Of all the self-proclaimed experts I wanted to hear from about the financial crisis, the one I looked forward to the most was Nick Leeson, late of Britain’s Barings Bank. In 1995, he bet hugely on Nikkei futures (whatever they are) and lost something like $1.4 billion. Leeson was 28 and often drunk, Barings was 233 and in fiduciary senility. Leeson went to jail, Barings went bust and Wall Street, without so much as a pause, went on its merry way.
Sadly, Leeson did not have much to say about the current financial crisis. Writing last week in The Guardian, he instead expressed bitterness that the former owners of Barings went on with their lives while he spent four and a half years in prison. What he did not say, to the regret of us all, is how once again the kids were allowed to play with huge amounts of money without any adult supervision.
“I was astonished that nobody stopped me,” he wrote in his book “Rogue Trader.” “People in London should have known.” Indeed.
The theme in the current financial crisis is not, as John McCain would have it, greed, since that, like lust, will be with us forever. Instead, it is transparency. Leeson, you may recall, was dealing from Singapore in exotic derivatives that his bosses in London little understood. All they knew was that Leeson was putting huge profits on the books, not that those books had anything to do with reality.
Somewhat the same thing happened on Wall Street. The complicated, exotic and downright erotic financial instruments cooked up at the investment houses were, in fact, little understood not only by the buyers, but by the sellers as well. You can see that not only from what they said, but also from what they did: Lehman, Bear Stearns, AIG and others all held on to financial instruments that were worth less than they once thought. This was truly a case of the blind leading the blind.
“The problem is that nobody knows what any institution owns and what the terms of the securities they own are and what they’re worth,” New York Mayor Michael Bloomberg said Sunday on “Meet the Press.” What he’s saying is what others on the Street having been saying for some time: Nobody knows what these things — securitized mortgages, etc. — are worth. And, just to darken the mystery (and maybe your mood), no one knows the value of the underlying real estate either.
I started with Leeson for a reason. He is the personification of a generation gap in the finance industry. He was young and computer-savvy, and his bosses in London were neither. That was true on Wall Street, too. The very top guys really had little idea of what was going on below. Everything was going right. They were making lots of money, which they deserved — in their wonderful circular reasoning — because they were making it. This, I tell you, is the true magic of the vaunted market: It justifies both stupidity and greed.
Now the government is proposing another pig in a poke. The huge federal bailout is necessary, but Democrats are right to insist on detail and oversight. For too long, the financial markets have operated without much of either. Now the Bush administration is asking Congress for a blank check, what New Jersey Gov. Jon Corzine calls the “moral equivalent” of the congressional resolution that wound up authorizing the Iraq War. Corzine, a former Goldman Sachs chairman (not to mention U.S. senator), is a voice worth heeding nowadays. When I talked to him, he had just gotten hold of the two-page administration program. Two pages! This is another exotic financial instrument.
The wise words of William Goldman, the screenwriter, should echo in Congress’ ears. He not only coined the phrase “follow the money” for “All the President’s Men,” but expressed the sum total of knowledge about the making of movies with: “Nobody knows anything.” The same has been true about opaque financial instruments. It’s up to Congress to fix that.
The lesson of Leeson has yet to be learned. Financial markets have moved well beyond the trading of things that could be seen or measured or weighed. On Wall Street, older men employed the lingo of younger men to pretend they knew what was happening — but they didn’t. Now, Congress is being asked to do something similar. That won’t do. Bear down. Ask questions. Don’t be afraid to regulate. Act as if you’re the government, for crying out loud. Because if you don’t do this right, you soon won’t be.
Richard Cohen’s e-mail address is cohenr@washpost.com.
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Some additional facts
Fannie Mae and Freddie Mac became a key enabler of the mortgage crisis. They became the key customer of all the subprime mortgage pools, in addition to holding a large amount of mortgages themselves. Greenspan warned of a meltdown in 2005 if Fannie and Freddy continued to grow. The result: a serious reform bill was passed by the Senate Banking Commitee which would have eliminated the investments in risky assets. The Repubs pushed the bill, but the Demos opposed it on a party-line vote in the committee. Because of this, the bill got constipated and never got to the Senate for a vote. Yes, these are the same Demos who are now insisting upon "oversight". Where was their oversight and common sense in 2005? There is a time to do what is best for America and avoid partisan politics. The Demos failed to do this in 2005 and now we will all pay for it.
John C.
Dallas, TX