Who Built the House of Cards?

Were chief executives at financial firms caught in “a financial tsunami” beyond their control, or are they partly responsible for what happened?:

A Tsunami of Excuses, by William Cohan, Commentary, NY Times: It’s been a year since Bear Stearns collapsed, kicking off Wall Street’s meltdown, and it’s more than time to debunk the myths that many Wall Street executives have perpetrated about what has happened and why. These tall tales … tend to take the form of how their firms were the “victims” of a “once-in-a-lifetime tsunami” that nothing could have prevented…

Take, for example, the myth that Alan Schwartz, the former chief executive of Bear Stearns, unleashed on the Senate Banking Committee… “Looking backwards and with hindsight, saying, ‘If I’d have known exactly the forces that were coming, what actions could we have taken beforehand to have avoided this situation?’ And I just simply have not been able to come up with anything … that would have made a difference…” …

Dick Fuld, the longtime chief executive of Lehman Brothers … told Congress: “I wake up every single night thinking, ‘What could I have done differently?’… And I have searched myself every single night. And I come back to this: at the time I made those decisions, I made those decisions with the information I had.” Harvey Miller, the bankruptcy lawyer who is representing what remains of Lehman, has been working hard to absolve Mr. Fuld … wrote, “The comptroller fails to recognize that Lehman was a victim of a financial tsunami that was beyond its control.”

Now, wait just a minute here. Can it possibly be true that veteran Wall Street executives like Messrs. … Schwartz and Fuld — who were paid an estimated … $117 million and at least $350 million, respectively, in the five years before their businesses imploded — got all that money but were clueless about the risks they had exposed their firms to in the process?

In fact, although they have not chosen to admit it, many of these top bankers … made decision after decision, year after year, that turned their firms into houses of cards. …

Could these Wall Street executives have made other, less risky choices? Of course they could have, if they had been motivated by something other than absolute greed. Many smaller firms … took one look at those risky securities and decided to steer clear. When I worked at Lazard in the 1990s, people tried to convince the firm’s patriarchs … that they must expand into riskier lines of business to keep pace with the big boys. The answer was always a firm no. …

So enough already with the charade of Wall Street executives pretending not to know what really happened and why. They know precisely why their banks either crashed or are alive only thanks to taxpayer-provided life support. And at least one of them — John Mack, the chief executive of Morgan Stanley — seems willing to admit it. … “The events of the past months have … made clear the need for profound change to that system. At Morgan Stanley, we’ve dramatically brought down our leverage, increased transparency, reduced our level of risk and made changes to how we pay people.” He continued: “We didn’t do everything right. Far from it. And … I take responsibility for our performance.”

Well, it’s a start. But there can be no restoration of confidence in the banking system — and therefore no hope for an economic recovery — until Wall Street comes clean. If the executives responsible for what happened won’t step forward on their own, perhaps a subpoena-wielding panel along the lines of the 9/11 commission can be created to administer a little truth serum.

Many people want more than just an admission of responsibility, but I don’t think economic recovery depends upon that happening.


Originally published at the Economist’s View and reproduced here with the author’s permission.