By Satyajit Das, derivatives expert and author of Traders, Guns, and Money.
Tom Wolfe writing in Bonfire of the Vanities created the term – ‘Masters of the Universe’: “He considered himself part of the new era and the new breed, a Wall Street egalitarian, a Master of the Universe, who was only a respecter of performance.” Wall Street bond trader Sherman McCoy, the original Master of the Universe, came to personify the avariciousness and self-aggrandisement of financiers.
Human history is a sequence of “ations” – civilisation, industrialisation, urbanisation, globalisation interspersed with actual or threatened “annihilation”. The most recent “ation” is “financialisation” – the conversion of everything into monetary form (also known as another “ation” – “monetisation”).
New paper economies emerged directly from the demise of the gold standard that removed restrictions on the ability to create money, especially debt. Finance inexorably displaced industry with trading and speculation becoming major activities as financial engineering replaced real engineering. In an earlier age, Heinrich Heine, the German poet, too had identified the change: “Money is the God of our time….” The rise of financiers is intimately linked to this financialisation of the global economy.
Financial innovations such as securitisation (the packaging up and sale of loans) and derivatives (effectively risk insurance) enabled banks to extend more credit. Banks could literally by increasing throughput, making more loans and selling them off to eager investors, magically increase returns to their investors. Bankers had invented a ‘money machine’.
Bank also began to trade more actively with their shareholders money, following the advice of Fear of Flying author Erica Jong: “If you don’t risk anything then you risk even more”.
All of this, of course, meant increased earnings for the bank and its star performers. As people who work in financial institutions know, it is primarily an enterprise that is run for the employees with an afterthought for shareholders.
Sherman McCoy could with a single phone call make $50,000 and, even better, a share of that was his and his alone. At the height of the boom, top hedge fund and private managers could make more in 10 minutes than the average worker earned in an entire year. In 2007, James Simons of Renaissance Technologies earned $1.5 billion and David Rubinstein of The Carlyle Group earned $260 million in the ethereal “economic stratosphere.” In Australia, Macquarie Bank employees rejoiced in the sobriquet – the ‘Millionaires factory”.
The ability to earn high rewards only becomes a problem where the promise of a share of profits encourages excessive risk taking and a focus on short-term earnings. It also becomes a problem where the basic measure of performance is ambiguous and can be systematically manipulated. Unfortunately, ‘earnings’ proved to be the result of wildly inaccurate models, accounting tricks and risks that had not been accurately captured.
Finance is also problematic when it comes to dominate the economy. In the U.S.A., financial services’ share of total corporate profits increased from 10% in the early 1980s to 40% in 2007. The combined stock market value of these firms grew from 6% to 23% over the same period.
It is now conventional wisdom to accept the central role of financial services. Gordon Brown, the Chancellor of the Exchequer under Tony Blair and then Prime Minister, harboured secret dreams of a Scandinavian-style social welfare state with low taxes funded by the growth of the City. In 2007, he told bankers: “What you have achieved for the financial services we … now aspire to achieve for the whole of the British economy.” Alistair Darling, Gordon Brown successor as Chancellor, was no less loquacious describing financial services as “absolutely critical” to the economy.
The golden age seemed to come to an end with the GFC. Initially, the world viewed the destruction of storied financial institutions in Global Financial Crisis as an entertaining blood sport.
Some bankers lost their jobs by the thousands. Others lived with the psychological fear of firing by text message.
In New York, bankers confessed it was hard to live on less than $500,000 – after all, the children’s private school fees, the maid, the Pilates lessons etc all cost money. They economised by buying cheaper cuts of meat. In London, families deferred moves to more expensive suburbs. The latest Gordon Ramsay restaurant was no longer a must have.
The effects of belt-tightening were seen in a fall in bookings at luxury hotels, holiday resorts and sales of super yachts – some of the plutocrats were down to their last billion. Once rich hedge fund managers were back in court trying to renegotiate the terms of their divorce pleading ‘poverty’.
For some women, the aphrodisiac quality of a young unattached male purring “I’m an investment banker” in a certain type of bar lost its allure. Some professions – personal trainers, dog walkers, personal dressers, children’s party organisers – were in danger of extinction.
There was a sense of Schadenfreude as the Masters of the Universe received their comeuppance. Unfortunately, the “financial” crisis quickly spread to the “real” economy – jobs, consumption, and investment- becoming everybody’s problem. “Too large to fail” financial institutions had to be bailed out by governments, that is the ordinary taxpayer. In a perverse piece of income redistribution, the less fortunate now were subsidising the masters of universe because it was in their best interest.
