never changes.

In my day, it wasn’t uncommon for the firm to ask associates to reschedule weddings if they conflicted with a deal. It wasn’t that firms were opposed to marriage; indeed, the partners knew a young man was theirs once he procured a wife and, better yet, kids. He was tied hopelessly into a personal overhead structure that would keep him in the business.

Not that there was any real risk that someone would leave voluntarily. Exhaustion and loss of personal boundaries are an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their worldview might not be the center of the universe, why they might not be deserving of their outsized pay.

The finance community has other elements in common with cults. One is the implicit and explicit reinforcement of bankers’ “specialness,” their elite status. In how many lines of work do you get to meet with CEOs at a tender age, much less work on matters where hundreds of millions, often billion, are routine? Senior people in the investment banks are political fundraising heavyweights and sit on high-prestige nonprofit boards. Anyone of a Calvinist persuasion would be impressed.

Another parallel to cult indoctrination is that the demands of the job remove new hires from established friends and family and plunge them into a new environment. Most people who come to Wall Street are not New York natives, and the extreme and erratic hours make it difficult to maintain old ties. Season tickets are likely to be given away. Vacations (save for the week before Labor Day and the Christmas-New Year’s period) are frequently rescheduled.

Class consciousness is felt nowhere more keenly than in the world of high finance. Wall Street denizens earn more money than most people—that’s the point, after all. And that means they become accustomed to the perks, such as eating at restaurants that might strain the budget of those less well situated. And, frankly, with their lives revolving around finance and business, other interests wither. In most cases, it’s more fun for them to talk shop than to relate to people outside their cloistered world. The incestuousness often extends to one’s personal life. When I was at Goldman, the only married women professionals who were not married to men at Goldman had come to the firm hitched.

These values become deeply internalized. One buddy, a vice president in hard-charging, testosterone-filled M&A, spent the better part of a weekend lying on her side on the floor of her office, reading deal documents. She kept reassuring concerned colleagues that she was fine, until the pain got so bad that she relented and called her boyfriend. He came and took her straight to the hospital. The doctors operated immediately, assuming she had appendicitis. They found instead diverticulitis, which usually afflicts the elderly, and she was so close to a colon rupture that they had to remove half of it.

The partners at her firm instructed her to not to return until she had recovered fully. But this was September. Bonuses were paid at year end, and as she read the unwritten code, and knew that staying away too long would be seen as a sign of weakness. She was back at the office three weeks later, looking wan.

She later became the first woman investment banking partner at her prestigious firm. Her instincts served her well. Or maybe not. She later lost 90 percent of the vision in one eye to glaucoma, an easily treated disease, because her overloaded schedule made eye exams seem like a luxury.

Trading, the other side of the business, is stereotyped as the antipode of investment banking, with the market makers and the dealmakers viewing each other in disdain. While there are other subcultures within large firms, the bankers and the traders are the alphas and set the tone.

In the old days, traders were almost without exception order flow traders who served the socially useful function of making markets in instruments that weren’t listed on exchanges. It’s an adrenaline-filled game, with quick highs and gut-wrenching lows. Unlike bankers, who can never truly take personal credit for the profits on a deal (even if they brought it in, the firm’s franchise usually played a role), traders see their P&L as their own output, even though they use the firm’s infrastructure, research and capital.

Historically, traders often came from modest backgrounds Indeed, some scrappy firms such as the former bond market king Salomon Brothers didn’t care if traders had two heads as long as they produced.

But as Wall Street became a bigger and more profitable, in part by eating commercial banks’ lunch, trading-related jobs became more sought after. Even Tom Wolfe took note in his 1987 novel Bonfire of the Vanities, portraying Sherman McCoy as inordinately proud of the Ivy Leaguers reporting to him.

As markets became more liquid, and more complex instruments were created, firms began creating specialist trading groups to make bets with house funds. Unlike the traditional market makers, they did not deal with customer orders but were strictly out to make money into more money. The pattern for the so-called proprietary traders was set nearly 20 years ago. Securities industry denizens were taken aback to learn that Larry Hilibrand, a member of Salomon Brothers’ bond arbitrage group, made $23 million in 1990, then an unseemly sum. But even that wasn’t enough for Hilibrand; he and his colleagues decamped to form the now infamous Long Term Capital Management, which did spectacularly well before nearly bringing down the entire financial system in 1998.

Trading is an autistic activity. Markets are impersonal. And despite the shows of bravura, there’s an ever-present undercurrent of terror. Even if things look to be working out well, they could turn swiftly into monstrous losses. And again, as LTCM illustrated, it’s all too easy for successful traders to lose that sense of fear, to start believing in their own genius and take risk recklessly.

The picture of traders, both in the media and too often in their own eyes, reveals more than a bit of a John Galt fantasy, casting them as brilliant, productive people, with others piggybacking on their earnings. That’s hogwash. Traders conveniently forget that they have managed to get themselves in a hugely advantageous position: They get a slice of their profits if they win, but don’t disgorge them when they screw up. The worst that happens is they lose their job. And a remarkable number fail upwards, or at least sideways. Witness how John Meriwether, is now raising his third fund after heading two firms (LTCM and JWM Partners) that failed.

Moreover, traders benefit from massive subsidies, such as artificially low interest rates (not just now, but certainly since 2001 and, some argue, even earlier), plus industry-serving policies that produced a highly concentrated structure, with a small number of firms sitting at the nexus of massive capital and information flows. The big Wall Street firm trader’s claim that he is an independent operator fully deserving his earnings is a wonderful bit of mythology. It’s like claiming prowess in hunting based on the results achieved at a well-stocked game reserve, with some of the prey drugged to boot.

Many psychological disorders are otherwise healthy tendencies carried too far, unchecked by other personal attributes. Single-mindedness, drive to succeed, aggressiveness and lack of remorse are useful traits in business, but when do they tip into the psychopathic? In the case of Wall Street, the collective psyche has suffered as important checks on ego and behavior have eroded.

One no longer operative constraint is the partnership form of ownership. In the days when partnerships prevailed, senior management had good reason to keep pay demands in line. The partners had most of their wealth tied up in the business; they lived poor and died rich. If the firm suffered a loss, the consequences were disruptive to catastrophic. You couldn’t replenish capital easily; mortgaging the house will only go so far. And the partners were personally liable. They were on the hook for any shortfall. Many once famous Wall Street names lost their independence due to weak performance or losses: Kuhn Loeb, First Boston (over a series of years), Bache & Company, A.G. Becker, Lehman Brothers Kuhn Loeb (in 1984), Drexel Burnham Lambert.

But despite the peril it posed to the owners, the partnership form had some compelling advantages: Compensation levels were confidential, so as not to annoy less well remunerated clients, and the firms were not exposed to double taxation. And the partnerships had a cachet that the public firms, mainly retail brokers, sorely lacked.

That mode of operation in turn produced a great deal of vigilance, at least in the firms that proved to be survivors. The management committees needed to set pay levels so that the business was also retaining sufficient capital to remain competitive. These owners also had narrow spans of control, acting as players in as well as managers of businesses they had grown up in. In the market-making businesses, they were usually the senior traders on the desks and knew the foibles of their subordinates.

And so performance-inducing levels of compensation and the long-term health of the business were held in balance. Moreover, the leadership had reason to rein in big egos, since they could feel emboldened to take risks that would jeopardize the firms.

In the early 1990s, Sallie Krawchek, then an equity analyst covering publicly owned investment banks for Sanford Bernstein, remarked, “It’s better to be an employee of a Wall Street firm than a shareholder.” Being public changed all the incentives. Management had less reason to be cautious. Indeed, that also showed up in her analysis. The most profitable business was fixed income, meaning the debt-trading business, and even then the firms were on a trajectory of taking on more risk.

And more risk changes the meaning of trader profits. The private partnerships had managed against the fact that the non-partner market-makers didn’t share in the downside, and a key device was making sure that joining the partnership was the richest reward. That alone encouraged underlings to be more judicious.

To illustrate how much values have shifted in a money-minded business, John Whitehead, the former co-chairman of Goldman who presided through 1984, blasted the current CEO Lloyd Blankfein over the “shocking” pay levels. “They’re the leaders in this outrageous increase,’’ Whitehead remarked in 2007. He urged the firm to be “courageous” enough to lower bonuses and re-instill a sense of propriety.

But Whitehead, like most seasoned hands trying to persuade younger generations of the error of their ways, was ignored.

In the “other people’s money” world, there was less reason for restraint. Indeed, an expression has become common that would have been unthinkable in the 1980s: “IBG, YBG”— “I’ll be gone, you’ll be gone.” In other words, long-term consequences (likely damage) don’t matter; all that counts is this year’s kill. And if it’s big enough, you will never need to work again.

This attitude is predatory. And it has become widespread. A former Deutsche Bank employee, Deepak Moorjani, wrote:

When speaking about the banking sector, many people mention a “subprime crisis” or a “financial crisis” as if recent write-downs and losses are caused by external events. Where some see coincidence, I see consequence. At Deutsche Bank, I consider our poor results to be a “management debacle,” a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks and balances.

In my opinion, we took too much risk, failed to manage this risk and broke too many laws and regulations. … [T]he system of incentives encourages people to take risks. I have seen honest, high-integrity people lose themselves in this cowboy culture, because more risk-taking generally means better pay. Bizarrely, this risk comes with virtually no liability, and this system of O.P.M. (Other People’s Money) insures that the firm absorbs any losses from bad trades.

And remember, in the Brave New World of OPM, management has every reason to be in on the game. Their bonuses are a function of the profitability of the businesses that report to them. And now that the consequences are evident, it is easy to rationalize the behavior: Everyone else was operating the same way, there was money to be made, you were just providing what the “market” wanted.

A second change has been in how members of the industry see themselves. Most I ran across were proud to be members of respected firms (the reaction when offering your card was quick confirmation), but no one labored under the delusion that finance was an elevated calling. It was a necessary function, the plumbing of a capitalist economy. If there was anything to congratulate yourself for, it was having discovered and gotten into a field that offered outsized rewards, thanks to regulatory and scale-based barriers to entry. The same M&A banker who jeopardized her health in her successful pursuit of partnership once commented dismissively, “It’s indoor work.” A successful institutional salesman said he had never run into more mediocre overpaid people than on Wall Street.

Thirty years of conservative extolling of the virtues of “free markets” seems to have contributed to the banking sector’s inflated ego. Even though the securities markets are far from “free” (they are regulated to varying degrees), the mythology has taken hold that players in finance allocate capital to its best uses—a role of vital importance to society—and therefore deserve to be more richly compensated than everyone else. Such rationales became necessary as growth in capital markets pay greatly outstripped that of other forms of indoor work.

But this flattering self-image is inaccurate. It’s the end investors that are making the capital allocation decisions; the brokers and bankers are facilitators and an information hub. And, unfortunately, as we’ve seen with auction rate securities and dodgy collateralized debt obligations sold to hapless investors as far away as Norway and Australia, the sellers were sometimes less than forthcoming about the quality of the wares they were peddling.

