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The Washington Witch Hunt


Are banks to blame for the financial crisis?


Banks have always suffered from a perception problem, but it's now evolved into a populous uprising; people are pissed and in many cases, rightfully so.

Having worked in the financial field for almost 20 years, specializing in derivatives at Morgan Stanley (MS) before working in the hedge fund world, I have a unique lens into what happened and why. Many of the practices that laid the groundwork for the financial crisis weren't malfeasance in the traditional sense; they were universally accepted trading practices.

We've witnessed a classic case of risk gone awry, the pitfalls of greed and a failure of regulators to conceptually understand the products they governed.

They were reactive in their response, waiting for the hammer to fall before addressing the situation. Ironically, the few that were made an example of -- Warren Specter of Bear Stearns (JPM), Stan O'Neal of Merrill Lynch (BAC), Chuck Prince of Citigroup (C) -- were fired in time to sell plenty of stock at much higher levels.

Even Hank Paulson of Goldman Sachs (GS) benefited in kind. When he assumed the role of US Treasurer, he was mandated to sell his $500 million in stock tax-free, which saved him upwards of $200 million, according to The Economist.

But alas, I digress. This isn't about what was; this is about what will be.

A tight correlation appears to be forming between the societal view of bankers as villains and strategic defaults; both from those underwater and those who opt for default, according to Professor Peter Atwater.

It's not very different than the discussion we had several years ago about voluntary and involuntary thrift. Involuntary thrift is when you can't afford to fill up your car and take your family to Applebee's. Voluntary thrift is when you have money in the bank but choose not to spend it.

What if mortgage defaults and credit card delinquencies emerge as the weapons of mass defection? What if, as posed by Professor Kevin Depew, folks stop caring about their FICO scores and remove themselves from the financial pecking order?

We, the people, must take a step back and a deep breath. We must stop asking ourselves who's to blame and focus on identifying solutions to stem this social progression.

It's easy to point fingers and place blame but the lens of culpability extends through the societal spectrum. From consumers who overextended on their credit to institutions that engineered the market to policymakers complicit by acceptance to the CEO of the United States of America, if the buck is to truly stop there.

It's time to stop harping on the mistakes and begin focusing on positive change through our lessons learned -- and do so without overcompensating on regulation or, for that matter, social mood.

If society is truly a sum of the parts, those parts are us and the time is now.

Also, don't miss this video insight below.

Random Thoughts:

  • Where I'll humbly disagree with the litany of policymakers and bank captains is that "nobody could possibly see the perfect storm on the horizon," this column contains a handful of links that suggest otherwise. It's a small sampling of the cautionary content featured within our community through the years.

  • Is the Google (GOOG)-China Syndrome a veiled variation of protectionism? Not at first glance but at some level, several degrees of separation away, it's a manifestation thereof. It's very much a cultural clash, which shouldn't be a shocker given China is a Communist country, and those Great Walls manifest in many ways.

  • Meanwhile, look at Baidu (BIDU) go; Geezums, talk about unforeseen gap risk!

  • Did you ever think we would arrive at a time when "think positive" was held to task?

  • Please keep the downside gap in the S&P in the back of your crowded keppe.

  • Yesterday we highlighted a chart highlighting what could happen during prolonged periods of compressed volatility. Is the biggest difference between then and now the collective social mood?

  • Seriously, wouldn't you think folks would be a tad happier after a 60% rally? It reminds me of December 2006 when I offered that "my greatest fear is that we were trading at all-time highs in the Dow, but nobody really felt like we were at all-time highs?"

  • And am I nuts to think that the "collapse" of Britney, Lindsay and Paris in the summer of 2007 was a social mood shift that served as a precursor to the stock market collapse?

  • Ten buck Critter tees! How can you not?

  • I encourage Minyans to check out our fan page on Facebook, the new corporate website and Minyanland, for those with Mini-Minyans in your midst.

  • Having dinner with a friend last night, I realized that over the last six months or so, I lost perspective; I lost a part of who I am and how I operate. I'm not talking trading; I'm talking life. That being said, there is most certainly a correlation between the two. It's a new decade and its chock full of promise; consider me officially rebooted.

  • As always, I hope this finds you well.


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