Saturday, March 07, 2009

"Well, that was Brazil -- they've just run out of money"

Paul Krugman takes us on a charming trip down memory lane:
I remember one personal incident: in the fall of 1982, during my year in Washington, I went to the Fed to talk to Ted Truman about Latin debt issues. I had to wait while he finished a phone call; eventually he came out and said, “Well, that was Brazil — they’ve just run out of money.”

Speaking of running out of money, have you guys read this Michael Lewis piece in Vanity Fair on Iceland? Excuse the pun, but it's kind of chilling. Here's a small excerpt detailing the problem, but I strongly suggest you read the entire thing:
Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.

Not to be too simplistic in my synopsis of the piece, but Lewis basically blames nutty bankers who believed their own hype. Now, long-time readers know of my antipathy toward investment banking and finance -- to put it simply, I always thought they were overpaid, overbonused, and overrated. As it turns out, their overleveraging of money they didn't have is in large part to blame for the world's economic problems at present.

The funny thing is, until this crisis, no one thought it obscene and perverse that twenty-somethings who spent their college careers puking at frat parties made large sums of money manipulating the flow of money. The argument I would always get from friends and people I know on Wall Street was that, in effect, they were worth it -- that they provided a service which made ungodly amounts of money for their clients, and so a fraction of that ungodly sum, while still obscene to sans culottes such as myself, was actually a bargain. As Hilzoy says, events of the last 12 months have brought that hypothesis into question:
I have been hearing for years and years about how the financial services sector pays such exorbitant wages because the people who work there are so immensely talented that they are cheap at $50 million a year. I never particularly bought that line before. But I never imagined that all those Masters of the Universe would do quite badly. If we had paid them $50 million a year to go far, far away and leave our financial system alone, it would have been a bargain.

Remember, these are the same soul-less people who felt that in the midst of the greatest economic crisis in a near-century, and after having received public money to bail them out, giving ludicrous bonuses to themselves and redecorating their offices to include $1500 trash cans was a wise and prudent thing to do.

Look, I know there are exceptions. I know there are some bankers who are nice, and actually smart, and actually able to put three written sentences together in a coherent and readable paragraph. But I could say the same about Republicans, and frankly, it's not the exceptions to the rule that are going to inform my judgments about these people.

11 comments:

Anonymous said...

As an ex-investment banker, I was a 20 something who made a lot of ££ during my stint in London. But I was structuring mortgage backed securities and when the shit the fan, I was screwed (not before I got paid out decently).

I think all this banker bashing is quite unfortunate, as governments around the world look for scapegoats for their own shoddy regulatory policies. As for the average taxpayer who is whining about his taxpayer's money and how he now owns the banks:

" if a fool gives you 700 billion dollars, the fool doesn't own you, you own the fool"

Large bonuses are always controversial, especially so during times like these. However, I do agree that bonus structures need to be changed to reward long term performance.

Ex-structured-finance-now-spending-his-severancepackage

Anonymous said...

As an ex-investment banker, I was a 20 something who made a lot of ££ during my stint in London. But I was structuring mortgage backed securities and when the shit the fan, I was screwed (not before I got paid out decently).

I think all this banker bashing is quite unfortunate, as governments around the world look for scapegoats for their own shoddy regulatory policies. As for the average taxpayer who is whining about his taxpayer's money and how he now owns the banks:

" if a fool gives you 700 billion dollars, the fool doesn't own you, you own the fool"

Large bonuses are always controversial, especially so during times like these. However, I do agree that bonus structures need to be changed to reward long term performance.

Ex-structured-finance-now-spending-his-severancepackage

Anonymous said...

Even more unfortunate is this personal witch-hunt against individual bankers, with governments trying to question the legality of contracts and basically appropriate what these people earned (even if they were obscenely overpaid).

Modern economies are built on concepts of contract law and private property. Governmenets should not fuck that up.

bubs said...

I loved the bit about how "Of course everyone in fucking Iceland knows fucking Bjork. Will you stop asking us that." (I paraphrase).

To go off-topic, it's quite amazing how Vanity Fair is the best magazine for long-form journalism after The New Yorker. If what everyone is saying about the death of print media is true, I hope it doesn't take Conde Nast down too.

Ahsan said...

The New Yorker is so good I want to cry. The writing, the reporting, the cartoons, just brilliant. I wanted to blog about the Steve Coll piece on the back channel diplomacy but frankly I don't know what I can say that he himself didn't say.

Anonymous said...

Not long ago, bankers were envied by everyone but today anyone connected to Wall Street is despised for trashing the global economy, and being insanely overpaid. This reaction is hardly rational. Most bankers are victims of poor decisions not made by them. The current crisis came about through reckless lending into a government-subsidized real estate bubble and misjudgments about the risk of complex financial instruments. Only a small minority of those employed on Wall Street worked in areas are connected to the big failures.