Nevertheless, one sees bankers and brokers, who concede that much of the anger directed at fancy finance is “very well deserved” nevertheless take DeSantis-like exception to their specialty being spattered in the mud-slinging. From the blogger Epicurean DealMaker:

And, in twenty years of offering M&A and financial advice to corporate clients, I have yet to meet someone who has intentionally pushed a “bad” M&A idea to a client, either. Sure, I’ve been in pitches where a banker has proposed silly, ill-thought-out, or downright stupid M&A ideas to a client, but those instances are either unintentional—in which case the client throws the banker out of his office and said banker usually gets fired in the next round of layoffs—or intentionally designed to provoke a deeper and more productive dialogue with the client.

One wonders, has the Epicure ever actually worked on the sell side? There, the banker’s role is to elicit the best possible price. And, trust me, plenty of crappy businesses get peddled. That’s precisely when a broker adds most value, in monetizing a garbage barge, and I saw tons of them when representing one of the preferred dumping grounds, the hapless Japanese. Ah, but of course! They aren’t your client; it’s perfectly OK if the guy on the other side of the table is a stuffee.

Yet to prove his point that the critics have gone overboard, the Epicure wraps himself and his colleagues in a mantle of “we’re good guys in our sector.” What is troubling is that his black-and-white portrait doesn’t appear to be a rhetorical device; he seems to believe it.

Later he writes:

Would the esteemed economist from the New York Times care to explain to me exactly how the finance industry was able to unilaterally increase demand for its services while drastically expanding its operating margins? Maybe I don’t remember my entry-level Economics so good, but that strikes me as a somewhat dubious proposition. And yet, that is exactly the conclusion an inattentive or ill-informed reader would draw from Mr. Krugman’s tendentious screed: regulate those nasty bankers, before they force our country to lever up and make them filthy rich again!

The anger is as telling as the logic, or lack thereof. The Epicure never addresses the inconvenient truth that lay at the heart of all those arguments for stricter regulation: that the rising asset values that fueled the securities industry boom in turn were the result of ever-increasing borrowings. Private sector debt to GDP rose gradually in the 1980s, more steeply in the 1990s, and went near hyperbolic from 1999 onward.

In modern economies, we don’t let banking systems that lend money on a reckless scale go bust, as much as that would be a useful cautionary practice. We socialize the losses. Those who weren’t perps fail to acknowledge that they benefited from the wanton risk-taking nevertheless. In the case of the Epicurean Dealmaker, how can he not recognize that transaction prices were pushed up enormously by the easy access to cheap deal funding? And that his fees, set as a percentage of the deal price, were higher as a result? Many of the cheap loans that funded transactions and pushed M&A prices into the stratosphere were in collateralized loan obligations. The big lenders and investment banks hadn’t unloaded them when the crisis hit, so they are part of the losses that taxpayers are now eating.

That’s why the great unwashed public is furious. They may lack the sophistication to grasp the arcana of the financial crisis, but they sense that the explanations for the costs they are bearing are insufficient; they see that a lot more people were feeding at the trough, directly or indirectly, than the poster children served up for public ridicule. And they’re right.

So the whining, the petulance, the defensiveness, the distorted reasoning, signifies something much deeper and more troubling.

Finance has lost sight of its role.

Banking and capital markets have become important to advanced economies, but also they represent a charge on the productive economy, just like lawyers and national defense. Ironically, the Japanese understood this well, and were still unable to prevent a turbo charged borrowing binge that left their economy a mess. They recognized that letting banks be very profitable comes at the expense of industry. And indeed, until the global financial crisis, while Japan’s domestic economy remained mired in deflation, its export sector was still robust. When our crisis broke out, Japanese policy makers were uncharacteristically blunt and warned the US that the mistake they had made was not cleaning up their banking sector quickly. We are repeating their error for the very same reason: financial firms have great political clout.

Or, as John Maynard Keynes put it, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.”

Yet the people at the heart of this system, even with the wreckage they created all around them, still fail to acknowledge that the rich pay of recent years was the product of a debt binge. It wasn’t just the makers of the pernicious securities who benefited; all boats in the finance industry rose with the surge of borrowing. Trying to defend the status quo ante shows a willful, self-serving blindness to the proper place of financial markets in a healthy economy.

Worse, it bespeaks a dangerous, destructive ideology that has somehow managed to live on, zombie-like, through the crisis. The idea that the needs of the financial sector trump those of the productive sector isn’t just specious; as the crisis so vividly demonstrated, it’s outright dangerous. But its strange persistence as an article of faith among our leadership class, both in government and the media, has yielded inertia and fecklessness where there should be energy and resolve. It seems that before we can confront the challenge of mending our broken financial system, a battle of ideology must be waged and won. And the hour is getting late.

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114 comments

  1. Carrick

    http://www.huffingtonpost.com/2010/03/12/brad-hintz-former-lehman_n_496766.html

    In an interview with Bloomberg Television this morning, former Lehman Brothers CFO Brad Hintz condemned the firm’s executives for camouflaging its ballooning balance sheet as the financial crisis set in.

    Hintz, who left Lehman in the late 1990s, called ‘Repo 105′ — the accounting technique the highly leveraged firm used to conceal $50 billion in assets — “shenanigans”:

    “No, it wasn’t done at the other firms, so it was clearly an accounting technical approach in order to bring a balance sheet down. But you’re not bringing the balance sheet down… If all you’re doing is hiding behind a curtain, it’s not there.”

    Hintz said that what shocked him most was how long Lehman waited just to address its balance sheet:

    “The comments about shrinking Lehman’s balance sheet really wasn’t something that occurred until well after the crisis began, which if you’re facing a funding or confidence crisis, the first thing you do is put your balance sheet into a nose dive and raise cash.”

    He remembered the accounting systems the firm used in the 1990s were “primitive,” and the problem of excessive leverage reached back to at least his days at the firm, he added. But former CEO Dick Fuld, who may face criminal charges over the scandal, was always “a very forceful personality” who was heavily involved in managing the firm’s risk: “It’s hard for me to see him giving up the risk side,” Hintz said.

  2. attempter

    Excellent analysis of the infestation. It’s ingrained, it’s incorrigible, it’s congenital. It can’t be rehabilitated. We’re dealing with a very aggressive, destructive cult fanaticism here.

    This part nicely encapsulates why greed and wealth concentration aren’t “innocent” but force themselves very aggressively upon everyone else:

    And the New York Times has itemized how the math of a successful banker lifestyle (kids in private school, Upper East Side co-op, summer house in Hamptons) simply doesn’t work on $500,000 a year. Of course, it omitted to point out that outsized securities industry pay was precisely what escalated the costs of what was once a mere upper-middle-class New York City lifestyle to a level most people would deem stratospheric.

    That (like many other things) refutes the “libertarian” Big Lie that they’re not hurting anyone else. On the contrary, outsize pay and concentrated wealth in themselves impose extreme coercion upon everyone else.

    [I]f someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco…?

    To this guy, and everyone like him, I agree with you 100%. They shouldn’t be paid the same. The deliveryman actually performs a real service. He deserves to be paid for it. But these finance parasites produce nothing. They should be paid nothing. They should be denied food.

    And of course every cent they stole needs to be restituted. Since that level of restitution is impossible, at least every cent they still have must be confiscated.

    And in the end they must be made to answer in full for their crimes. Justice must be done.

    This innate vice can’t be “reformed”, but only dealt with as any other termite infestation in the walls.

    1. el Gallinazo

      Well, there is always the Shakespearean solution – perhaps a pound of flesh for each million dollars stolen.

  3. MacroStrategy Edge

    Precisely my experience as well, although I came in from the “buy side” in 1983, in an investment management partnership that ran pension fund, endowment, high net worth family, etc. money.

    In fact, when I left the firm in 2008, the experience felt remarkably like I was waking up from a trance. The whole culture of finance was set up to breed a monomaniacal, zero tolerance for error mentality that ultimately bordered on sociopathic behavior.

    Unless you’ve experienced it, or known someone caught in its sway, it is hard to imagine, although you have done an excellent job capturing the essence of it.

    The days of finanzkapital uber alles must now be drawn to a close, if for no other reason than the goose stepping, jack booted characteristics that its culture often breeds can no longer be hosted by the larger community which it perceives it has been ordained to loot and pillage…because it is, to quote Blankfein, God’s work. Finance certainly has a useful purpose, but the reality is, the whole world can no longer be made to revolve around and serve finance.

  4. psychohistorian

    This ideological battle that you say needs to be fought. How are the sides defined?

    Is this a class struggle? How do you define the crux of the difference in positions between factions? There are those that would say that the MSM spends all its time making sure that problems are never seen as a class struggle, IMO. All “public” discussion is currently contrived by the MSM around theocratic and corporatist/fascist narratives which have been built up as reflecting mainstream values over the years.

    Another rich, insightful and thought provoking article Yves, thanks!

    There are so many people complicit in this mess that is is hard to get a mass going in the other direction but you sure are fueling a debate over the effects to society of these sorts of value orientations….truly sick and anti-social IMO.

  5. Kevin de Bruxelles

    Good article.

    The description of work conditions at investment banks closely mirrors those of the architectural profession (minus the high salaries unfortunately). I’m sure most white collar professionals now share this fate that is so well known to Chinese sweat shop workers.

    One underlying theme of the article seems to be that the financial industry is just not playing fair. This implies that the normal behaviour of people is tends towards cooperation, etc. In other words that people are motivated by idealism. My view is that the people in the financial industries, and of wealth in general, when allowed to are motivated by realism, more commonly known as might makes right. In other words if Wall Street has the power to dominate, and no one is willing to try to stop them, why wouldn’t they continue to act exactly as they are? A school yard bully doesn’t choose on his own to stop pounding the dweebs.

    To me being perplexed about Wall Street deploying its ideological weapons against the masses is similar to asking why an invading army is so unfairly deploying its tanks against the local population. There is nothing puzzling about Wall Street’s behaviour, that’s just the way the powerful treat the weak, when there is no countervailing force to deter their aggression. The weak can either get strong and resist, pray for some white knight to come around and save them, or meekly accept their new status as defeated vassals of Wall Street.

    The Cold War ended with the thesis of free market capitalism merging with its antithesis of communist planned economies into its synthesis of socialist-protected global capital driving market-disciplined peasant labour. In other words the capitalist head protected by a socialist helmet merged onto the communist body stripped naked of protection from market forces to create the current economic Frankenstein of global financial capitalism.

