As we struggle with the do’s, dont’s and maybes of the continuing financial reform debate, pearls of wisdom come from the strangest places. Last week’s press conference with John Travolta, John Gotti Jr. might be assumed an unusual source to derive insight. Yet Gotti Jr.’s words as he sat next to a botoxed Lindsay Lohan and Sister Victoria were profound.
“Some people say, ‘John Gotti was a killer, John Gotti was a gangster.” Yeah, he was, but he was also a man’s man, which is the most important thing. He made a choice to be something in his life and he stood true to those convictions. He never one time deviated from that path, not once.”
For some reason this moving testimony from a devoted son to his misunderstood Pa reminds me of the ongoing financial reform war. The current battlefields are fought on the same issues that created the global economic crisis. Monitoring derivatives, credit ratings, capital rules, and “too big to fail” banks has kicked up another firestorm. Only three years after Bear Stearns crashed and burned under the weight of its recklessness, lawmakers are claiming that regulations to prevent another crisis are unnecessary.
Republican Senator Jim DeMint introduced “The Financial Takeover Repeal Act of 2011” in an attempt to abort the nine-month old Dodd-Frank financial regulation bill before it is born. DeMint said, “We must repeal the Democrats’ takeover of the financial markets that favors Wall Street corporations, over-regulates small businesses with massive new bureaucracy and hurts consumers.” The 2300 page law attempts to rein in proprietary trading, re-establish capital limits and fiduciary responsibility for executives and institutions, create transparent exchanges for swaps and derivatives—and hardly favors Wall Street.
Dodd-Frank by its sheer size does look like a bureaucratic nightmare, but after the events of 2008, there wasn’t a whole lot of choice. The bill also establishes a state-of-the-art consumer financial protection bureau (the first of its kind) headed by none other than consumer hero herself, Harvard law professor, Elizabeth Warren.
Meanwhile, back at the ranch…the Democratic Senate that is, lawmakers take heat from both Tea Party Revelers and Wall Street Ranters. Jamie Dimon, CEO of the one of the largest “Wall Street corporations” on the planet, JPMorgan-Chase-me-if-you-can, says that the U.S. still has the “best financial system in the world” and Dodd-Frank is poised to “destroy that.” Dimon railed against derivatives regulations threatening if the government imposes any conditions at all on derivatives trading he might pick up his swap-marbles and bring them oversees.
In Mr. D’s own words, “If I can’t offer you a foreign exchange swap or credit derivative at a price that you like, you will do it elsewhere. And that could be Singapore…” I guess he means it. I have heard Singapore is an amazing city even you if you can be jailed for writing a book.
Yet a brief chat with the CEO of a $14billion hedge fund based in New York warns, “We better fix it (regulate) with derivatives or that will blow us all up.”
So who are we to believe? Will regulation safeguard the financial system or destroy it?
How we got here:
Only a few short years ago, a free-market evangelist in the form of Federal Reserve Chairman Alan Greenspan waxed rhapsodic over the poetry of economic anarchy claiming deregulation was the path to prosperity. Warren Buffett, arguably the most successful investor in the modern world, warned Mr. Greenspan of the dangers of unrestrained risk in exotic derivatives like Collateralized Debt Obligations (CDOs).
Buffet explained the reason that he refused to trade these products: “You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you’re going to understand that CDO, you’ve got 50-times-300 pages to read, it’s 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you’re now up to 750,000 pages to read to understand one security.”
Greenspan would allow no one to rain on his parade and dismissed old Warren’s fears. Testifying before the U.S. Senate Banking Committee in 2003, the Fed Chair said, “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.”
Dispersing risk is another way of saying “moving it off your books” onto someone else’s books. The chief economist in the United States was encouraging market makers to pour trillions of dollars worth of toxic debt directly into the financial system. This “transfer” became the risk management tool of choice and ultimately contaminated the U.S. and global economies. It’s like playing “hot-potato” with a three trillion dollar grenade. Okay, so you know this already. Why cry over spilled milk? Very simply, because the milk is still not cleaned up.