Commentators briefly dared hope that the power and influences of finance and financiers would be reduced. Finance would revert to being a facilitator rather than the central driver of the economy.
The Economist wrote: “Over the past 35 years it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dot.com. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America’s retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started.”
Unfortunately, those hopes are misplaced. Low or zero interest rates, heavily managed markets, reduced competition and state underwriting of solvency has helped surviving banks prosper.
Bank risk levels have increased to and in some cases beyond pre-crisis levels. The higher levels of risk taking reflect increasing comfort in central bank support of financial institution’s liquidity and their ability and willingness to intervene to limit price risks.
In 2008 in Canary Wharf, the financial district in London’s docklands, I meet two affable recruiters from the English Teachers Union who explained that there was “a bit of financial crisis”. Well-educated and highly motivated bankers who were losing their jobs by the thousands might like to consider a new career teaching. I questioned the adjustment in salaries that the change in careers would necessitate. One recruiter’s responded: “If you haven’t got a job then it’s not relevant is it? It was never real money and it wasn’t going to ever last was it?”
Over the last 30 years, talent has increasingly been lured from productive profession into finance and the speculative economy. The rewards available mean that the brain drain into these professions is unlikely to stop. The excesses of the financial economy are also unlikely to be easily tamed.
The Masters of the Universe that survived the carnage are back to their old tricks. The ‘fight for talent’ means that bonuses and remuneration guarantees for new employees are all back in vogue.
Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, illustrate Mancur Olson’s thesis – small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The resulting policies benefit the coalitions and its members but large costs borne by the rest of population.
The “finance government complex” (dubbed “Government Sachs” by its critics) and financiers have proved exquisite masters of the game of privatisation of profits and socialisation of losses. Many countries now practice Chinese socialism with Western characteristics.
A year after the collapse of Lehman, the near collapse of AIG and the grande mal seizure in financial markets, the Masters of the Universe are still firmly in charge. As Giuseppe di Lampedusa, author of The Leopard knew: “everything must change so that everything can stay the same.”
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Masters of the Universe they may still be, but they should relish the moment, for their days are surely numbered.
When one assesses what the Masters of the Universe have wrought, one cannot help but be reminded of this passage from A Tale of Two Cities:
Far and wide, lay a ruined country, yielding nothing but desolation. Every green leaf, every blade of grass and blade of grain, was as shriveled and poor as the miserable people. Everything was bowed down, dejected, oppressed, and broken. Habitations, fences, domesticated animals, men, women, children, and the soil that bore them—all worn out.
Monseigneur (often a most worth individual gentleman) was a national blessing, gave a chivalrous tone to things, was a polite example of luxurious and shining life, and a great deal more to equal purpose; nevertheless, Monseigneur as a class had, somehow or other, brought things to this.
And, writing of the French Revolution, Dickens warned: “Crush humanity out of shape once more, under similar hammers, and it will twist itself into the same tortured forms.”
It boggles the mind how these people who hold themselves out as being so intelligent, so brilliant and so ingenious can be so blind as to where all their cleverness leads. Perhaps it was Shaw who summed the lot of them up best:
Your friends are not religious: they are only pew-renters. They are not moral: they are only conventional. They are not virtuous: they are only cowardly. They are not even vicious: they are only ‘frail.’ They are not artistic: they are only lascivious. They are not prosperous: they are only rich; not courageous: only quarrelsome; not masterful, only domineering…
Even as they are being led off to the guillotine, they will surely still be in denial that it was their greed, their corruption and their complete and utter incompetence that brought them to this point. No one said it better than Dickens:
It was too much the way…to talk of this terrible Revolution as if it were the one only harvest ever known under the skies that had not be sown—as if nothing had ever been done, or omitted to be done, that had led to it—as if observers of the wretched millions in France, and of the misused and perverted resources that should have made them prosperous, had not seen it inevitable coming, years before, and had not in plain words recorded what they saw.
DownSouth,
Not sure if you got my reply to your message of a couple of days ago, but searching the blog for the relevant article, I simply can’t find it. I made the reply yesterday late in the afternoon. It would seem that the article was trooped down a long, dark corridor, pushed to the floor in some murder room and dispatched with a bullet to the back of the head. :-)
Lavrenti,
Yes, I caught your response yesterday. Thank you very much.