    In fact leading banksters and their central banker fellow travellers have formed a sort of global financial politburo protected by their government lackeys assuring them access to the wallets of their Red Army of the tax-paying masses. Sure every now and then one of the members of this politburo has to get taken out back and shot but these moves should not be confused with markets and are in fact just part of esoteric power plays. With this view in mind we have to be careful about totally chucking away the ideological tool of free market capitalism. In fact this is the very weapon Wall Street most fears being deployed against them. There is no contradiction here, just because an invading army uses tanks against the local population doesn’t mean we should ban tanks. It means we should build our own tanks and use them to destroy the invading force. In other words the strongest attack against Wall Street is to force them to submit to market forces irrespective of the results this will have on the rest of the economy. Wall Street needs a serious round of liquidation but this will only happen if the people revolt against the current economic Frankenstein.

    1. attempter

      With this view in mind we have to be careful about totally chucking away the ideological tool of free market capitalism. In fact this is the very weapon Wall Street most fears being deployed against them. There is no contradiction here, just because an invading army uses tanks against the local population doesn’t mean we should ban tanks. It means we should build our own tanks and use them to destroy the invading force. In other words the strongest attack against Wall Street is to force them to submit to market forces irrespective of the results this will have on the rest of the economy.

      I agree and frequently make that argument. Variations on, “It’s not capitalism, it’s feudalism, it’s gangsterism, so if you care about capitalism, you have to want to Smash the Rackets.”

      But I was thinking about it the other day and recalled how Dean Baker insisted in The Conservative Nanny State that we shouldn’t use “market” memes; that that’s fighting on the enemy’s turf. I agreed strongly at the time I read it in 2006.

      (That’s a free e-book:

      http://www.conservativenannystate.org/ )

      The answer is that the situation has changed since then. Back then it wasn’t widely understood how bogus the “free market” scam was. So to try to make the argument, “it’s not capitalism but corporatism”, was likely to sound abstruse.

      But today, even if “corporatism” is still a clunky term obscure to most people, I think most people get the basic truth that this is a rigged game, a crooked system, and that what’s happening has zero to do with all the lies about hard work and Edison-style ingenuity. That whatever was supposed to be virtuous about “capitalism”, this ain’t it.

      So that’s an example of how I did a self-check on one of my ideas and thought I was on the right track.

      1. LeeAnne

        attempter,

        A free people, in order to remain ‘free people,’ must keep up the good fight and make their own laws.

        In this Orwellian era, the idea of ‘free people’ is co opted by the rhetorical trickery of ‘free markets;’ code used by so-called conservatives to push a radical agenda in the Ayn Rand mode: no laws, oversight or regulation; indeed, no such thing as fraud for we people in power; but lots of surveillance, peonage and prisons, IRS harassment and economic deprivation to keep the rest of you non believers in line.

      2. Kevin de Bruxelles

        So that’s an example of how I did a self-check on one of my ideas and thought I was on the right track

        Wise words, I try to always do the same and I am thankful for this forum to bounce ideas off of.

        My primary motivation in preserving the in one way or another the concept of “free markets” is political. I was disappointed in the Chris Hedges piece yesterday in that he never got into any nuts and bolts scenarios for any coming rebellion, be it a political, non-violent civil disobedience, or violent uprising. Instead he just pushed emotional word-candy to his progressive readership in the form of a rainbow of victimology. To me, the key to any success in destroying Wall Street and rebuilding America is to unite the progressive and tea party elements, and in order to do that the concept of “free markets” has to be preserved in some sense or another. For Wall Street to survive, they need to keep the progressives and tea partiers fighting each other. While we all know taken literally “free markets” is bullshit, no market has ever been truly free; the concept is well known and comforting to our tea party friends. My personal economic outlook would be very similar to that expressed by Karl Polanyi in The Great Transformation and frankly I think this is an ideological node around which many people could agree. To be honest perhaps the term should be “free-ish markets” but let’s wait to debate that until after Wall Street has been liquidated!

        1. Joe

          I’m an old lefty who has moderated over the years. I have teabagger relatives. They wonder – “why couldn’t Obama start a new WPA”?

          Once we get over the name-calling we would find out most of us are good old-fashioned social democrats. We like creative entrepreneurial types and wish them well; we also know a lot of people want to earn – and should be able to earn – “a fair day’s work for a fair days’ pay”.

        2. Yves Smith Post author

          I’m actually opposed to the use of the term “free markets” since it has become a Trojan horse for ideology. Free markets has come to mean two things that are actually fundamentally inconsistent. One is the libertarian fantasy that you can have markets with no rules. That works only in settings (like small communities) where pretty much everyone who deals with vendors knows each other, and bad actors will be uncovered quickly. It is not a good model in a world of anonymous, one off transactions. The second use of “free markets” roughly translates as “competitive markets do a good job of allocating resources”. But markets are competitive ONLY if economic actors do not have much power. So we have anti-trust, prohibitions on market manipulation and consumer protection rules (disclosure, anti-fraud) to create settings in which markets are more likely to produce the textbook advantages.

          The problem is that powerful interests will argue for “free markets”, implying they produce the advantages of the second notion of “free markets” (broad social benefits) when they want the first version (no rules) which allows them to skew the playing field to their advantage. Notice how the financial services industry, in opposing reform, often invokes “free markets” to argue why its abuses should not be curbed. And notice how the public reacts. The conditioning is almost Pavlovian.

          1. Kevin de Bruxelles

            I hear you and agree. The key word is markets. I’m no good at marketing but I am sure there is a term that would to communicate the will to continue to have markets but that would avoid the connotations already established by the term “free markets”.

            Fair markets?
            Just markets?
            True markets?

          2. psychohistorian

            I agree that the term “free markets” should die. My suggestion for a replacement term that may fit Kevin’s criteria is Competitive Markets.

            My observation is that many markets do not stay competitive on quality and price over time as product and markets stabilize. As example, in the 50′s I watched Firestone and Goodyear keep radial tires out of the US for 10 years on highly specious claims. IBM is famous for its ongoing Fear, Uncertainty and Doubt (FUD) marketing strategy and Microsoft has suppressed technical innovation in the PC world for years using this strategy.

            While I don’t believe that we should legislate much in the way of morality for humans I am all over legislating the morality of corporations completely. This is necessary to keep psychotic pricks from destroying world economies to fatten the rich further.

    2. Joe

      We shouldn’t have illusions about the free market in US history. The post Civil War era of US industrialization was characterized by enormous tariffs:

      http://www.cato.org/pub_display.php?pub_id=10983

      “In the election of 1888, Republicans called for tariffs to protect American manufacturing. Benjamin Harrison’s defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. An interesting aspect of the 1890 debate over the tariff is that protectionists abandoned any pretense that high tariffs were needed to protect infant industries. Even mature industries, they argued, needed protection. They further argued that high tariffs were needed to reduce the Treasury’s surplus. They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.8

      Protectionist tariffs remained the bedrock of economic policy of the Republican Party for the next 20 years. Indeed, Republicans were so intent on passing the Payne-Aldrich tariff in 1909 that President William Howard Taft supported the 16th Amendment to the U.S. Constitution creating a federal income tax as the political price for Democratic support of the tariff.9 That has to have been one of the worst deals in history — a lose-lose situation if ever there was one.

      The Underwood tariff of 1913, passed early in the administration of President Woodrow Wilson, liberalized trade somewhat. But as soon as the Republicans reassumed power after World War I, they raised tariffs again. The Fordney-McCumber tariff of 1922 generally increased tariff rates across the board. However, it also gave the President power to raise or lower existing tariffs by 50 percent…

      The infamous Smoot-Hawley tariff of 1930 was the last outrage inflicted by the Republican protectionists.”

      Not to mention the head-bashing thugs in every mining and factory town.

      This was the “golden age” for Glenn Beck.

      Cold War ingenuity was centered around the Defense Department.

      Government-supplied Wall Street money has financed most of our recent high tech industry. Without customers in the “money center banks” Silicon Valley would be one big vineyard.

      1. Ignim Brites

        Before it was Silicon Vally it was Santa Clara Valley, world famous for apricots. Pretty good case can be made that the wine industry is symptomatic of a central bank controlled monetary capitialism.

  6. Gentlemutt

    Reinhold Niebuhr, Moral Man and Immoral Society

    “… the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from… the special privileges which they hold.”

    Excellent quotation to start this piece off.

    DownSouth has often referred to Niebuhr, and after finally taking his lead and reading the book I must say the parallels with Yves’stance (and that of many on this board) are noteworthy.

    The cult of Fed Economists should be required to read Niebuhr and Smith.

  7. Anonymous Coward

    I’ve spent a good chunk of my life in banking. This is an accurate picture of the ideological crisis we are facing as a society (somewhere between Denial and Anger). Thank you Yves – keep the faith.

  8. Alexandra Hamilton

    “The finance community has other elements in common with cults. One is the implicit and explicit reinforcement of bankers’ “specialness,” their elite status.”
    ———————————————————
    That is not unique to finance. You’ll find that in almost any large business, especiallly top management.
    The problem may have started in finance, but it is now everywhere.

    1. Yves Smith Post author

      Alexandra,

      By virtue of being a consultant, I have worked with large companies in a variety of different industries (traditional commercial banks, as opposed to investment banks, cable/telecom, some large IT players).

      This is a case where differences in degree are differences in kind. For instance, even when I was at Goldman (a LONG time ago), anyone who left, even for a very successful career, felt he had taken a horrid step down. I’d meet ex Goldman types and to a person, they would almost apologize for having left the firm. I would stay it took the average ex Goldman person a minimum of two years to get any perspective. All accounts I have now from people who have worked at the firm more recently suggest the pattern is even more pronounced. That sort of attitude, which was pronounced at Goldman in my day but much more limited on the rest of Wall Street has now become pervasive and is not firm specific as much as job function/industry specific (look how the Epicurean Dealmaker, not just above, but in a post this week, keeps feeling compelled to defend M&A. Huh?)

  9. Alexandra Hamilton

    “But the firms are white-collar sweatshops with glamorous trappings. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme and unrelenting time pressure. Priorities are revised every day, numerous times during the day, as markets move.”
    ——————————————————-
    Sounds like permanent ‘hell week’ to me.
    http://usmilitary.about.com/od/navytrng/a/sealhellweek.htm
    However, Navy Seals only do this 5.5 days in their training, while employees nowadays have to put up with this constantly over several years.
    Bringing you to your breaking point is intentional.
    Everyone will crack sooner or later and either leave and possible carry away psychological scars from this, like PTSD or such, or (s)he might become brainwashed and accept the value system and start acting like them, namely like a psychopath. Like it or not the business environment is psychopatic in nature.

  10. Jones

    Great article. Wall Street promoted the race to the bottom for the rest of American society for three decades under the guise of the free market and quarterly returns. In the meanwhile they set up a Government-protected club for themselves. The Libertarians like to emphasize the latter; we Midwesterners remember with fierce determination the former. Libertarians – don’t run from the Wall Streeters – these are your guys. Defend them or stand aside!

  11. MacroStrategy Edge

    See definition below. Fits to a T the mold of many (not all) I met and knew in the Wall Street world, especially the “intraspecies predator” part.

