A dry summer of discontent is now upon us, and not a day goes by without some sad or lurid tale of pathos and angst on Wall Street filling the pages of newspapers. If the truth be told, we have yet to even come to grips with the depth of our current predicament, let alone with how to address it. As someone else once said, “there comes a time in a man’s life when he must take the bull by the tail and face the situation”. Surely, that time has come.
A problem can only be solved after it is defined, which means that the right questions are being asked. That process invariably leads to the source, the essence of the problem that enables us to recoil from it and find our selves again. When a man is sinking and does not know how to swim, the only possible avenue is to wait till he hits rock bottom and then push off. This is the “solution” the Federal Reserve is now attempting to implement. The Fed’s Chairman, a legend in his own mind, is busy rearranging the deckchairs on the Titanic and doing a fine job to boot, but we are still sinking. Is there another way? No, for what we are doing now is not a “way”, it is nothing.
Doing so Much and Accomplishing so Little
Before one can act meaningfully, one must get a hold of oneself and stop trying to overcome excesses of one sort with excesses of a different sort. Methadone is not a cure for illegal drug addiction, merely a legalization of it. The obvious first step to a cure for alcoholism is to stop drinking so you can think. Here are three easy steps to momentary financial sobriety.
The first step is to relax. Things can’t get any worse and there is nowhere to run. We are moving inside a circle whose end looks suspiciously like its beginning. We do way too much and think way too little to see the problem as such.
The second step is to ask why such luminaries, those living on Wall Street and entitled to such high incomes, could be so wrong for so long about so much, including their own lack of understanding. Wall Street’s most glaring and fatal mistake seems to have been its apparent ignorance of its own ignorance. Knowing that you don’t know is already the beginning of true knowledge. Are we so much better than they were? If not, why should we be trusted and, some time in the future, cause the very thing we sought to avoid.
The third step is to stop taking ourselves so seriously, to stop believing that what Wall Street is doing is missionary work, instead of what it is really doing, i.e. taking advantage of historical circumstances to which it contributed nothing. The most amazing thing about American finance, once you discover how it actually works, is not that it undergoes ever widening cycles of boom and bust, but that it still exists at all. Even a dry cleaner delivering services of similar quality would long ago have been sued out of existence. Clearly, there must be something rotten in the Kingdom of Wall Street!
What to Do
Granted, the last few paragraphs were depressing, offering more cautionary tales and philosophy than substantive proposals. On the other hand, the world is full of half-baked proposals that took five minutes to put together over breakfast to keep the New York Times in business. In fact, not having a proposal has got to be the best proposal of all.
However, let us venture three measures that, if implemented and maintained, would both eliminate any future liquidity crisis, as if that were possible anyway, and restore credibility to the credit markets in a few weeks. In reality, the mere announcement of reasoned and meaningful action would cause the markets to kick themselves into shape practically overnight.
They are due to Joshua Rosner, and we are pleased to endorse them:
a) A two-year waiting period between working at a rating agency and working at a sell-side firm. This may be moot anyway since rating agencies are themselves fighting for their ultimate survival as we write;
b) Secondary-market monitoring of all existing structured transactions using an automatic true-up mechanism based on monthly servicer reports. The latter are widely available and tell the real story of the deal, not the Disneyland version favored by traders. Ah yes, traders, those who went from Latin lovers to limp losers in one day. An authentic valuation of structured securities would restore liquidity almost overnight, especially when coupled with a moratorium on mark-to-market accounting, something that has never worked to begin with for the simple reason that is self-referential; c) Establishment of primary-market valuation standards. Such standards exist and are now being taught, among other places, at Baruch College in New York City, at the University of California at Irvine, at the Hong Kong University of Science and Technology and at Euromoney Training. At least according to that framework, it is possible for a transaction to show itself not to work, i.e. to be a “non-deal.” This is a major step forward since, as things now stand, all structures Wall Street wants to underwrite are by definition “good”. That is, of course, until they blow up before our very eyes. Was it possible to know such deals were bad a priori? Yes, it was. The question is not that but far more: what would you have done about a deal that had shown itself not to work? Currently, the answer is: whose side are you on? Changing that answer is the real challenge, not coming up with the question. We simply no longer have the will to change;
At the moment, politicians, true to their nature, are doing things right. They are holding hearings and seen appearing on television “addressing issues of concern to their constituents.” Unfortunately, what we need is for them to do the right thing. It is widely and mistakenly believed that it is hard to do the right thing. No, it is not. What is hard is to know what the right thing is. Once you know it, it’s hard not to do it.