In ‘Den of Thieves,’ James B. Stewart’s brilliant expose on the Insider Trading Scandals in the 80s (that brought down Michael Milken and Drexel Burnham Lambert), you read about people doing unquestionably illegal and amoral things. Ultimately, they are carted off to prison.
This storyline plays out again during the S&L Crisis and following the Tech Bubble burst.
But, this time…not so much. How could that be?
A better proxy for the present times is the Collapse of Long Term Capital Management in 1998, which required a joint save by the US Government and the major Investment Banking houses to avoid a major earthquake hitting the global financial markets.
Then, as now, the ultimate crime was embracing as the gospel that models are always right and human intervention won't offset or derail them.
True believers, not deep cynics, who assumed that the level of risk that they were taking was so unlikely to yield a doomsday type of outcome (and corresponding negative returns) that such outputs were treated as rounding errors, and NOT one of the central equations to be continuously re-calculated.
Add in compensation, investment and liquidity externalities that incented behaviors that were asymmetric to national and personal security/stability, and you have a pandemic case of people's eyes deceiving them.
Thus, at every turn you see people putting a large percentage of their balance sheet and liquidity in play versus running for the hills.
The individual investor, the institutional investor, the investment banker, the real estate broker, the loan officer, the developer and the entrepreneur were all (or mostly) true believers.
To be sure, with the benefit of 20/20 hindsight a great many truths appear to be patently obvious, almost demanding (for the benefit of our psyches) that crimes MUST have been committed.
Yet, once you get beyond the Madoffs and schemers/deceivers who arise whenever the ground is fertile, my honest belief is that (in the moment) there were very few canaries in the coalmine that were signaling imminent danger.
Intellectually, maybe a tiny alarm bell sounded that outsized returns, in absence of a corresponding REAL risk to principal, was perhaps too good to be true.
But let's not be too hard on ourselves, or too quick to blame others.
The road ahead looked pretty clear - until the hard data arrived in the form of a series of seismic events that VERY quickly became the New Normal - doing long-term damage to personal portfolios and mortally wounding our financial system.
What is most amazing about the carnage that resulted is how few people were required to perform the actual trades that resulted in the fiscal equivalent of a nuclear meltdown.
In ‘AIG: We Own It,’ 60 Minutes interviews Ed Liddy, the emergency CEO parachuted in to stabilize the company that is one of the poster children of this saga.
He shares this interesting tidbit. While AIG has 116,000 employees, it took only about 20 people to bring AIG down. Think about that one from a systemic risk perspective.
UPDATE 1: Good article by Michael Lewis in August, 2009 Vanity Fair, 'The Man Who Crashed the World,' on Joseph Cassano, head of the AIG Financial Products business unit that is considered Ground Zero of the credit default swap meltdown. Read this article, if for no other reason to affirm the fact that while there is/was plenty of arrogance and ignorance left utterly unchecked (at multiple levels), this crisis was/is more a product of zeal and certitude than smoke and mirrors and criminality. Again, argues for the merits of better systemic checks and balances.