    Not trying to demonize these people – but this was the role, the character mold, that many of the best and the brightest in this country and elsewhere were drawn to (given the monetary reward, which is what we’re all here for, right?)and groomed for (in elite MBA schools, etc.)

    It is truly sick and twisted, and history is unlikely to be kind to this last 30-40 year rule of finanzkapital uber alles and its wrecking ball form of global capitalism.

    And Jones, I think you are dead right and have hit on a crucial insight which we best hammer home soon. As the LibertAustrians start waving their snake flags high on the way to victory in the midterm elections, demand that they defend all their John Galt’s on Wall Street.

    The predator state, as Jamie Galbraith put it in a recent book, is not the only predatory institution out there. There clearly were other predators working close to the heart of their beloved free market, who for all intents and purposes corrupting and eroding all the rules of the game and social practices that would keep anything resembling a free market intact.

    Hy Minsky used to say, it’s like the label on Heinz ketchup says: there are 57 flavors of capitalism. This one leaves a decidedly foul, rancid taste in the mouth…while it rots you from the inside out. Time to head back to the kitchen and try a different recipe altogether.

    Psychopathy ( ) is a personality disorder whose hallmark is a lack of empathy. Robert Hare, a researcher in the field describes psychopaths as “intraspecies predators who use charm, manipulation, intimidation, sex and violence to control others and to satisfy their own selfish needs. …
    en.wikipedia.org/wiki/Sociopath

  12. LeeAnne

    “Employees of bankrupt enterprises seldom go about chest-beating that they did a good job, it was the guys down the hall who screwed up, so they therefore still deserve a fat bonus check. That line of reasoning is delusional, yet DeSantis had no perspective on it. And there is the self-righteous “honorable service,” which casts a well-paid job in the same terms as doing a tour of duty in the armed forces, and the hyperventilating: “proud,” “betrayed,” “unfairly persecuted,” “clearly supported.”

    One explanation for the derangement: these guys were all sleep deprived; a kind of cult loyalty test.

    In the earlier days of Wall Street and banking, there were ‘bankers’ hours. People who understood the good life: 10:00am to 3:00pm, an acknowledgment of how little effort it took to do the job, whatever finance job. Most of the work was keeping up with information a compelling and enjoyable 24/7 and social connections (networking to you young folks).

    Normal people can’t think straight when they’re working round the clock, nights, 24/7 traveling and fighting jet lag.

    1. Jay

      Especially when they’re worrying someone will discover they don’t have many skills. (How many Wall Street analysts would flub “explain OLS”? How many IT guys couldn’t explain the difference between a hash join and a nested loop? How many accountants stay up all night copying and pasting in Excel because they are too obsessed to learn how to create a macro – or are waiting for the IT job from the other guy above?)

  13. john newman

    Buckley v Valeo was in 1976. A Supreme Court committed to the avant guard of Post Modernism decided that money was speech despite the obvious non-commutative nature of the proposition: you can buy food with money but while you can eat your words, you derive no nutrition from them.

    Once money was legally structured as speech, those with it gained a structural political advantage that has been compounding interest now for 34 years. On the money side the financial crisis is the fruit of this confusion of economic and political power. On the word side is the recent Supreme Court metonymy embodying corporations with human rights.

    Can’t wait to see where this takes us! I enjoy the Epicurean Dealmakers style and industry insight, but this essay places those insights in their proper relation to the real economy that has been predated now for twenty years. I propose that bankers and Supreme Court Justices be paid henceforth with words rather than coin.

    1. LeeAnne

      john newman,

      I propose that bankers and Supreme Court Justices be paid henceforth with words rather than coin.

      well said –add insider corporate shareholders. Perfect!

  14. Talton Embry

    There are intelligent bankers with firms such as Allen & Co and Lazard who make a lot of money providing valued advice to clients who are willing to pay for it. There are less intelligent bankers who make a lot of money providing advice tied to financing cheaply provided through bank funding insured by the public.

    There are a lot of intelligent traders who make a lot of money at hedge funds and other private investment vehicles using little leverage and a lot of their own capital. There are a lot of less intelligent traders who make a lot of money using vast and cheap leverage provided by bank funding insured by the public.

    If you look around the financial industry, the reality is that the really smart people work outside the banking sector. As our system is now designed, we are providing the least capable people with the greatest ability to use almost unfettered leverage against other people’s capital. As long as the second-rate enjoy this situation, the results will be foreseeable.

    1. Bob

      The shorts have been trying to force Wall Street to live up to its own bullshit, and for that they can be praised. It should be noted they have been almost completely unsuccessful – Wall Street banks are as powerful as ever. If the wizzes (or their younger siblings) are interested in using their math skills for a higher purpose they should consider real engineering not financial engineering.

  15. fresno dan

    I would pretty much agree with everything in the article.

    However, an inconvenient question: Pick your starting president – Obama, Bush, Clinton, Reagon, or even Wilson with the establishment of the Federal Reserve – but there has been a BELIEF in credit. How many times have Geithner and Bernanke said that the economy runs on credit? How many politicians upbraid the banks NOW for not lending? A modern economy needs banks, but a modern economy can not only have the industry of finance.
    Some of us old codgers can remember a time when most people did not have a CREDIT CARD!!! Gasp!!! And it seemed as though me were more prosperous!!! GASP!!! GASP!!!
    Credit has a place in an economy – but there has been a view that keeping everyone running faster and faster on the hamster wheel will solve our problems.
    Borrowing is not income, and debt is not wealth. And it is not a perpetual prosperity machine.

    1. Yves Smith Post author

      Fresno,

      I will be the first to admit I did not follow policy all that closely in the 1980s. However, I do NOT believe the “belief in credit” started in the Reagan era, even though that’s when credit growth started serving to mask the lack of increases in worker incomes. Remember, it was in 1982 that Volcker finished his punitive interest rate increases to wring inflation out of the economy. That was celebrated in the 1980s, particularly on Wall Street. It was hard and costly to issue debt during that period.

      We did have two debt parties towards the end of that decade, the S&L crisis and the LBO boom. But neither was the direct result of policy. Remember, the S&L crisis was the result of deregulation so that the thrifts could compete with other banks plus the fact that problems in the S&L industry in the early 1980s led regulators to greatly lower the requirements for buying a thrift (and as Bill Black sets forth in his book, also allowed for bogus accounting when one bank/thrift acquired another). That in turn allowed for fraudsters (no joke, people with prior indictments and/or convictions) to buy thrifts.

      I would peg the debt friendly policies to Greenspan (but it took a while for him to embark on that path, and I don’t see his posture on debt growth as a consideration in his being nominated to the Fed chair by Reagan) and the Rubin-Summers Treasury.

  16. blunt

    Neibuhr, no doubt, is helpful in understanding the mindset behind the crisis and its aftermath.

    But perhaps more in tune with the overall conduct before, during and now would be a stroll through Hannah Arendt’s “Eichmann In Jerusalem.”

    I was forcefully struck by the ways in which the various unnamed characters in this piece were reminiscent of Arendt’s views of Eichmann and of the culpability of the victims, in some respects, to enabling the horrors.

    Surely, nothing could argue more forcefully for “the banality of evil” or the discovery that these people are not any different than the mass of us when we are, like Eichmann, eternal joiners of average intelligence who when we join the “right” group manage to believe we lose all volitional response to any situation.

    Arendt was spot on. Such behaviors were not simply confined to Nazi Germany, but are a part of the human repertoire, available to any of us given the opportunity.

    I find myself feeling a copmpassion for the fools, knowing that given a certain mindset, I could as well be one of them.

    Still, to follow Arendt’s justification for Eichmann’s, that more normal than normal man, execution: since they, the traders and brokers, see no reason that they should share the world with us, then we should see no reason to share the world with them.

    Justice and a reminder to us all that we could be them and to reinforce the lesson maybe a few public executions would not come amiss. Certainly there’s need for seizures of whatever gains they’ve acquired through the banality of their regimentation.

  17. DownSouth

    Yves concludes: “It seems that before we can confront the challenge of mending our broken financial system, a battle of ideology must be waged and won. And the hour is getting late.”

    I sense the same sort of resignation here that I did in Chris Hedges’ piece from yesterday’s Links. Could it be that the great promise of modernism is not achievable? Is it even possible that the “battle of ideology” can be “waged and won”? If not, then the entire edifice of modernism will surely come tumbling down.

    One of the core tenets of modernism is that social intelligence can be imparted to the masses and that this enhanced social intelligence will result in greater social justice.

    This concept is totally modern. Before the advent of modernism such thoughts were unheard of.

    Greek “democracy,” for instance, was predicated upon slave ownership. Slaves, operating within the private realm, were the producers, producing the necessities of daily existence so that “citizens” could venture forth into the public realm and be free. “In Greek self-understanding,” Hannah Arendt explains in The Human Condition, “to force people by violence, to command rather than persuade, were prepolitical ways to deal with people characteristic of life outside the polis, of home and family life, where the household head ruled with uncommon, despotic powers.”

    So democracy and freedom in Greek society were reserved for a select few, whom Greek thinkers also deemed to be wiser and more intelligent. As Niebuhr explains:

    The philosophers (of antiquity) were optimistic in their confidence that the wise man would be virtuous; but, alas, they had no confidence that the many could be wise. The Stoic Chryssipus could conceive happiness only for the wise and was certain that most men were fools. The Stoics tended on the one hand to include all men in the brotherhood of man on the ground that they all had the spark of divine reason; but on the other hand they pitied the multitude for having no obvious grace of rationality. Thus their equalitarianism rapidly degenerated into an aristocratic condescension not very different from Aristotle’s contempt for the slave as a “living tool.” Seneca, despite his pious universalism, prays “forgive the world: they are all fools.”
    –Reinhold Niebuhr, The Nature and Destiny of Man

    Niebuhr and Arendt cling to the hope that sufficient social intelligence can be imparted to the masses so that they can identify their own interests and advocate for them. But they are not naïve to the almost insurmountable hurdles they face in doing so. This is much of what Moral Man and Immoral Society is about. As Niebuhr observes, the entire education and media establishment is arrayed against the masses, preventing them from acquiring the needed social intelligence:

    A certain system of power, based upon the force which inheres in property, and augmented by the political power of the state is set against the demands of the worker. Efforts to destroy the economic power by giving the worker the political power, inherent in the strength of his numbers, are frustrated by the use of the organs of education and propaganda in control of the dominant group…

    Also at the disposal of the “lords of property” are an army of what Orwell called “hired liars and bumsuckers.” These are the theologians, economists, military professionals and other putative “experts” who give the ruling oligarchy intellectual and moral cover. Or in the words of Niebuhr:

    The conception that what society needs and, if intelligent enough, will be able to secure, is “trained and experienced specialists” to perform the “expert functions” of government, betrays an additional class prejudice, the prejudice of the intellectual, who is so much the rationalist, that he imagines the evils of government can be eliminated by the expert knowledge of specialists. Any kind of government must of course avail itself of the specialized knowledge of experts. But the idea that such expert knowledge can ever guarantee the impartiality and justice of a state is to overestimate the impartiality of reason in general and the reason of experts in particular. Politics are given their general direction by the pressure of interest of the groups which control them; the expert is quite capable of giving any previously determined tendency both rational justification and efficient detailed application. Such is the inclination of the human mind for beginning with assumptions which have been determined by other than rational considerations, and building a superstructure of rationally acceptable judgment upon them, that all this can be done without any conscious dishonesty.

