Tuesday, April 14, 2009

Done to Death by Slanderous Tongues

Leonato: "Which is the villain? Let me see his eyes,
That, when I note another man like him,
I may avoid him. Which of these is he?"

Borachio: "If you would know your wronger, look on me."
Leonato: "Art thou the slave that with thy breath hast kill'd
Mine innocent child?"

Borachio: "Yea, even I alone."
Leonato: "No, not so, villain; thou beliest thyself:
Here stand a pair of honourable men;
A third is fled, that had a hand in it.
I thank you, princes, for my daughter's death:
Record it with your high and worthy deeds.
'Twas bravely done, if you bethink you of it."

— Much Ado About Nothing

I tell you what, my friends.

I understand the widespread anger average citizens feel toward bankers and their kind. I really do. In fact, I believe a large portion of that opprobrium is very well-deserved. Greed, arrogance, stupidity, and hubris have permeated the financial services industry over the last several decades, and when the recent credit bubble burst and the inevitable shit hit the fan, many individuals were justifiably upset that they were splattered with debris as well.

I personally am seriously pissed off, as my own net worth and investments are in tatters, my business of advising corporations is lying comatose on a hospital gurney, and my tax bill for the indefinite future is likely to reach the stratosphere in order to pay for the reckless bumbling of the feckless knuckleheads who were in charge of our financial system this past decade. And who, by the way, raised the price of every good and service I consumed these past years through the increased pressure of their stratospheric pay.

That being said, I am getting pretty goddamned sick and tired of ill-informed, self-righteous, ignorant assholes taking gratuitous pot shots at my industry and the people who work in it, simply because they are too intellectually lazy to address the problem in all its complexity and nuance. Too many well-educated commentators and pundits in a position of influence and authority—people who should know better—are channeling the CAPS LOCK hooligans in the comments section of the blogosphere with virtually no filter. When they do so, they come across—to me, at least, and to anyone who has more than a passing acquaintance with the global finance industry—as damn fools.

Or worse.

* * *

Exhibit A in the List of Shame is Steven Pearlstein of The Washington Post, who penned this this little gem of character assassination last week:

The most important is culture -- in the case of Wall Street, a culture that not only tolerates but almost celebrates taking advantage of customers. Here is an industry in which brokers traditionally get their start making cold calls to strangers, offering bogus stock tips, and investment bankers cut their teeth peddling bad merger and acquisition ideas to corporate clients. It is an industry in which the majority of money managers consistently underperform the broad market averages, analysts and strategists are almost always bullish, and firms rarely run into a security that can't be brought to market. These days, Wall Street is a place where the trading culture has supplanted the investment culture and score is kept on the basis of how many securities a banker or a firm underwrites rather than whether those securities actually turn out as good investments.

Leaving aside the minor quibble that it is not Wall Street's job to make sure every security that ends up in Mr. Pearlstein's 401K is a "good investment," whatever the fuck that is supposed to mean, I take severe umbrage at his characterization of my colleagues and me as shysters, hucksters, and con artists.

I don't know what kind of stockbroker Mr. Pearlstein is familiar with, but I can assure him that most practicing financial advisors haven't knowingly peddled a "bogus stock tip" to an existing or potential client in their entire careers. Sure, there are bad apples, and even a few bad firms that spring up from time to time (usually during an investment boom driven and eagerly participated in by credulous sheep who view investing as just another get-rich-quick scheme), but in the past our industry has made a point of getting rid of these as soon as possible. It's just good business practice to do so, you see. We don't want the friggin' lawsuits.

And, in twenty years of offering M&A and financial advice to corporate clients, I have yet to meet someone who has intentionally pushed a "bad" M&A idea to a client, either. Sure, I've been in pitches where a banker has proposed silly, ill-thought-out, or downright stupid M&A ideas to a client, but those instances are either unintentional—in which case the client throws the banker out of his office and said banker usually gets fired in the next round of layoffs—or intentionally designed to provoke a deeper and more productive dialogue with the client.