I think that the position of Martin Luther King, Reinhold Niebuhr and Hannah Arendt is that we do everything possible to follow the path of the American Revolution and not the French Revolution, the Progressive movement of the turn of the 20th century and not the October Revolution, the New Deal and not the National Socialist takeover of Germany.
The students at the University of Pittsburgh are diligently trying to get out the message of how the police so brutally squashed their protest. Their multi-media presentations keep getting better and better. Here’s a new one they put out yesterday, where they’ve merged video with the police scanner voiceover. It’s pretty effective:
http://www.youtube.com/watch?v=W-cxHC_JU8o
I think Arendt’s analysis of what is going on in America is accurate:
Those who have been empowered naturally feel powerful; even when the people withdraw the basis of that power, the feeling of power remains. That is the situation in America—not only there, to be sure. This state of affairs, incidentally, has nothing to do with the fact that the people are divided, but, rather, is to be explained by loss of confidence in the so-called ‘system.’ In order to maintain the system, the empowered ones begin to act as rulers and resort to force. They substitute force for the assent of the people; that is the turning point.
–Hannah Arendt, Crises of the Republic
I’m not so sure TPTB are doing themselves any favors with their total news blackout of what went down in Pittsburgh. They’re just driving the dissent underground, which can be very dangerous. As MLK said: “Like a boil that can never be cured as long as it is covered up but must be opened with all its pus-flowing ugliness to the natural medicines of air and light, injustice must likewise be exposed, with all of the tension its exposing creates, to the light of human conscience and the air of national opinion before it can be cured.”
But it appears the American ruling class is going to follow in the footsteps of the English ruling during the twilight years of the British Empire. “Clearly there was only one escape for them—into stupidity,” George Orwell wrote in “England Your England”. “They could keep society in its existing shape only by being unable to grasp that any improvement was possible. Difficult though this was, they achieved it, largely by fixing their eyes on the past and refusing to notice the changes that were going on round them.”
I thought the Daily Show last week did a pretty good job pointing up the responses the Blue Meanies gave to the G20 protesters and how Teabagger’s get carte blanche. Maybe a little more French Revolution is needed. Maybe had the kids dressed up like older whiter people, put some gray in their hair, and taken advantage of Pennsylvania’s “open carry” laws (http://paopencarry.org/) they’d have been respectfully tolerated … well, at least repressively tolerated …
That’s not a police force, that’s para-military, and we should call it by its name.
Comrade Raithel …. signing off …
“You didn’t know it, you didn’t think it could be done, in the final end he won the war
After losin’ every battle”
From Idiot Wind, by Bob Dylan.
The line never made much sense to me until the financial crisis unfolded. For the first time I saw a situation where winning every battle can snuff out your oxygen, can stop the fires of your accumulated successes from burning on. Are not the financial institutions winning every battle at such costs to the economy upon which they feast, that they are bound to destroy themselves? If they further insist on winning every battle, they will lose the war. If they insist on winning, they will lose. They depend on the economy, the economy does not depend on them.
To my mind, Idiot Wind is the perfect song for the financial crisis.
“Talent?”
That word crawls miserably around discourse of this topic like a cockroach around a kitchen.
Talent is not a narrow, shallow and morally bankrupt intelligence that performs calculations and reads a computer screen while financially raping the world.
A “skill” maybe. Like the skill required to evaluate and trade slaves or to compose chemical formulas that make cigarettes more and more addictive or to lobby politicians so they’ll approve public funds to bail out your industry’s mistakes.
Skills that should be personally embarrasing to put on public display. Skills that should trigger profound personal moral crises. Let us call this stuff what it is. It will clarify the foundations of the dialogue.
“The beginning of wisdom is calling things by their right names.”–Confucius
By the way, your comment on this thread yesterday was absolutely superb:
http://www.nakedcapitalism.com/2009/10/quelle-surprise-bankers-claim-regulating-them-will-be-bad-for-us.html
Ok, now I’m gettin’ creeped out ….
I wish I had your talent for putting into words what it is exactly what I mean. Thank you for sharing kind Sir.
Brilliant!
“everything must change so that everything can stay the same.”
That’s about the same as: ‘as much as things change, they remain the same’.
I’m not sure where such quotes take me. It is helpful to describe the profilgacy that rages in the finacial markets. It would be more helpful if we could devise incentives that bring that profilgacy to heel. My point being that my experience has taught me that incentives work better than so called controls.