Two of my good friends who did their MBA's from Wharton and Columbia were offered six figure salaries soon after graduation. Today, they are going through constant fear of being laid off. Situation has become so much depressing and frustrating that it is affecting their personal lives also.
MBA in finance now means 'More Bitterness Ahead’, job freezes, receiving rejections and very few offers from financial companies. Job market has become very competitive and painful. MBA students are facing one of the worst economic downturns since the Great Depression. Aspiring investment bankers are panicked and networking like crazy, has already lowered their expectations, looking for a Plan B or even C, scrambling to find alternate routes into a brutal job market.People who used to dream of working in hedge funds or Investment banks are now thinking of doing entrepreneurship or working in start ups as there are not any jobs out there. Things are very bad and depressing in the field of finance.

Only People in academics and health sector can hope for a bright and more secure future.

Ahsan said...

Anon1003:

I guess one of my issues with Wall Street (and this is not anyone's fault per se, it's just an observation) was that with the absurdly high salaries they offer right out of college (as well as at more advanced stages of your career), it artificially boosts the number of people who (a) think they want to do I-banking/finance, and (b) they they CAN do finance.

What I mean to say is that the high wages/bonuses in finance have depressed the number of otherwise talented people we would see managing art galleries or teaching or working at a publishing house or something else. These are all worthy careers (both from an individual and a social perspective) but because finance proves (proved?) so lucrative, it sucked people away from what they might have been better at. Which means as a whole, society loses.

I do think in the long-run that this recession will be a good thing for the finance industry (and everyone else) because it will mean only people who really like finance will do it, as opposed to people chasing the highest bottom line. There will be more of an equilibrium.

Asfandyar said...

my question is since bankers now seem pretty keen on laying the blame on governments and their regulatory practices, where were they the past decade?

where was the hue and cry over shoddy regulation then, when the going was good?

and just how much did banking lobbies around the world contribute to making weakening any worthwhile regulation?

not to mention I still don't understand the 'bonus' argument - that if bankers aren't paid bonuses they'd just walk away.

so.the.fuck.what?

Anonymous said...

Ahsan:I fully agree with you.Most of my friends and classmates who are bankers or aspiring bankers were engineers, chartered accountants, doctors and even lawyers. Almost, everyone wanted to do MBA in finance. Hardly, anyone chose HR or health or even media communication. In my case, coming from an Indian family where everyone is a doctor and engineer and then when you express your aspiration to study and teach history or work in ‘MOMA ,’ or work as a volunteer in ‘American Red Cross’ or take admission in Parsons school of fashion, people either think you have lost your mind or you are simply dumb or you have cracked a bad joke or you will be subjected to hear remarks like ‘you will be paid 1/4th of what even a rookie in my field will be paid.’ So, it was not money or increased status among my peers but the feeling that what the heck, I can also do it and I am also practical and smarter than you guys just pushed me to embrace this career. However, recently, in my elective class of business coaching, as a part of an assignment, I interviewed my classmate in a role play of an executive coach and a client who is suffering from depression due to his boss’s constant condescending remarks. My professor who had her own coaching consultancy watched the video tape and commented that my body language was more like a social worker unlike an aggressive banker and I should think of choosing career as a executive coach or in non profit organizations or as an hospital administrator. At first, I was in a denial mode but later it forced me to introspect that am I doing what I really wanted to do. Recession is a kind of a blessing in disguise for me. At least, it has forced me to explore other avenues. A couple of days ago, I joked to my classmate that if nothing works out, we should think of opening a tea bar ( chai ka dhabha) in NYC and she seriously considered it as a great business idea. So, who knows, you may find people who dreamed of working in Mckinsey or Chase working as a wedding planner,in art galleries,as teachers ,as social workers or even running a tea bar. But seriously, I feel sad for those people who had worked as senior analysts in Investment companies for the past 10-15 years who are now studying finance because they really love this profession and their desire to learn more about this field has motivated them to become a banker.

Peace said...

Thank god i finally get to write something that is not related to terrorism. well hold on for a second, isn’t this also a kind of terrorism:)))

well jokes apart i have been a banker for few years straight out of my B school and i can tell you that for sure there is truth in what we see today as most of what we see as part of the financial crisis is because of the pure greed with which some of us have run behind money. If you would ask me to blame this on someone i would blame it on all the people who invested in stocks and go for day tradings or any possible means to profit. I would attribute this to a totally failed accounting system which focuses purely on quarterly PnL's. With this being the target all the CEO's and CFO's are only concerned on how they can show a high returns on a Q TO Q basis.

Anonymous said...

@ Peace

Very true and very well said.I wish people should stop portraying bankers as the ultimate villains.