Saturday, February 21, 2009
Normally, I might have cheered Andrew Cuomo's subpoena of Ken Lewis, CEO of Bank of America, for the billions in bonuses issued to at the end of 2008 to executives of Merrill Lynch before the merger. But I was in the middle of the lead article of Foreign Affairs, where Roger Altman tried to explain why bankers behaved the way they did, competing to create the dumbest and most unstable instruments possible.
Sure, Altman is going to make a partial defense of bankers, but his explanation makes sense. He sees housing as merely the market of random exploitation, and subprime mortgages as the easiest instrument to exploit. To him, the crisis began with excess global liquidity, and a clamoring among institutional investors and foreign investors for the highest risk possible among instruments (since yield is proportional to risk). If this liquidity had been there during the Internet-infrastructure/dot-com boom of 1999, the meltdown might have happened then. Suddenly, bankers were scrambling to approve as many subprimes as possible, and bundle them into futures contracts. (Yes, I know you're thinking of a prosecutor rolling his eyes as all the drug dealers in town claim, "We had to cut the heroin with Comet cleanser, everyone was doing it.")
I've already made the argument for mandating a cap on rates of return on investment (12, 15 percent?), which may be more important than capping executive salaries. Free-market wankers may whine that the Nanny State is once again trying to dictate the level of risk which can be assumed. But if you run a sky-diving or hang-gliding school and have a couple students who always insist on launching from the most dangerous spot to increase their thrill over the risk involved, in a drive for monoamine oxidase overdose, don't you have a responsibility to say something, at least because of your liabilities? If you run a gun shop and a customer boasts of going home to play Russian roulette, isn't there a cautionary tale? Remember, cops can treat a suicide attempt as a crime, if they wish, because the damage is not limited to the individual, it affects the society at large. And if you become addicted to increasing levels of risk, you will eventually die, run the numbers.
None of this is meant to take the heat off bankers, mortgage brokers, hedge-fund managers, or any of the other links in the chain that led to the meltdown. But the next time some conservative blathers on about Fannie Mae, Freddie Mac, and the Democrats being the sole cause of our problems, or Rick Santelli launches into another mindless rant about how poorer people caught in subprimes were the cause of our miseries, remember the Altman article. A few friends last week mentioned the long-rumored and long-forgotten anonymous conspiracy-theory newsletter, One Great Big Conspiracy. As I watched Cuomo defend his subpoenas, I thought about the apocryphal final issue of OGBC, never finished and never distributed, with a mirror on the cover and the bold declaration, "The problem is YOU." (And me.) Let this be our mantra as we climb out of this mess.