    And then there is that great imponderable that Niebuhr calls stupidity. “The stupidity of the average man,” he writes, “will permit the oligarch, whether economic or political, to hide his real purposes from the scrutiny of his fellows and to withdraw his activities from effective control.”

    I started reading Jonathan Haidt’s The Happiness Hypothesis last night and he has quite a bit to say on the subject of stupidity. He cites a study conducted by Walter Mischel at Stanford University that gauges the emotional intelligence of four-year-olds, and then follows them throughout their lives. It seems that if one is emotionally intelligent at the age of four, this is a characteristic that stays with one throughout life. And most four-year-olds who demonstrate lower intelligence never manage to close the gap.

    Of course “the average man” has no monopoly on stupidity. But it is the intelligence of “the average man” upon which the success of the entire modernist project depends. So the success of modernism seems to boil down to whether there is a sufficiently large portion of average men who possess the intelligence, both emotional and objective, to see through all the obstacles the “lords of property” throw up to confuse and bamboozle them.

    The outcome of this “battle of ideology” is of course unknown. But my hat goes off to you, Yves, for your unwavering commitment to fight the good fight.

    1. Alexandra Hamilton

      One of the core tenets of modernism is that social intelligence can be imparted to the masses and that this enhanced social intelligence will result in greater social justice.

      This concept is totally modern. Before the advent of modernism such thoughts were unheard of.
      ————————————————————
      Thanks for your great post.
      This concept is not modern, however. It is thousands of years old.Just to name a few: the New Testament and the Qu’ran, among others.
      The struggle is still the same, but has different names.

      About the Greeks: Some time ago, I think I noticed something. Have you ever tried to analyse the personality types of the greek gods? The are amazingly pathological.
      I think, the Greeks were aware of what those rather human “gods” actually described and thus were rather reserved about worshipping them. However, the Romans – which had the same gods under different names – acutally believed in this.They semm to have gone full tilt basing their society and ideals on those personality types.

      1. Justicia

        Jehovah doesn’t exactly come across as well adjusted in either the Old or New Testament — unless you think that human sacrifice is a good thing.

        But then, I suppose, if you’re a god you don’t have to adjust to social norms.

    2. Doug Terpstra

      When I spotted the Niebuhr quote, I couldn’t wait to scroll down for your contribution, enriching as ever. What would Yves do without you? (pretty well, on reflection).

      You write “I sense the same sort of resignation here that I did in Chris Hedges’ piece from yesterday’s Links. Could it be that the great promise of modernism is not achievable? Is it even possible that the “battle of ideology” can be “waged and won”? If not, then the entire edifice of modernism will surely come tumbling down.”

      Chris Hedges is indeed (realistically) gloomy lately, but Yves piece was exceptional in the way she humanizes the villains (if without excuse). And I dare say her tireless work, this blog, the wider internet(s), your shared wisdom, and certainly the general evolution of humanity (and literacy) since the ancients (not so sure about the modern Greeks though), afford great hope that we are nearly ready for a leap in evolution (2012?). That the current system of things is falling apart, though painful and chaotic, is surely necessary. “Unless a grain of wheat falls to the ground and dies, there can be no harvest.”

      I like Haidt’s book. His analogy of the human mind, the conscious and subconscious, to that of rider and elephant is excellent toward understanding the cult pathology Yves describes. Elephants can easily buck and trample an inexperienced rider, but they are prodigiously powerful allies when properly reined. Another is that all of us have an internal lawyer on retainer, absolutely and convincingly faithful to defending our false egos, no matter how stupid and irrational they may be, and they are expert at consistently winning arguments over our supposedly reasonable frontal cortex. I enjoyed his book; it too is hopeful.

    3. EmilianoZ

      Talking about progress, intelligence and stupidity, here’s another pearl from the oracle (nntaleb):

      Education makes the wise slightly wiser, but makes the fool vastly more dangerous. [Overconfidence, Chapt 4]
      2:11 AM Feb 8th via web

      http://twitter.com/nntaleb

  18. Tom Crowl

    Fantastic article and overview of the culture of Wall Street and it’s unfortunate evolution.

    Paradoxically, much of this arises as a consequence of biological altruism’s dysfunction in scaled societies… Which is why we need regulations and oversight…

    A couple of brief posts on these issues if interested:

    The Foundations of Authoritarianism
    http://culturalengineer.blogspot.com/2009/05/foundations-of-authoritarianism.html

    Compensation and the Social Network
    http://culturalengineer.blogspot.com/2009/10/compensation-social-network.html

    Ayn Rand & Alan Greenspan: The Altruism Fly in the Objectivist Ointment
    http://culturalengineer.blogspot.com/2009/10/ayn-rand-alan-greenspan-altruism-fly-in.html

    1. DownSouth

      Tom Crowl,

      Interesting stuff.

      I can’t agree with you in your admiration of Ayn Rand, however. To me she was a selfish, spoiled brat at best and a highly disturbed emotional case at worst. Her whole purpose in life was to turn erstwhile sins like greed and selfishness into virtues.

      As to altruism and proximity, Niebuhr eluded to this in Moral Man and Immoral Society when he wrote:

      The failure of even the wisest type of social pedagogy to prompt benevolence as generous as those which a more intimate community naturally evolves, suggests that ethical attitudes are more dependent upon personal, intimate and organic contacts than social technicians are inclined to assume. The dependence of ethical attitudes upon personal contacts and direct relations contributes to the moral chaos of civilization…

      And I’m glad you wrote wealth and status in your post. Rewards for elite producers in primitive societies are definitely more of the status variety than the material. Herbert Gintis et al in Moral Sentiments and Material Interests cite studies showing that high producers in hunter-gatherer communities give away most of their excess production. These gifts are rewarded with status and prestige, which eventually translate to political power and mating opportunities.

      But I think altruism and proximity is only one human behavioral trait that evolved over millions of years in small groups but hasn’t adjusted to, to use your vernacular, “scaled social organisms.”

      Think of the simplicity of the following in small groups vs. “scaled social organisms”:

      • Identifying elite producers
      • Identifying free-riders
      • Rewarding elite producers
      • Punishing free-riders
      • Economic fairness
      • Economic justice

      Take rewarding elite producers, for example. Rewarding elite producers in a primitive society, as explained above, is fairly simple. Not so in our “scaled social organisms.” People have grown accustomed to material rewards instead of status (or spiritual) rewards. Furthermore, rewards can be stored up in the form of accumulated capital. And then this stored up capital (material wealth) becomes the way of keeping score, and also can be passed on to children, giving them a status and ability to consume which exceeds their merit.

      The problem is that humans began organizing themselves into these “scaled social organisms” only within the last 10,000 years or so. But humans evolved over millions of years.

      I began reading Jonathan Haidt’s The Happiness Hypothesis last night. There’s a lot of insights I think you might find interesting, including the following, which gives an idea of what we humans are up against in these “scaled social organisms”:

      Nobody knows how long ago human beings developed language, but most estimates range from around 2 million years ago, when hominid brains became much bigger, to as recently as 40,000 years ago, the time of cave paintings and other artifacts that reveal unmistakable modern human minds. Whichever end of that range you favor, language, reasoning, and conscious planning arrived in the most recent eye-blink of evolution. They are like new software, Rider version 1.0. The language parts work well, but there are still a lot of bugs in the reasoning and planning programs. Automatic processes, on the other hand, have been through thousands of product cycles and are nearly perfect. This difference in maturity between automatic and controlled processes helps explain why we have inexpensive computers that can solve logic, math, and chess problems better than any human beings can (most of us struggle with these tasks), but none of our robots, no matter how costly, can walk through the woods as well as the average six-year-old child (our perceptual and motor systems are superb).

      1. Lidia

        I came across a great comment that cuts through Rand’s BS:

        —————————
        What I found out was that, in each of her books that I read, at least, Rand provided her own refutation of the ideas she claimed to be promoting.

        In The Fountainhead, the idea that I took away was this; if someone owns a building, and you happen not to like the way that person decorates his building, you have the right to get a bunch of dynamite and blow it up. Rand’s rights of personal property illustrated in a most peculiar way, eh?

        Then there was Atlas Shrugged. Through all thousand pages of that dreary pile of drek, the protagonist Dagney Taggart wandered, moaning and bitching because she wanted a railroad of her very own, and no one would GIVE her a railroad! This from the arch-enemy of altruism, generosity and self-sacrifice, the apostle of self-sufficiency?!?

        There were other books, with equally preposterous self-contradictions, but these should suffice for now. I believe Rand allowed herself to become a slave to her own gnawing resentments at having been made to give up her life of privilege and ease in Russia, after the revolution. Her so-called philosophy was an unsuccessful attempt at giving intelligible voice and order to a cacophony of unrecognized, disordered and self-pitying internal wailings and gnashings of teeth.
        ——————————————–

      2. Lidia

        Others are writing about the culture at Lehman:

        >> … wives found the social events sponsored by the firm and the annual summer retreat a ghastly ordeal, not least because of Fuld’s obsession with dress code. Evenings on the summer retreat required dresses, jewellery and Blahnik shoes, while they were all expected to don hiking gear for a trek up a mountain. One wife once brought a fake plaster cast so she could pretend she had a broken leg. She was flummoxed when Niki arrived with a real cast on her leg saying she planned to climb regardless.

        Fuld’s requirement that his executives sacrifice all for the sake of the firm, often put unbearable strains on their families. Karin Jack recalls that her child had a seizure on the day the Jacks were supposed to go on a Lehman outing. Rather than excuse her for the day, they landed Joe Gregory’s private helicopter at her home and waited for her. “Can you imagine the pressure?” she told Ward. “I have this really sick child, but I know that if I don’t get on that helicopter it’s going to hurt Brad.” <<
        —–
        http://women.timesonline.co.uk/tol/life_and_style/women/the_way_we_live/article7061698.ece

  19. don

    To put this in historical perspective, read (June 1994):

    http://monthlyreview.org/940600sweezy.php

    “Financial capital, once cut loose from its original role as a modest helper of a real economy of production to meet human needs, inevitably becomes speculative capital geared solely to its own self-expansion. In earlier times no one ever dreamed that speculative capital, a phenomenon as old as capitalism itself, could grow to dominate a national economy, let alone the whole world. But it has.”

  20. Siggy

    Yves,

    A very accurate polemic this post.

