Who knew what when

I've been meaning to do another post about the financial crisis for a few weeks now. I started thinking because of a series of strips in one of my favorite comics, Sylvia, where the characters are finding out why they hadn't got the message that they were supposed to sell their stocks, when it seemed like all their friends had.

Certainly Will & I decided the housing bubble was too stupid to keep playing with about five years ago. We sold about two or three years before the peak, so we lost a few thousand pounds I guess. How did we know? The difference between prices in Bath vs. Evanston, and the difference between mortgages vs. renting. With respect to that last, owning should always been cheaper than renting, because it's harder to own, since you need capital. If renting is cheaper, something is seriously wrong.

But what about the banks? What I kept thinking about after I read the Sylvia strips was that my friend Hilary explained to me and Chris that all the banks were bankrupt the last time I was in Chicago, last Spring. She said she was totally freaked out about it, but that a lot of people were saying all the banks had also been bankrupt during the Savings & Loan crisis under the previous President Bush (when one of his other sons went to jail -- remember Silverado? When I was campaigning in Ohio in 2000 for Al Gore someone asked me why no one was mentioning Silverado.) Apparently at that point they just kept doing what they do and eventually worked off the debt, and people thought the same thing would happen again. But then she started explaining that the government knew that something needed to be done this time, so they were going to make special institutions to buy the most risky debt, so the banks would be in less trouble. Chris said "That's why the head hunters have been phoning me constantly this last week!" The new institutions would need new heads of IT.

So by now we've all heard of these institutions, they are called toxic banks. But we don't hear that the Bush administration already knew something needed to be done and that the banks were bankrupt in March 2008.

Right now I am finally getting around to posting this because I am watching Jon Stewart's interview of one of the guys on CNBC. He says something at minute 14:00 "I can't tell you how angry that makes me, because what it says to me is that you all know. You all know." Well, he's right. I know, and I haven't been employed in finance since 1991.

Sometime when I was first working in trading industry, some of the traders that worked for Larry Schulman were telling me that everyone in the pits knew there were good companies and bad companies there -- people who ripped off their customers, and people who didn't.
I got really angry after watching the Enron movie, The Smartest Guys in the Room. There's a scene in that movie where Enron is pitching a blatantly illegal product to a room of select people representing various financial companies, and they all pause and then say "yeah, sure." Someone was filming it secretly, so it's fuzzy. But the narration says who the people are, and it's all the same names who were evil in the 1980s being evil in the 1990s. Like Merrill Lynch and Citicorp.

I was thinking about this post, and I remember I started talking to a guy I was sitting next to on the London Underground when we were walking through the Docklands together. He was a researcher from Luxembourg. He was doing research on ethics and its impact on business. And I told him I was sadly dubious about any impact, and about the Enron movie thing I just told you. And he said "Well, the bad institutions are getting into trouble now." And looked knowingly at me, as if he expected I was on the inside of some knowledge he had. And I suspected he meant the impending financial crisis, and I was skeptical then that that was only going to hurt the bad institutions.

That wasn't after Hilary told me about it. I remember it distinctly, because I was on the way to viva a PhD at Goldsmiths, which I've only done once. That was the evening of 21 November 2007. Luxembourg (presumably therefore, the EU) already knew. And I already had at least some guess so I could figure out what this guy was referring to. Yet loads of politicians now claim they couldn't have seen it coming, just like the Bush administration couldn't have seen Katrina or September 11 coming, despite all the memorandums about those dangers. Why can't people say "I knew something was up, but I guessed wrong how important it was"? I guess they'd lose their elections.

None of us knew exactly what was going to happen, and I suppose we all hoped & maybe some really believed that someone or something else was actually going to fix it. You can know about a whole lot of contradictory theories, and you can only guess which if any of them are right. But I think Jon Stewart is right to think that a lot of people knew that illegal, unethical and even dangerous things were going on, and they let them slide, or even thought they were funny, or worse, exploited them. Others didn't -- some people wrote letters to the SEC complaining that Madoff couldn't possibly be making money legitimately. People like Hilary went around and said "something is very wrong, shouldn't we be fixing it?" Not all financial people are bad. I don't have any sympathy for institutional or professional investors who lost money to Madoff, because it's their job to understand how money is made, and to notice when something smells fishy.

I guess that's what it comes down to. If everyone realizes it's their job to help enforce norms, laws and ethics, then we do OK. If people can break the laws and get away with it, then everyone starts playing games. A political organizer I met when I was volunteering for Sen. Paul Simon's presidential campaign in 1988 told me there was a theory that the Savings & Loan crisis wouldn't have happened if Nixon hadn't been pardoned rather than facing charges. Kissinger has apparently documented in one of his books that Ford was chosen for VP because he was the only candidate who would promise the pardon. I remember after Iran Contragate that the judge said the Republican administration had treated the law like a puzzle to work around rather than something you were meant to respect the spirit of.

One of the great mysteries is why anyone is convinced that Republicans are the party of ethics. I suppose it's because they are the party of fundamentalism, and people mistakenly believe that there's a correlation between intensity of religion and intensity of ethics. I mean, mistakenly believe there's a positive correlation.
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