Monday, February 16, 2009
When the sordid history of our times is finally written, many years from now, the catalogue of explanations for our current plight will be manifold.
* Avarice on the part of lenders, borrowers, banks, brokers, investors, and ratings agencies? Check. It seems as if just about everyone out there thought that they could get something for nothing, whether it be a million-dollar house with no money down, or LIBOR + 100 with no credit risk. What just about everyone seems to have forgotten, however, is one of the oldest rules in the book: if something seems too good to be true, then it probably is.
* Stupidity from many of the same people. As excuses go, "I didn't understand the risks" is a pretty lousy one, particularly combined with a venal attempt to get something for nothing. You may not have understood all the risks in their full mathematical glory, but surely some kind of bullshit detector should have gone off when someone offered you a $999,999 mortgage without either knowing or caring that you made $18,750 per year? And for anyone running a complex financial model, as the ratings agencies did, to say that the model won't work if the price of the primary input starts to fall, as the ratings agencies did...well....Macro Man is left to wonder if the agencies' subprime pricing models were written by Cap'n Crunch.
*...and of course, no tale of financial or economic woe would be complete without a healthy dose of hubris. From Ralph Cioffi to Dick Fuld, Peloton Partners to Fannie Mae, CBR to Peer Steinbrueck, the list of people and instiutions who thought that "that can't happen to me" is legion. Special mention should probably go to Fred "the Shred" Goodwin, who led the charge to consummate what may have been the stupidest, most ineptly-timed takeover in corporate history. What does it say when less than a year after the consortium gained approval to take over ABN, two of its three members were getting bailed out by their governments?
Of all the faults in any financial crisis, hubris is usually the most difficult to forgive. Greed is, to some extent, hard-wired into the human psyche, an inheritance from our ancestors' days as hunter-gatherers. As for stupidity, well, P. T. Barnum supposedly (though apparently, apocryphally) said it best. But hubris, ah hubris! The most popular drama in finance is the morality play in which the ruthless, unscrupulous, and very possibly immoral high-flier finds that bad things can, in fact, happen to him, usually in spectacular fashion.
And yet this morning Macro Man finds himself with a touch more sympathy for those hubristic authors of Icarus-like descents. For on Friday, Macro Man found himself tearing up meter-deep fresh powder off of the black Combe de Caron run in Val Thorens (pictured below, in considerably less snowy conditions.) A few hundred meters above the end of the run, Macro Man's friend suggested that they ski back onto the piste, where turning down the steep slope would now seem easier than ever.
"Why would I want to ski on that," said Macro Man, pointing at the piste with his pole, "when we have this," indicating the deep bank of largely-untouched powder.
Why, indeed. And so they took off, and Macro Man really attacked the powder, going as fast as he ever had off piste, in deeper snow than he can ever recall skiing in. Until his left ski got caught in the snow, Macro Man face planted, and he felt the tell-tale pop in his left knee. Hubris, indeed.
He'd love to share more of his thoughts on hubris with you, but he has to go to the doctor now to get the ball rolling to confirm and treat the initial diagnosis of a torn anterior cruciate ligament. Let's just say, however, that he's learned his lesson...and at €400 for mountainside rescue, €150 for the hospital treatment, and another €300 for crutches, braces, and drugs.....so far it's been a damn sight cheaper than the lessons learned in the financial marketplace.