    I spent 20 years on LaSalle Street. It wasn’t Wall Street but the conditions and character of the activity in the Second City were and are essentially the same and comparable to Wall Street.

    I left the industry in 1970. I took a sizeable cut in income; nonetheless, given the market experience from 1970 to 1980, it was a good choice. I left because it had become extremely difficult to create value. The Asian labor arbitrage was beginning to hit manufacturing and the alternative of a service based economy seemed to be a fairy tale never to be realized. Most importantly, I left because the increasing pressure to do a deal was creating demands on my personal time that I was unwilling to accept. I have never seen a deal worth doing that could not be done tomorrow. But, that was the coming trend, the very culture you have so accurately described.

    I have begun reading your book and I have also begun to skim the Lehman Bankruptcy Report. What I am taking away is the confirmation of what I have understood for a very long time. This financial crisis has many facets and they are dynamically linked and in constant motion. What appears to be the reality of the situation changes drastically when you alter your point of view; and, quite curiously the view that is presented when you go back to your original position has changed.

    The constant reality of this crisis is it’s internal basis. That constant basis is rather like a little electric motor connected to a Rube Goldberg construction that whizzes and whirles accomplishing absolutely nothing. The little electric motor that enervates Wall Street is an army venal souls who desparately need to meet their maker.

    Love your stuff.

  21. craazyman

    The perception of injustice is a strange thing.

    I recall reading about an Indian Brahmin priest or religious figure of some sort — forgive my ignorance of the specificities of Hindu religion — who set himself on fire and died to protest the dissolution of the caste system. Such a strange inversion of morality.

    A sense of priviledged identity is the last frontier. When that is destroyed, there’s nothing left but molecules and the void.

  22. MichaelC

    “But the firms are white-collar sweatshops with glamorous trappings

    I’m glad you brought glamor into the discussion. It’s role is underrated. A large part of the challenge to having this story heard is that it is just too ugly to look at. The reality is so at odds with the imagery we are inundated with from tv, CNBC,etc and print, Vanity Fair, etc. that covers Wall St in a kind of invisibility cloak, when actually its the Dementors, not Harry, hiding under it (Sorry, I’ve spent too much time trying to explain this to the kids without freaking them out, and Harry is useful).

    Picture of Dorian Grey needs to replace Atlas Shrugged as required reading for the next batch of Ivy League MBAs. Imagine what Timmys portrait must look like at this point.

  23. Ina Pickle

    Excellent article. Very much the same pressures and conditions exist in big-firm law — but they are still a partnership form, for the most part, so quite risk averse in many aspects. However, specific, non-productive forms of risk are not only tolerated, but encouraged. . . .naturally, lawyers get paid a whole, whole lot less than i-bankers. I’m sure that the i-bankers think the lawyers are not fit to pick up their dry cleaning.

    It seems to me that the core problem is a horrifically skewed incentive structure, amplified through a microcosm that seeks to extract everything possible out of humans like strip miners destroying a landscape. The personality traits and skill set useful to surviving the experience are not those conducive to correcting the problem, or to improving the business. The whole business becomes extractive in all its dealings.

    It is a cult. And you have suffered so much for them already – you are so close to the brass ring and getting some reward for everything you have given up. Stepping outside the mindframe and getting off the ride are not options.

    I’m not sure that it can be regulated or fixed, but returning to a structure that required personal assumption of risk at the top would be a good start.

    1. DownSouth

      Ina Pickle,

      You say: “It seems to me that the core problem is a horrifically skewed incentive structure, amplified through a microcosm that seeks to extract everything possible out of humans like strip miners destroying a landscape. The personality traits and skill set useful to surviving the experience are not those conducive to correcting the problem, or to improving the business. The whole business becomes extractive in all its dealings.”

      That reminds me of this Niebuhr quote:

      The spirit of capitalism is the spirit of an irreverent exploitation of nature, conceived as a treasure-house of riches which will guarantee everything which might be regarded as the good life. Man master’s nature. But the social organization of capitalism at least theoretically rests upon the naive faith that nature masters man and that her pre-established harmonies will prevent the human enterprise from involving itself in any serious catastrophes (physiocratic theory).
      –Reinhold Niebuhr, The Nature and Destiny of Man

  24. emm

    I can hardly wait for the regulatory-captured to be in US captivity, in a genuine american, publicly-run CAPTIVITY (US JAIL)

  25. Otto

    “The partners at her firm instructed her to not to return until she had recovered fully. But this was September. Bonuses were paid at year end, and as she read the unwritten code, and knew that staying away too long would be seen as a sign of weakness. She was back at the office three weeks later, looking wan.

    She later became the first woman investment banking partner at her prestigious firm. Her instincts served her well. Or maybe not. She later lost 90 percent of the vision in one eye to glaucoma, an easily treated disease, because her overloaded schedule made eye exams seem like a luxury.”

    Well should I (chump public) consider it an outrage that she probably received “obscene” bonuses or should I say, you worked hard and deserved it?
    Who judges “greed”? You, me, Yves, etc.Are all of you who are in the financial business prostitutes or is it the other person and not you.I put all of my retirement money in my company’s 401K GICs because of higher yields , am i greedy?Are those people who bought higher yield securities greedy, after all even the layman knows that higher yields mean more risk.
    Let’s stop the name calling and self-rightousness and give specific ideas on why we had the bank panic ( if i hear greed one more time i’ll puke. )because only then can we propose meaningful reform.

  26. Justicia

    “The average employee at Goldman Sachs made $630,000 in 2007. That includes everyone, the receptionists, the guys in the mail room, the back office staff.”

    Ahm, no. The receptionists and mail room guys most decidedly did not pull down $600 K a year. Averages lie.

    If Bill Gates walked into a room of to people who’s average net worth was $100, the average net worth of everyone in the room would sky rocket.

    1. Yves Smith Post author

      Justica,

      That statement is accurate, and I am at a loss to understand your objection. The average DOES include all staff. It is an average across the firm.

      Most investment banks have fairly high support staff ratios. I’m dated, but a bare minimum of 0.6 to 1 on the investment banking side, much more on the trading side (back office, IT, trading assistants, etc). So when you take the support staff out of the average (that was the reason for mentioning them) it means the average across the professionals, even very junior professionals like new college grads, was MUCH higher than $630,000 a person.

      1. Justicia

        Then I mistook your point. I read what you wrote as saying that the mail room staff were getting $600K and not simply that back office salaries were included in the average.

      2. lurker

        “The average employee at Goldman Sachs made $630,000 in 2007″

        The commenter was correct, this statement is simply wrong: average employees (medians) and average salaries (means) are apples and oranges.

        “The average salary at GS was $630K” would have been fine.

  27. Hugh

    More excellent writing. This is a good description of the paper economy. It doesn’t produce real, sustained wealth or serve any useful societal function. It is all about money chasing itself, about markets divorced from their real world underpinnings, yet which at the same time have large, distorting, destructive effects on the real world economy.

    These people whether you call them MOTU or banksters are unreformable. They are gamers. They only know the game. Anything you do to control them they will game on you. This is why regulation will not work with them. There was regulation. They filled the regulatory apparatus with their people. What about the politicians? No problem, they bought them too. Then they had them deregulate the regulators.

    Fraud has become an institutionalized part of the financial system. And why not? Who is going to call the banksters on it? The regulators? People who either have or will work for them? The politicians whom they own? We just went through two years of the worst financial crisis since the Great Depression and we could well have worse to come, yet what was the upshot for Wall Street? Trillions in bailouts, no strings attached, no punishment of the banksters, no prosecutions, not even any investigations, and, of course, no curbs on bonuses. And reform? Do you even need to ask? DOA. Or maybe I should say, DBA. Dead before arrival.

    Because of its size, complexity, and above all culture of fraud and criminality, the only way real reform is going to work is if the system is taken over in its entirety and restructured from the ground up. Most of those now in the financial industry need to be banned for life from it. Their assets need to be RICO’ed, and they need to face charges. I am talking of prosecutions in the 10,000 plus range.

    We should not view these people by what they say they are or how their bought stooges in government and the media defend them, but rather we should judge them by their actions. Do this and you will see they are the great financial terrorists of our times. They have done more damage to us and our country than Osama bin Laden or al Qaeda could ever dream of. I am not looking for revenge here. No Gitmos. I think simple justice fairly applied would be harsh enough. But I don’t see that. I see another collapse and somewhere an explosion that will either reassert our Constitutional processes or more likely destroy them.

    1. Doug Terpstra

      Most excellent commentary. Systemic collapse, the death of the current order, is necessary for any meaningful change, root and branch. Otherwise we are just “tweaking the twigs” as Nader said.

      All of this increasing complexity is, as Yves said, “a convenient cover for massive risk-taking and fraud.” It is a constantly recurring groundhog day nightmare—S&L, Mexico, Asia, Enron, Russia, LTCM, Bear, AIG, Dubai, Greece, Spain—that will never come out right until the entire structure is dismantled. That is what Geithner and the kosher frat pack fear most and why in their own twisted delusions they justify outright crimes for some imagined good end—saving the “free” market god, as someone commented here yesterday. But I think this is finally the rumblings of the “big one” that will shake the foundation to its core.

  28. EmilianoZ

    Another epic post for an epic battle!

    One question: where does the 3 trillion figure come from? Most people are only of TARP which cost a few hundred billions. Can we have a break down of the 3 trillion figure?

  29. Justicia

    Minor quibbles aside (see above), this is a brilliant analysis of the financial sector’s pathology.

    Early in my career I worked in the bank finance department of a top Wall Street law firm and I recognize the mindset you describe from my dealings with the bankers. The level of delusion as their own intelligence and importance in the world was simply breathtaking. The lawyers weren’t a whole lot better but the partnership structure of the firm helped control lawyers who became too pliant to the bankers’ demands.

  30. breathwell1

    There needs to be a new Nurenberg trial.

    That is the only thing that can smash the present corruption and all these actors who are presently happily beyond the reach of the law.

  31. Joe

    How about saying we need an alliance between labor and small business against big business? Why does everything have to be about ideology?

    1. EmilianoZ

      99% of the population has an interest in uniting against big business. But the other 1% has honed the skills of divide and conquer for centuries if not millenia.

      Take the Tea Party for instance. They don’t strike me as a wealthy lot. But they seem to hate people poorer than themselves more than they hate bankers.

      1. anon

        While undoubtedly true for some members of the Tea Party movement, it isn’t true of any that I know in real life or most that I’ve encountered on blogs. (NB: I have never visited a Tea Party blog.) I think the left began to demonize the Tea Party movement almost immediately. Once demonized, any commonalities that it had with the Tea Party had to be minimized and denied. The elements of the Tea Party that were anathema to it were emphasized even when those beliefs were not held by most of those in the Tea Party. This isolated the Tea Party movement and pushed the it further toward those elements, e.g., xenophobia. IMO, it’s a way that the MSM and current political parties cynically manipulate Main Street in order to maintain the status quo.