And by the way, who the fuck is Mr. Pearlstein to judge what is or is not a "bad" M&A idea? Just another passenger on the "All M&A is Bad" bandwagon originated by self-interested consulting firms and supported with ludicrously weak "event studies" which claim to identify value creation or destruction from M&A based on stock price performance before and after a deal? Poppycock.

I might just as well label the entire print journalism profession a meretricious collection of liars, fakers, and unscrupulous hacks based upon the evidence of a few bad apples like Jayson Blair. I, however, have the intellectual honesty to know better. (I also lack the financial incentive, unlike Mr. Pearlstein and his fellow journos, to tell my audience what they want to hear, whether or not it is correct.)

* * *

Exhibit B in this slander fest is that great man and Nobel laureate Paul Krugman, who dished up his own poisonous stew of half-truths and innuendo last week as well. He cited the work of Thomas Philippon and Ariel Resheff—which I have referred to approvingly in the past—describing the waxing and waning of the domestic finance industry in this country over the last century. What Mr. Krugman seemed to miss, however, was what I have taken to be one of Messrs. Philippon and Resheff's principal points: that the size of the financial services sector has fluctuated in the past in response to structural shifts in the economy and variation in demand for financial services like securities underwriting, capital formation, and M&A from non-financial companies.

Instead, he regaled his audience with crowd pleasing nuggets like this:

The banking industry that emerged from [the Great Depression] was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.

Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.

After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.

Of course, the implication a casual reader of this passage would derive is that the size of the financial sector is almost wholly dependent on how big the government allows it to be. Until the eighties, bankers were boring and conservative. Constrained by regulation, they just didn't allow anyone to borrow money. Happiness, economic prosperity, and moral rectitude broke out all over the place. Then, the nasty eighties intervened, government shackles came off the greedy and grasping bankers, and they spent the next thirty years ramming debt of every description down the throats of (presumably) reluctant corporations and consumers because they wanted to grow their exciting industry and get rich.

Nowhere in this narrative is the notion that bank and other financial intermediaries grew in response to a sustained increase in demand for their services from corporate and individual consumers.


Would the esteemed economist from The New York Times care to explain to me exactly how the finance industry was able to unilaterally increase demand for its services while drastically expanding its operating margins? Maybe I don't remember my entry-level Economics so good, but that strikes me as a somewhat dubious proposition. And yet, that is exactly the conclusion an inattentive or ill-informed reader would draw from Mr. Krugman's tendentious screed: regulate those nasty bankers, before they force our country to lever up and make them filthy rich again!

* * *

I am thankful that Charles Davi at The Atlantic has spared me further heavy lifting by dousing Brad DeLong and Matt Yglesias, who are Exhibits C and D in this shitshow, with a curative dose of cold water. Sadly, I fear we have not seen the last of such pandering. It plays too well.

This strain of commentary is all part and parcel of one of the dominant memes circulating our culture at present: that somehow, someone (else) has tricked our innocent asses into this mess, and we'll be damned if we don't detect evil self-dealing and conscious fraud wafting off the perpetrators. At its core, the idea seems to be that dishonest and greedy bankers have been able to magic demand for their toxic products and services out of thin air, for their benefit and our ruin. It is a dishonest notion, designed to comfort the rest of us that we had no complicity in our own victimhood. In this way, it smells to me just like the dotcom bust did, when retail investors and stock market commentators alike screamed bloody murder that Wall Street forced them into gambling their kids' college funds on Pets.com. The damage is more widely spread this time, of course, but so is the culpability. This is not a popular message to impart.

Nevertheless, it's past time for economic commentators who aspire to something more than leading the mob from the front to display some intellectual courage and integrity in addressing the current financial crisis, rather than rousing the rabble. There is plenty of important and interesting material to discuss, and there may even be an interesting and useful policy proposal or two that might come out of the mix.

Failing that, from my point of view they are more than welcome to shut the fuck up.

© 2009 The Epicurean Dealmaker. All rights reserved.