January 2, 2008
The firing of Prince at Citigroup and Cherkasky at Marsh & Mclennan has some wondering whether lawyers make good CEOs. Too much attentiont to process and not enough attention to results was common in both firings. Is this a bias that lawyers must overcome to be good CEOs? Some think so.
Blaming the Fed
No-one on Wall Street seems to have anything good to say about the Fed. The economy is slowing and some on Wall Street see cherished positions threatened by a higher than comfortable probability of recession. I is hard to recommend (or sell or underwrite) stocks when the market is flat. The Fed "knows nothing" according to a popular TV touter. What Wall Street wants is for the Fed to roll over and drop fed funds interest rates a bundle -- make credit cheap again. Such a move would, of course, hurt an already sagging dollar and could trigger inflation but so what -- with scads of cheap credit, assets will turn over again and the financial game, collecting fees on asset turnover, will again be afoot. I wish it were so easy. The Fed cannot change market fundamentals (other than the supply of money). We know now that asset backed securities were mispriced and that large banks did not have internal controls sufficiently tuned to properly manage risk. We also know that the improperly managed risk drove up real estate prices too unsustainable levels and we know that consumers overspent the phony equity. The Fed can do nothing about all this. We are simply too dependent on the need to blame someone as an idiot, read, the need to rely on someone as a savior, in times of financial difficulty. It feeds our control fetish; someone, in the middle of a very complex, huge market driven economy, is in control and needs only to act sensibly. I wish is were so easy.
Smart People Seeking Dumb Money
There was a great headline in the NYT "Smart People Seeking Dumb Money" referring to the IPO's of private equity groups in the past year (all have lost money since their initial day price run-ups). The headline is broader than the story. This is an old, old Wall Street game. It has some very familiar and repeatable themes; only the names of the securities sold change. First, smart people sell something novel, new trendy -- with a promise of high returns-- and take fees [Goldman underwriting SIVs]. The fees go into solid investments (treasuries). The recent new, new thing was CDOs and/or ABSs. Second, some smart people get caught in the returns and themselves take equity, hoping to sell to greater fools (the greater fool theory) [Merrill Lynch; not Goldman]. If they get out fast enough they win; if they get in too late or hold too long they lose. And third, the really smart people sell short the very thing they are pushing [Goldman]. The whole thing explodes and those who still hold the equity in the security lose big. Government investigates, castigates and over-regulates. It is a very old game. For our government, perched on a capitalist economy, the issue has always been how much to protect the dumb money. Too much protection and we get too little financial risk-taking and innovation. Too little protection and we get too little investment capital. The tendency of government is to overprotect -- with each crisis comes more federalism, more promises to protect, more efforts to appear concerned and empathetic. Only the threat of new competitive economies elsewhere keeps government honest and even then we often get unhelpful subsidies and other forms of protection rather than structural reform than makes us more competitive. What always amazes me is that we find enough common sense in this repetitive process to stay competitive at all.