    2. blunt

      “Why does everything have to be about ideology?”

      I believe if you refer yourself to the cultlike indoctrination that preceeds throughout such firms and becomes part and parcel of the common parlance among economists, philosophers, and average joes through the cheerleading of the MSM, pulpit-pounders and generally everyone you may find some sort of reason to look at these matters as ideological.

      Nothing made capitalism arise in the world until the late eighteenth century, although in tracing the history of the Fuggers, D’Medici, Knights Templar and others you can certainly find the roots going back to the thirteenth century.

      Capitalism itself is an idea just like monotheistic religious belief, Schroedinger’s Cat, or Objectivism are ideas. There is nothing elemental, basic, about them.

      Nor is there anything elemental about the notion that human society, and human beings, are innately selfish or brutal. Such notions are ideas that are often read into history to justify some present trend of behavior.

      One might as well argue that humans are basically altruistic (there is some evidence that altruism is an evolutionary positive) given that humans are, at their most primitive “social animals” that require long periods of care before they can begin to care for themselves ably enough to survive.

      Even in adulthood naked apes don’t tend to live alone, rather in congregations of some size or another with elaborate social bonds. Come to think it one might more rationally posit that human altruism and social equity are elemental.

      Anyhow, I believe that there are very good reasons to wage an ideological battle over institutions that have made themselves social predators and gone to great lengths to indoctrinate their membership with their institutional conditionings.

      1. Underground Roots

        Capitalism is a little longer than just the 18th century ( I think you meant the 16th century when widespread trade with Asia and looting of the Americas began from Europe). 4000 years or 5000 is very, very young. The Sumerian and Harappian civilizations did trade with each other of capitalist nature. Before that there were temples in modern day Asia Minor, dating back more than 4000 years, about 10 000 on average, that collected grain, beasts of burden,, you name it and changed those goods for smaller symbolic stone tablets. Capitalism is not mass control – mass control only came into existence about 4000 years ago for the building of large stone structures of ritualistic purposes or irrigation canals, water ways on one level and the dumbing down of the quality of life of innocent people on the other.

        What you are complaining about has nothing to do with capitalism – excessive profit taking is at odds with “money-making” even a child knows it, in the long term view at least. This has more to do with ideologies of the master race, a certain groups of people think they have a right derived from their scriptures revelations and rituals to torment, terrorize others financially, who are sub-human to them. For that fraction, they are the implementers of mass control on this planet and they are proud of it. Of course, it is all fraud,lies and etc… but those who control the banks since Charles the Great, have found good service for these tribes from the Northern Black Sea basin and the Crimea.

        This same mass control is in place in all the major religions, including those that claim to oppose mass control hierarchy such as Islam or some neo-nazi Wodan worship or exotic ones such as “non-violent” buddhism, modern day druids, etc .. Thus in many different versions there is always the same story of the “chosen” middle men being “selected” by some divinity or other to do “God’s Work” as parts of the strict hierarchy receiving in return for their sold Souls a life of privilege, luxury, participations in pleasurable “strange” sexual rituals etc … It is all the same for jews, nazis, fascists, communists, shinto in japan… They all want to eat good foreign food, satisfy their sexual desires, wear good clothes, live in mansions and palaces along with feeling chosen by the Higher Levels (nothing can replicate that sensation to the politician, to the banker) and being respected by the masses for being at the top of the pyramid (which they really are not)

        As such these fractions of middle men do great battles on this planet, claiming that the masses receive something from histories many pains and sufferings – but it is all about gaining attention from the Higher Level people, those who control the banks – so they get to be the “chosen” middle men for the millenium, a bit like people in Africa fighting over food aid – who gets the good parts as bags of rice are thrown of the truck.

        Many or most oeople of the masses despise the “folks” (I kind of dislike the word) who have ruled the banks for the activities of the middle men. Even in here, in a more intelligent quarters this is so. But you must understand, whether the middle men be “chosen” orthodox jews/communists or some angry and crazy nazis/fascists or some strange Asian sect like Shinto of Japan – the families of the bankers do not in principle and in practice support all the activities of the middle men. So yes, sir, you can have a world without the evil of Goldman Sachs in it, but that is a bit like saying to the japanese that you can have a world without their sweet ruler/emperor or the tibetans that they can be free of the influence of corrupt religious figures like the Dalai Lama – how many would really want that inside those target groups? How many would want that change inside your audience? From a guaranteed life of profit and prestige into an ascetic (meaning in the original greek sense: a practitioner) of temperance, reason and modesty? I doubt many will but I will return to talk things over in April, but as you can read I am not unintelligent nor am I a crazy fool that the middle men will try to portray be as.

  32. anon

    “Nevertheless, one sees bankers and brokers, who concede that much of the anger directed at fancy finance is “very well deserved” nevertheless take DeSantis-like exception to their specialty being spattered in the mud-slinging.”

    I suppose this is one of the most infuriating aspects of Wall Street/DC’s behavior to the Average Jo(e). Using TED as an example, M&A were the vehicles for massive wealth transfers from the workers to the top managers and finance industry. The defensibility/desirability – either of specific deals or overall – to his clients or the sell side clients is irrelevant to Main Street. What’s relevant to them is that a “good” deal for the clients was almost certainly gained at their expense.

    I understand why TED would believe that his clients don’t care that their increased profits came from “efficiencies” gained at the expense of the average worker. What I don’t understand is how he expects the workers who are out of jobs or working longer hours for less (real) pay to agree that TED should receive outsized rewards for that or that TED somehow be exempt from their anger. TED and the new merged orgs are knocking down Main Street and taking money out of their wallets to pay their fees and to realize “efficiencies” that will benefit the top management. Yet instead of objecting or trying to get their money back, Main Street is supposed to applaud TED’s work and endorse the theft? I don’t understand that.

    (I put “efficiencies” in quotes bc it seems to me (a non-economist) that, as well as having very undesirable distributional effects, many of the M&A deals were horrendously inefficient when viewed from the perspective of society-as-a-whole, although efficient when only the orgs that were merged are considered. I understand why TED is viewing them solely from the perspective of the orgs and the firm he works for. What I don’t understand is why he expects others to view them from that perspective, especially when those others are the ones who are paying the price for those deals.)

    BTW, is there a way to edit one’s comments? I have difficulty reading what I wrote when it’s in the small box for typing comments.

    Thanks for another illuminating post, Yves.

    1. Stumpy

      Anon asks:

      BTW, is there a way to edit one’s comments? I have difficulty reading what I wrote when it’s in the small box for typing comments.

      ————–

      Start up the Notepad application (Windows) or Textedit (MacOS) and edit your post there – you can even save your draft to a file, if needed. Then use copy/paste when your post is ready to submit.

      1. anon

        I forgot to add this:

        “Yet the people at the heart of this system, even with the wreckage they created all around them, still fail to acknowledge that the rich pay of recent years was the product of a debt binge. It wasn’t just the makers of the pernicious securities who benefited; all boats in the finance industry rose with the surge of borrowing.“

        I agree with that. But the rich pay was only partly because of increased debt and leverage. It was due in large part to the redistribution of wealth from the bottom and middle of society to the very top of society, including many of those in the finance industry. The finance industry was at the center of this transfer aka legalized looting. I think it’s that transfer (and its continuation, rationalization, and cover-up thereof by both the finance industry and the politicians) that forms the primary basis for the public’s anger.

        Debt dramatically increased the payoffs/amount looted and allowed the looting to continue for much longer than it would have otherwise but debt, by itself, did not require the massive redistribution of wealth and incomes to those in the finance industry or elsewhere. The debt bubble was neither necessary nor sufficient to accomplish this transfer. I think public policy needs to address both the debt binge and the redistribution.

      2. anon

        I have yet to master cut and paste. (That’s not surprising since I’m disabled. However, I’ll try to be more careful in the future.) This got cut off the top of my reply:

        Thank you Stumpy. I appreciate the tip.

  33. scraping_by

    Calling this mindset sociopathology is spot on. It’s a common disease in this country, mostly infecting the jobs involving expensive wardrobes and obscure vocabulary. One of the ways you can see this is a current example and how it relates to law.

    The Lehman report reveals an act with Repos that was certainly an attempt to defraud. Yet, the report calls the deception “colorable” rather than unlawful, a fraud that’s only a fraud against, oh, someone somewhere. Not something that would send people to jail, rather something that should be settled by civil lawsuits. Lots of civil lawsuits, requiring lots of hours of legal work by lots of highly-paid lawyers. One notes in passing this was a report by lawyers, but that may not have relevance.

    The relevance is that instead of public officials defending the public, we have private individuals settling things among themselves. From honest finance being a public good, it’s now just a civil arrangement. You can’t expect anything, since it’s all negotiable before and after you say yes. Hand over your money and take what they give you. Both as an individual and as the state.

    The danger is that the descent from public law to civil law will keep going. Getting to private law, like the Open Carry wackos, is no longer so wacky.

  34. Paul Tioxon

    Another excellent confession. Again, you are onto something. Here is a juicy chestnut from the social sciences that confirms your anecdotal submission. I first played this in high school. Read it and weep. There but for the grace of god….

    StarPower

    * StarPower: $249
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    * View a List of StarPower Clients

    By R. Garry Shirts

    Simulation Contents…Since its creation in 1969, StarPower has been our most popular simulation. By conservative estimates, three million people have played it. Some instructors have used it with more than 100 different classes or groups. It provokes participants to rethink their assumptions about the use and abuse of power.
    What is StarPower?

    StarPower is a real time, face to face, non-computer based simulation of an organization or system in which leaders are given unlimited powers to make and change the rules of the simulation.
    What happens in StarPower?

    Participants have a chance to progress from one level of society to another by acquiring wealth through trading with other participants. Once the society is established, the group with the most wealth is given the right to make the rules for the game. The power group generally makes rules which maintain or increase its power and which those being governed consider to be unfair. This generally results in some sort of rebellion by the other members of the society.
    Who is it for?

    It can be used with any students from 8th grade and older. There are three general types of groups within educational institutions and charities that use StarPower:

    1. Groups concerned about the ethical use of power. This generally includes peace groups, classes on racism, diversity, ethics, and almost any other course or activity concerned with making the world a better place to live.
    2. Teachers of business, sociology, psychology, political science, economics, or history, who believe that it is important for their students to experience and understand power as a concept.
    3. Those who are interested in teaching people who have power how to use their power in an appropriate manner.

    What are the unique features of StarPower?

    The most unique feature of StarPower is the strength of the impression it makes on the participants. It sneaks up on them. During the first two rounds, the atmosphere is very social. People are laughing, talking, exchanging chips, and having a good time. When the announcement is made that, “because the squares have worked so hard, they now have the right to make the rules for the game” participants begin to sense that more is going on than the exchange of a few chips. Then, when the Squares pull their chairs in a tight circle and begin whispering conspiratorially about the rules they want to make, the social atmosphere evaporates and the players become very earnest about the game. Without really being aware of it, “winning” the game has become very important. And because it is important, the actions, decisions and behaviors are important.
    What does StarPower teach?