He’s back. He is not exactly “back,” but Alan Greenspan will not leave us alone. His latest diatribe against financial regulation is being used by lawmakers to support repealing reform. I admit there was a time when I was smitten by the deregulator’s indifferent and seemingly sound brilliance. But we are all so foolish when we are young…
In a recent Financial Times Op-Ed, Greenspan writes that regulators are incapable of forecasting market risks and preventing “undesirable repercussions.” He claims defensively, “No one has such skills.” In his case this was most certainly true, but isn’t that their job? Greenspan collected checks for two decades to do precisely that: anticipate and regulate risks.
His solution? “The Invisible Hand.” No, I mean it. It’s true. After all the chaos we have been through these past few years, Greenspan reverted back to his 2006 claims that Adam Smith’s 18th century version of a free market regulator was the next best thing to being there. “With notably rare exceptions ["the once-in-a-century-economic-tsunami"], the global “invisible hand” has created relatively stable exchange rates, interest rates, prices and wage rates.”
I once heard that the definition of insanity is “repeating the same behavior over and over expecting different results.” I am not picking on poor Alan, I’m just saying…
In an intense conversation with a couple of brilliant and innovative financial execs the other day, one man was the former head of equity derivatives for a giant global securities division. He called the current culture on Wall Street of irresponsibility and indifference “sociopathic.” I was struck by the fierceness of the term and its power.
I had never attached this concept to the lack of integrity and honor in finance before so I looked up the word to see how it applied. The definition read, “A person…whose behavior is antisocial and who lacks a moral responsibility or social conscience.” I was astounded. He had hit it on the head. Lacking a social and moral conscience is how we got here…
It has not been revealed yet if Dodd-Frank is “too much” or “too little,” but it is clear we have to do something profound. Those like DeMint say we should do “less” and get out of the way of market makers. Others like Greenspan refuse to acknowledge mistakes and continue to insist the greatest financial crisis of our time is a “rare exception” to otherwise market perfection. As irrationally exuberant as this may seem, these men insist we go back to business as usual.
Our usual business through 2008 was to “transfer risk” from those who should never been allowed to handle it to that degree to those who were unwilling and unable to handle it at all: ordinary homeowners and the unsuspecting public. The risk was transferred successfully and rears its ugly head in record foreclosures, defaulting loans, joblessness and a growing national debt.
The financial crisis is a wake-up call for the sane among us to refuse to repeat the same mistakes that brought us here. In an enlightened society, our job is not to destroy financial markets—but to preserve them through a sustainable future.
Which brings me back to John Gotti Jr.
Junior explained that he authorized the movie about his hero father “to rewrite history – the right way.” He called his mobster father who was convicted of 13 murders, and considered by the legal psychiatric community to be a homicidal maniac, an “icon” whom he truly admired. “A man’s man” with the courage of his convictions. The film’s producer Nick Cassavetes called Gotti Sr. a “victim” of the system. Former heartthrob, John Travolta called the mob boss “glamorous” and “charming.”
Gotti Jr. ended his brief missive with, “In the end, when he had an opportunity to say ‘uncle,’ he believed he was right, he stood his course and he suffered greatly.”
What do we as Americans believe is right? In the wake of the financial crisis, we have turned criminals into victims and victims into criminals. Helpless homeowners are punished further and banks that entrapped borrowers into unconscionable loans are rewarded.
As a culture, we have allowed distorted and disturbing sentiments to rewrite history and convince us that crimes like murder and economic indifference are acceptable. It is okay to torture and kill dozens of your enemies. After all they deserved it. It is okay to render millions of unsuspecting homeowners bankrupt to enrich ourselves. After all they should have known better.
This brainwashing calls us to abandon our social conscience and moral responsibility as we fail to create a system where we help others not harm them. We experienced a global economic meltdown precisely because there were no rules or regulations to rein in risk. A few years later, a smear campaign reignites to tell us that what we know is true is not true. Economic rape and pillage is not a moral code to defend.
As a society, we need to redefine honor. “A man’s man” is not a cold-blooded killer who destroys people’s lives with abandon—nor is he a cold-blooded money man who destroys people’s economic lives with glee. Instead our heroes should be men and women with a sense of honor and social conscience for the world they leave behind. Righting the wrongs of the past means we do not rewrite history. Instead we examine our mistakes and learn from them.
Don’t let Hollywood or Washington convince you that murder is justice and unrestrained greed is morally sound.
Category: Sustainable Small-B