If too big to fail is an acceptable philosophy, then the business model becomes ‘too big to fail’. That is where we are, allowing bankrupt institutions to continue with the support of artificially low interest rates and taxpayer credit that is being used as a bridge to solvency.
Massive fraud has been perpetrated and only Bernie Madoff goes to jail? Now there’s a topic for inquiry!
The Lampedusa quote – however translated – is certainly suitable. Comes from L’s novel Il Gattopardo (the Leopard) which remains a fine read fifty years on, contains more than a few insights.
Interested parties may (or may not) skip the Visconti film, which reproduces the surface narrative without finding ways to deliver the substance of the original work.
“In a perverse piece of income redistribution, the less fortunate now were subsidising the masters of universe because it was in their best interest.”
In a perverse piece of income redistribution, the less fortunate now were subsidising the masters of universe because it remained in bankers’ best interest to continue to scr*w the taxpayer.
There – fixed it.
Does this mean if someone comes to the next election party carrying prewritten executive orders to disband all the tarp recipients and reinstate Glass-Steagall (on the grounds of national security) that we might stop all the bickering about which republicrat is worse?
We might
I suppose Satyajit Das can be forgiven not knowing that the original “Masters of the Universe” were HeMan and his Friends, from the eponymous 80’s children cartoon. Tom hijacked the term to spoof his protagonist, Sherman McCoy. This is why Tom is a writer and Satyajit is a banker.
Say, given all the bashing of the profession here ( well deserved I might add ) how many of you people reading this make your money in the financial industry? I am reminded of the prose of another 80’s Downtown performance artist and old acquaintance, Sue Anne Harkey. “It’s not about them, it’s about us. We are them and they are us. I have no pride, I have no shame. I have no guilt, hiding behind blame”.
That’s a good piece of writing. It can’t be said often enough in enough venues and styles. Why aren’t we demonstrating? Some of you would be surprised by how many of those most victimized don’t get ‘it.’ They’ve been so educated over the last 30 years to find solutions within themselves that their ‘feelings’ are more relevant; feeding into the lobotomizing enterprise. And living in suburbs makes demonstrating a bit difficult, while large cities provide a safety net -so far.
And the victims are subject to depression, fear on the job of being fired; of having no control over pensions they were taught to trust others to manage whose assets are lost or at risk; fear of unemployment insurance running out; fear of sickness with no medical insurance, fear of permanent poverty, loss of housing, fear of losing an apartment, a house, a car, a marriage, the children’s education -like the gradually submerging frog.
Like images from the literary references on this blog I so love, I think of this mise en scene in Europe post WW1 1900s that inspired Bartok’s opera “Miraculous Mandarin.” I recommend it even if you don’t like opera. The introduction and context are worth it. Its available in 4 parts on YouTube beginning with Part 1 here.
The defiance of the finance sector leaves me speechless; its audacity nothing less than a war against the American people, IMHO mirroring perfectly the Pittsburgh show-of-force at, of all places, a World Business Conference, while corporate-bought government with all the lying possible oppose affordable insurance for decent basic health care for tens of millions of American men, women and children at a time during which they are experiencing or threatened with loss of homes and health insurance and worse.
Police create “shock and awe” multimedia events on special occasions like Pittsburgh, billed just prior as “The Perfect Host for World Economic Summit.” Not only the Darth Vader Pittsburgh event, but the lack of police protection on the streets surrounding schools where incidents such as the brutal Chicago killing of an innocent are most likely to occur are horrors. Areas of danger for teens are well known by authorities but do not get the police out of their patrol cars and onto the streets to protect them. Where’s Bratton for protecting school students from gangs? Bratton took his crime control success in New York City to the west coast; why not to school children and teens? Bratton’s intentions may be pure, but the people who hire him have other uses for his citizen control models.
I refer to former Police Commissioner Bratton under Guiliani. It was Guiliani’s hiring of Bratton influenced by a Harvard paper on the metrics of crime control called COMPSTAT that got street crime in New York City under control and BTW the mentally ill off the street and into prisons. And so, I just went looking for Bratton’s next move and found this: here Bratton will be moving back to New York City to take a position with a private international security firm called “Altegrity,” serving as a CEO of a new division where he will consult on security for police departments worldwide.”