    1. Each of us may be more vulnerable to the temptation to abuse power than we realize. Power can be amazingly seductive.
    2. To change behavior, it may be necessary to change the system in which that behavior occurs.
    3. Few people are likely to participate in an endeavor if they feel powerless.
    4. If rules do not have legitimacy, they will not be obeyed.
    5. What seems fair to those in power is not likely to seem fair to those who are out of power.
    6. Persons who are promoted rarely remember those they leave behind.
    7. Power is like fire, it can be used to help make the world a better place to live or it can be terribly destructive.
    8. In any system, there needs to be checks on power. If there are no checks, power will almost certainly be abused.

    How long does StarPower take?

    It is best to plan one and one half-hours for the playing of the game and a half to one hour or more for discussion. If time is an issue, it can be played in one fifty-minute period and then discussed the next period.
    How many participants does a StarPower kit accommodate?

    A minimum of 18 and a maximum of 35 can participate. It can be run with as few as 12 participants but we recommend a minimum of 18.
    How much preparation is required?

    Preparation requires approximately one-half hour to one hour for the inexperienced gamer; less for the person who has been through it or is an experienced simulation facilitator.
    Are any consumable forms or special equipment needed?

    No. All materials to run the simulation are included in the kit.

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  35. chas

    Anybody ready to cut to the chase yet?

    Abolish the Fed. Period. Gone. Done.

    Replace it with an independent body of economists & businessmen (no banksters), senate approved & add 49 more state banks to State Bank of ND. Body would handle monetary policy & be lender of last resort.

  36. Evelyn Sinclair

    So are they Reinflating the Zeppelin or not?

    “… the financial services industry has resumed its reckless, self-serving ways .… Wall Street just looted the public on a massive scale. Having found this to be a wondrously lucrative exercise, it looks set to do it all over again….”

    Yesterday, in response to “We Can’t Inflate Our Way Out of the Debt Crisis … So What CAN We Do?” I tried to ask a NON-rhetorical question about my concern.

    I wrote:

    What I don’t see addressed is the big ugly factor of the derivatives bubble, which was not created by the government, only subsidized afterwards by feeding “real” (value-based?) money into honoring the gambling-debt economy of big financial institutions.

    If I understand correctly, when a wager is made, such as a credit default swap, it amounts to a promise to pay, which is equivalent to credit. This “creates money” in exactly the same sense that a mortgage loan does by becoming an “asset” over here and a debt over there. I understand that the creation of new derivatives is still going on because it is still immensely profitable to spin money out of thin air. In the process “money” is “created.”

    So yes the Fed/Treasury team might officially put some kind of brake on inflation. But they don’t prevent the creation of debt money in massive quantities by the exact same people who created the debt-Hindenburg we’ve just stabilized by wrecking the real (non casino) economy.

    Please tell me if I’m missing something.

    If a pile of money is created as derivatives, I don’t think there’s any way to stop it from doing its inflationary harm. Its not like we did anything to reinstate regulations….

    Won’t we be called upon soon to try to bail out the next big “surprise” crash, when the banks are suddenly going into massive deleveraging shock and need blood-donors???

    – I would really and truly love to have someone explain to me why I am mistaken in my thinking.

  37. Jim

    The Libertarians keep saying “its the Fed, its the Fed”.

    In fact the problem is the global oversupply of labor, aka “deflation”. As one of our astute observers stated above, the “arbitrage of labor”.

    Some have mentioned the Monthly Review school, others Minsky. Perhaps we should review their teacher Kalecki.

    We dance. And Wall Street dances. And the Fed dances. Because we are terrified of what will happen when the music stops. (I’m tempted to say “Lady Gaga” but that’s for another thread).

    What are we going to do about the fact that only a relative handful of the world’s population is needed to produce daily life, though all of us want – and need to work?

    I am not a Communist. Capitalism is the worst of all possible systems – except for the alternatives.

    But what answers do we have for this fundamental question?

    1. Karl

      Why are you not a Communist? What do you mean by Communism? To me it simply means that the predominant social behavior is cooperation and maintaining the commons (environment, resources, knowledge) which sustain us all.

      I can visit a public beach. To get to the beach I use a public road. I don’t need to ask permission or pay anyone to use them. I might drink from a public water fountain and help some other volunteers in picking up the trash. When I get home I can turn on my computer which runs a community created operating system. All the software applications and the tools required to build new ones are again, freely available. I can listen to music, read books, and watch informative lectures from the internet at no cost. Would my life be better if I had to pay or otherwise negotiate with private owners for access to these things?

      People don’t need to own the beach or the road or their operating system, they simply need access to them. They need to have input in how they are maintained and developed. The question which most people in this society seem to avoid like the plague is: Why can’t everything be freely available like this?

      Any form of money is not the answer. Money is an archaic, outdated, excuse. Why should someone’s bank account, a freaking number in a database, which represents an entirely subjective notion of ‘value’, limit ones access to food or shelter? Why is it that ownership of stuff is more important than human welfare? As this latest financial debacle should finally make clear to one and all, the number of dollars a person possesses has no relation whatsoever to their contribution to society. We might as well all be playing ‘Super Mario Brothers’, and whoever has the high score gets to rule the world. Our entire culture is sick.

      Jim, you correctly note that most people don’t need to work. Any civilized society would automate the hell out of all production, distribution, transportation, construction, and maintenance systems. There would be open access to these systems so that no one need be in the dark about little details, like say, where the food they eat comes from. Rather than spending hundreds of billions on a bloated military, it would spend resources on free education so that people could help to constantly improve these systems.

      Humanity can do better. There are ways other than Communism or Capitalism in which we could live.

  38. John Knoeller

    Good Article. I have a suggestion though. You should stop using the words “make” and “earn” when you discuss what people in the finance industry are paid. These are loaded terms that suggest that they add value, and deserve what they are paid. The correct terms for incomes in the finance community are “skim”, “take” or just the value neutral “pay”

  39. axh

    > But the firms are white-collar sweatshops with glamorous trappings. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate.

    Bullshit. In your limited life, what else have you ever experienced? What are you comparing this with? What’s your background; what are the statistics? I work on Wall St and know there are a ton of cruisy 60-hr/week or less jobs paying over $500k. I’ve also worked elsewhere and know closely other fields that much closer approximate the life-controlling sweatshop you try to describe. To think you have it “hard”, let alone uniquely hard (!!), akin to slavery (!!!), shows a rather profound lack of connection with the real world. Slightly harder is a job that nominally takes 80-hour weeks but in practice really _is_ interrupted frequently in the so-called off ours for real life-affecting crises, and yet pays less than $70K/year … obviously not “investment banking”. Please compare and contrast this with your “you don’t know how hard”, “slavery”, claims. Come on now, you made a strong claim about the unique awfulness of your job, please back it up.
    (This is rhetorical – you and I know you cannot because you just pulled this out of thin air.)

    Most Wall St professionals, and and for an absolute certainly most investment banker, have a relatively easy life for huge pay. Short hours, short demands. The concept of an IB faced with a ticking clock of “we need to get this deal signed by midnight, else one second later they will open the magic briefcase with the signed confession as to how much we are raping them” is TV, not reality. They very rarely, if _ever_, face the type of consequential decisions that a lawyer, accountant, or doctor faces at least once a month. Anyone disputing this lying to you and probably (since this is likely their profession) themselves as well.

    1. Yves Smith Post author

      axh,

      You have absolutely no idea how hard investment banking analysts and associates work, none. Your ranting and name calling does not amount to any sort of rebuttal. I am not defending it, the entire piece is unfavorable to the industry, but the juniors on the investment banking side do not work anything even approaching 60 hours a week. 80 hours is the effective minimum. And you are missing another key point, the acute time pressure. Even when you get to go to meetings, you are stressed out about all the other work you have, on tight and constantly shifting deadlines, to get done. The law firms that serve the big i-banks have similarly horrid hours, but the associates there tend to be on only a few matters, so they lack the stress element of having to reconcile the demands of numerous bosses, none of whom gives a damn about you, they just want their work done. Tell me any other field in which you acute time pressure, along with 100 ish people (30 clients, 3-4 people per client, between people in the firm and the client itself) who can demand you do something, and do not give a damn what the other 99 have you doing. When you find a business with these kind of hours, this kind of time pressure (moving markets) and so many conflicting demands (numerous people asking you to do work, no time or way to negotiate their demands, you are expected to execute) then we might have something to discuss, but you refuse to consider the distinctive, and abusive, features of this industry.

      The trading side is completely different, and you appear to be conflating the two.

      1. Skippy

        May I just add dear lady that kids are armed to the teeth with year 12 educations (under standing of the world) and meeting their maker every day or giving the opposition the same opportunities to their maker.

        Skippy…stressed out financial types lawl!

  40. walter_map

    More like the Social Pathology of High Finance.

    They failed to completely crash the global economy this time. But their political control is immense and all is forgiven, so they will no doubt have fresh opportunities. They’re just bound to succeed eventually.

    1. Skippy

      I concur walter, its like the second coming, demand needs to brought forward so one can bask in its glow, in the now.

      Skippy…I just might join the NRA and table a submision for a hunting season…seems we have a population problem with the herd…thining it would increse deversity of opinion….eh.

  41. Junkdeck

    With all due respect to Talton, you are full of yourself. There are smart traders everywhere as there are plenty of stupid people at both buyside & sellside houses. Significant money is really made by taking risk and sometimes it pays and sometimes it doesn’t. Some hedge funds do great in some mkts and less so in other mkts. Plenty of HF’s, traditional long-only money mgrs, etc. lost big in the past couple of yrs. There are plenty of smart people working at i-bankers. The blogger is right, the overall culture and lack of controls are the problem. But there is nothing new about this assumption. Wall St drove us into the Great Depression with the same free flowing capital and risk. The difference this time is that we, the taxpayers and the govt, bailed out companies that should have been allowed to fail. We have permitted lack of regulation/controls and structure to enable i-banks to become so massive that their size and interlocking relationships held the keys to locking up the economic system. We then compounded this bailout with selective bailouts of the auto sector and other industries deemed too big to fail for whatever illogical reason. Our economy will function much better if those who take too much risk or mismanage themselves into failure are allowed to fail otherwise we are just fooling ourselves and creating massive moral hazard. If we had allowed the i-banks to fail we wouldn’t be worried about incentive comp. I realize this still doesn’t address obscene incentive comp during good times and/or when macro-economic policies dictate favorable interest rates. However, knowing you won’t be bailed out might make mgnt more willing to create controls over incentive comp. Finally, the other participant that allows the i-banks to run wild is the shareholders who support their activities by investing. These shareholders were also bailed out at a time when their own investment risk should have led to zero return.

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