Monday, January 03, 2011

Echoes from The Big Short, a book on the financial meltdown: "Either the game was totally rigged, or we had gone totally fucking crazy."

Michael Lewis's bestselling The Big Short: Inside the Doomsday Machine is an entertaining, compelling, and tragic narrative that explains how the bond and real estate derivative markets led to the market crash.

Essentially, the few people who did the math saw it coming, and everyone else kept their heads in the sand. And nearly all those who let it happen, and got bailed out, stuck around to get rewarded.

Gulp.

Couldn't that scenario apply to other things, like a project promised to last ten years but instead would last decades?

The AY connection

And, guess what, some firms in Lewis's book play key roles in the Atlantic Yards saga.

There's Goldman Sachs, packager of the Atlantic Yards bond deal, which is considerably less exotic than the "synthetic subprime mortgage bond-backed CDO, or collateralized debt obligation."

While the CDO had been invested to redistribute the risk of corporate and government bond defaults, more recently it was used to disguise the risk of subprime mortgage bonds.

Goldman Sachs managed to get crappy bonds re-rated by the mortgage rating agencies, Moody's and Standard & Poor's, as 80 percent triple-A. No surprise that the rating agencies played along; they get paid by Wall Street.

And, yes, those rating agencies rated Atlantic Yards arena bonds--though not, apparently, the more questionable securities being marketed to would-be immigrant investors.

No one stood up

Lewis points out that those positioned to see the fall coming never blew the whistle:
Why didn't someone, anyone, inside Goldman Sachs stand up and say, "This is obscene. The rating agencies, the ultimate pricers of all these subprime mortgage loans, clearly do not understand the risk, and their idiocy is creating a recipe for catastrophe"? Apparently none of those questions popped into the minds of market insiders as quickly as another: How do I do what Goldman Sachs just did?
And, it turns out, not only are the staffers at the rating agencies considered low down on the Wall Street food chain, those rating these bonds were at the lowest rung of the rating agencies. Lewis writes:
Wall Street bond trading desks, staffed by people making seven figures a year, set out to coax from the brain-dead guys making high five figures the highest possible ratings for the worst possible loans.... They quickly figured out, for instance, that the people at Moody's and S&P didn't actually evaluate the individual home loans, or so much as look at them. All they and their models saw, and evaluated, were the general characteristics of loan pools.
That sounds a little like the way the United States Citizenship and Immigration Services analyzes job creation for the EB-5 investment visa program. After all, the key is a formula applied to money spent.

Bad incentives

Along with inadequate government oversight, Lewis blames the transformation of Wall Street. Moody's, Lewis noted, had gone public in 2000 and seen its revenues nearly triple in five years.

Not dissimilarly, after Lewis's old firm, Salomon Brothers went public, with risk transferred from partners to shareholders, "the psychological foundations of Wall Street shifted, from trust to blind faith," and irresponsible dealmaking became common.

Warnings ignored

A couple of contrarians saw it coming, but were ignored, Lewis writes:
By late March 2007, "We were pretty sure one of two things was true," said Charlie [Ledley]. "Either the game was totally rigged, or we had gone totally fucking crazy. The fraud was so obvious that it seemed to us it had implications for democracy. We actually got scared." They both knew reporters who worked at the New York Times and the Wall Street Journal--but the reporters they knew had no interest int heir story. A friend at the Journal hooked them up with the enforcement division of the SEC, but the enforcement division of the SEC had no interest either.
The grown-up in charge?

Steven Pearlstein, in his Washington Post review of the book, observed:
What Lewis writes of two of his characters, young Ledley and Mai, might just as well apply to Lewis himself, or to us:

They "had always sort of assumed that there was some grown-up in charge of the financial system whom they had never met; now they saw there was not."
Since Gov. George Pataki and Empire State Development Corporation (ESDC) Chairman Charles Gargano, the governor's chief campaign fundraiser, left office at the end of 2006, has any grown-up really been in charge of Atlantic Yards?

Given the performance of the ESDC's Peter Davidson in China, bolstered by Brooklyn Borough President Marty Markowitz and New York City Mayor Mike Bloomberg on tape, it's hard to say yes.

No comments:

Post a Comment