I wanted to share this comment with you from Miguel that was left on my post from yesterday:
I’m surprised to see you go for the cheap shot sound bite. I can get that in the MSM. What I would hope for from you would be a more nuanced analysis of the situation.
The problems on WS are a combination of factors, which include economic policy mistakes (on a global scale), deregulation, lax enforcement of regs, poor risk management decisions on the part of WS management, and ultimately lack of long-term accountability both at the leadership level, as well as in some case at the employee level. Throw on top of that an explosion in new products and financial technology (i.e. derivatives) to amplify the effects of the above.
Wall Street is a mixed bag when it comes to talent. True, you have some dullards (usually the eye candy sales types who are good at sweet talk and following orders) and these people are often simply carried by the tide, but for the most part, you really do have some extraordinarily talented folks. Many of them either donâ€™t really need to work, or have enough put away to sit out this round for a few years, or have enough to go start their own business, or are extremely in demand at other firms that are not handicapped by the current crisis (and yes those do exist) or all of the above.
Additionally, there are many departments at WS firms that did make money the old fashioned way. They are the reason some of these firms didnâ€™t lose even more money. Drive the talent away, and you might as well shut down the bailed out firms (which you might argue is what you would have preferred anyhow).
Lastly, some of the healthier firms were strong-armed into participating. Would you kill off those firms too? I guess our political establishment has done a pretty good job of redirecting attention and anger away from themselves and towards an easy populist target – those guys over there make too much money so they must be stealing it!
I just hope that in the process, we donâ€™t throw the baby out with the bath water.
Rather than add fuel to the fire, how about some serious academic thinking about the source of our present state of affairs? And yes, if that sounded like a challenge – it was.
I like and respect Miguel very much and it was NOT my intent to take a cheap shot. Miguel has been a reader of my blog for several years nowthough he is not able to comment as often as he’d like.
Miguel makes some excellent pointspoints that I did not consider when I wrote yesterday’s post, which was meant to be a humorous piece but went awry.
I don’t have all the answers. I’m frustrated with the situation just like everyone else.
To Miguel’s thoughts, I’d like to add a few of my own as to how I think we got into this situation. There’s plenty of blame to go around:
1. The bulk of the blame has to lie with the people who allowed themselves to get suckered into these toxic mortgages in the first place. Had there not been buyers for these mortgages, there wouldn’t have been a reason to sell them.
2. Mortgage brokers (and banks that originated mortgage loans) were huge instigators of this mess. Why? because they were on the front lines selling people on these mortgages. There was no accountability from the mortgage brokers. They simply wrote the business, got their commission, and went on to the next mortgage. A lot of them made out like bandits.
3. The rating agencies should have NEVER given securities that were backed by subprime loans high ratings. High ratings imply safety and these were not safe securities.
4. Mortgage brokers should have NEVER been paid higher commissions to sell one type of mortgage over another. Brokers were paid higher commissions to sell subprime mortgages than prime mortgages. It creates a huge conflict-of-interest. The broker should be there to help the client get the best mortgage for their needs…not to sell the mortgage that pays the highest commissions. There were prime borrowers who were sold subprime mortgages simply because there was an incentive for the broker to do so.
As far as Miguel’s thoughts on compensation for those firms receiving bailout money: I’m conflicted on this one. Surely there has to be some sort of limit. Market purists will say that the market should take care of this issue. I agree, BUT these same companies shouldn’t have been begging for government assistance either. When things were going great, they wanted the government to stay out of their business. But, as soon as things turned south, they’re at the government’s door looking for a handout.
I realize that these are big companies with lots of different business units. Is it fair for the good business units to forgo bonuses when the losses occured in one or two units? I think it is. Why? Because we are talking about the business as a whole. When the business as a whole loses money, then everyone should suffer. Of course the downside to my line of thinking is that the bonuses are structured differently for different units. Traders can makes tens of millions of dollars in one year while most average employees will make nowhere near that much. Unfortunately, a series of errors by these traders, can ruin a company. The trader of course can lose his job but he can also be the cause of innocent people losing their jobs.
So, maybe the pay structure needs to be changed.
Folks, one of the reasons I blog is so that I can learn too. Believe it or not, I appreciate points of view that don’t agree with mine. There have been numerous times when I have written something and someone will say something in the comments that will make me think, “Hmmm…I never thought of it like that before.” Miguel and Ted made me do just that with their comments.
Thoughts? Weigh-in, weigh-in.