The Weird World Of Economics

Grow Up Already

NOW for a few thoughts on the credit crisis and the need to prepare for retirement.

First, the credit mess. Here is a simple truth: As we know, Merrill Lynch, Citigroup, Bear Stearns and other financial entities have taken immense charges on their holdings of bundles of subprime mortgages, collateralized debt obligations and loans made in connection with mergers and acquisitions and for general commercial purposes.

But these deals did not just come out of the blue. Someone sold these debt instruments to these huge banks and investment banks. The someone might have been a borrower who was not qualified, or another player in the financial field like a hedge fund or a mortgage originator.

If the buyers are now realizing that these instruments are worth tens of billions less than they paid, someone else must have booked a roughly corresponding gain. Now, it’s true that the seller might not have realized that he had the gain. He might have sold at what he thought was fair value at the time. It may be that only when the credit correction started was the asset in question marked down to problem levels.

But even if there were no intent and even if the loss were not foreseeable at the time, someone is sitting pretty. There are gainers somewhere, and it sure looks as if some home borrowers are in that group. Obviously, with hindsight, we can see that the lenders’ risk premium in fees and interest rates should have been even higher than it was.

It’s an ill wind that blows no one any good.

Second, much has been made of the failure of officers and directors to notice that something was amiss at these big banks. Why didn’t the directors ask the chiefs, “Gee, how can you continue to earn a far higher rate of return on debt than the market rate? How are you defying gravity this way? Can it last?”

Why were the questions not asked?

Possibly because the directors might have been chosen with an eye toward political correctness instead of an eye toward what they knew about finance and accounting. I was staggered when I read about the backgrounds of the Merrill directors. It is nice to have leaders of colleges and universities on boards (as Merrill does) but wouldn’t it have been better to look for accounting expertise? Was the idea to conform to P.C. principles and not have anyone asking tough questions? What about fiduciary duty?

On the other hand, maybe I am wrong. Long, long ago, when I was a lad at Parkside Elementary School in Silver Spring, Md., we would take an annual bus trip to Annapolis, the state capital. We would sit in the chairs of judges, state legislators and even the governor, and pretend that we were high honchos in government. But we weren’t. We were little kids.

Later, when I worked for Mr. Nixon and Mr. Ford, I was sometimes allowed to sit in on Cabinet meetings and other high-level sit-downs. It was just like kids’ day at Annapolis. We were at the chairs of Jefferson and Lincoln and the seats had the names of immense government departments. But we were still just ordinary working stiffs trying to do work vastly beyond our ability — namely, governing a great continental nation. We were basically kids trying to do grown-ups’ work.

Now, I have worked on Wall Street, in Hollywood and at big newspapers, and it’s always the same. There are very few geniuses out there. There are some fancy titles and immense responsibilities and, on Wall Street and in Hollywood, some giant paychecks. But there are few really smart, capable, perspicacious people (and I am certainly not one).

Next, when I saw that Citi had taken a bath in collateralized debt obligations and subprime, and saw that Robert E. Rubin had been on the board in a major position and had failed to stop the train wreck, I was staggered. And now he has been named chairman. He couldn’t protect Citi’s stockholders, and now he’s in charge? And let’s remember, he was Treasury secretary when we had the first part of one of the worst bubbles in stock market history. What on earth are the Citi directors thinking?

ANYWAY, back to credit. The problem with credit has been the always dubious promise of magically high returns without unacceptable risks. It is insane greed that leads people to toss aside arithmetic and basic theory and just go for the green stuff up to the elbows. It happened with tech stocks, Drexel junk bonds, savings and loans and real estate (over and over). And it will happen again.

What is to be done? If you are a normal working stiff and you want to retire eventually, you have to keep investing. You cannot put your savings under your mattress. You have to diversify, be patient, make sure you aren’t caught up in fads and make sure you have ultracapable people working for you — Warren E. Buffett comes to mind. And keep diversifying: foreign and domestic, large- and small-cap, emerging and developed. You have to have some guaranteed income that cannot dry up before you die — annuities, bought with an eye on fees — and you have to be patient as can be.

Human beings, even at the very top of Wall Street, can be just like greedy children. (In fact, maybe that’s why they wind up on Wall Street.) They can get into trouble over and over again with their greed and infantilism. You have to stay on the edges of their world. Make sure that any one sector is just a part of your investment future, and you’ll be all right.

But it certainly hurts to spend day after day, as I did this fall, at Walter Reed Army Medical Center — where the incredibly brave wounded soldiers from Iraq and Afghanistan learn about walking and eating without their natural legs and arms — and to realize that the America for which they’re fighting is led in so many arenas, especially the money one, by such weak, disappointing specimens.

It’s high time that the America for which soldiers sacrifice so much is run on a moral standard more like theirs. And this is without even talking about Section 60 at Arlington National Cemetery, where fresh graves are dug every week and the fresh tears keep the ground damp. They deserve better.

Grandpa Picks Up Wrong Kid From School

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posted by UncommonBusiness @ 4:01 AM