Do not underestimate the amount of resources thrown into today’s American police state. These police departments worldwide have been organized, trained and armed in large part by ‘drug war’ funding, fueled by the stupidity of allowing drug prohibition and related law enforcement to continue growing with the illegal trade like a rolling stone gathering military/police power for one hundred years and exporting US drug prohibition policy all over the world. Drug prohibition policy is a large part of the foundation for drug wars begun under Nixon followed by corporatist economic wars under Reagan.
Beginning his first administration with the firing of air traffic controllers, Reagan’s brutality effectively put the fear of God into unionization. Amazing to think of how the brutality of that firing of union members fighting for better compensation contrasts with the billions and trillions taken out of the economy since then by corporate and FIRE personnel and their cronies. After all, who was Ronald Reagan really? He was an idiot savant (he wrote and spoke like a statesman -excelled as a B-grade actor) heavily influenced and bought by his corporate handlers, Annenberg in particular: “Not long after his inauguration in 1981, President Reagan nominated Mrs. Annenberg as the United States chief of protocol, with the rank of ambassador, requiring confirmation by the Senate. here She sailed through on a 96-to-0 vote and rolled up her Bill Blass sleeves.” ”It’s the first paying job I’ve ever had,” Mrs. Annenberg …”
It is Annenberg also who introduced Reagan to Margaret Thatcher and Annenberg who ‘gave’ the Reagan’s their California ranch.
The left has been practicing democracy all these years while corporatists on both sides of the aisle practice fascism by other names. But I would distinguish between those criminals who have hijacked the Republican party from the legitimate Republican right just as I would the blue dogs from legitimate Democratic representatives; we need both parties and real finance reform. My hope is for Representative Grayson’s leadership to inspire others to separate the wheat from the chaff and articulate forcefully against the policies and personalities of the criminal corporatist liars in both parties. Legitimate right wing Republicans need a safe place in the system and finance reform for a functioning government.
An excellent piece. A few thoughts:
You state: “It is now conventional wisdom to accept the central role of financial services.”
That financialisation has also been absorbed into everyday life in the US (and elsewhere) is pretty obvious. With credit cards, the ATM and debt dependency, households have become little financial centers of exchange, which itself reflects the integration of everyday life into financialisation.
You have left out one factor that needs to be added to your first sentence, second paragraph: commoditisation, or the commodification of everyday life. Understanding the role this factor plays in the evolution of society spells out the causes that lead to financialisation, a crucial aspect missing from your descriptive and otherwise persuasive argument. The key to this causal understanding is aided if one keys in on an important concept by Marx: the ‘violence of abstraction.’ Addressing this are excepts from professor of Political Economy at York University, David McNalley.
“. . . this requires that derivatives be capable of computing all
concrete risks – climatological, political, monetary, and more – on a single metric. They
must, in other words, be able to translate concrete risks into quantities of abstract risk.”
“In trying to measure abstract risk, the models in question attempt to create indicators of
current and future value relations by predicting the riskiness of investment or economic
activity in a given situation (and the appropriate premium or “risk reward” that ought to
be expected).”
“The process of abstraction these models undertake involves treating space and time as
mathematical, as nothing more than different points on a grid. This homogenization of
space and time assumes that what applied at any one spatio-temporal moment applies in
principle at any other. Future events in multiple spaces are thus held to be predictable on
the basis of past events. But crises destroy any basis for such assumptions – they bring
about the “collapse” of “the whole intellectual edifice” on which they rest.”
“As a result of financialization of neoliberal capitalism,
therefore, the crisis of value measurement is expressed in the first instance in markets for
financial instruments, like derivatives. But it is at root a classic case of a crisis of value
measurement, caused by collapses in value brought on by over-accumulation, falling
profits, and unsustainable build-ups in fictitious capitals.”
http://marxandthefinancialcrisisof2008.blogspot.com/2008/12/david-mcnally-from-financial-crisis-to.html
In an interview, Robert Brenner, a professor of Economic History at Univ. of California, San Diego, explains the cause of the financial crisis.
http://links.org.au/node/957
“Over the last 30 years, talent has increasingly been lured from productive profession into finance and the speculative economy. The rewards available mean that the brain drain into these professions is unlikely to stop.”
Seriously how much talent does it take to destroy trillions in wealth and set the country on the course for depression?
“Unfortunately, ‘earnings’ proved to be the result of wildly inaccurate models, accounting tricks and risks that had not been accurately captured.”
Or as it is know in the vernacular: outright fraud with the help of our elected officials…
I love the language in this post, including all the comments and replies.