An angry man opens his mouth and shuts his eyes.
— Cato the Elder
Anger is seldom without argument but seldom with a good one.
— Lord Halifax
Anyone can become angry — that is easy, but to be angry with the right person, to the right degree, at the right time, for the right purpose, and in the right way — that is not easy.
I need to get on a different schedule, something that is less out of whack with normalcy, and this is going to necessitate a cutback in posts over the next few days.
Based on the disappointing riposte she made to the arguments I made in these pages this weekend, I must say I agree with her. Perhaps then she would think twice before putting out such desperately sorry pap as this:
Remarkably, the often-sound Epicurean Dealmaker defends the fantasy resolution authority. And his choice of metaphor undermines his argument. He uses both a “break glass” emergency image and the same expression in the article. Surely he must recall the Neal Kashkari “break the glass” memo mentioned in Sorkin’s Too Big Too Fail. It was well received by the higher-ups and was totally useless in practice.
ED offers two defenses, that the vagueness give regulators flexibility and discretion. Ahem, regulators always have those available to them. And the powers that be had that in spades during the crisis. They went around and did rescues that were widely criticized for their inconsistency and ad-hoc-ness. Why were Bear’s shareholders given anything at all? Why were WaMu’s sub bond holders crammed down (and worse, as John Hempton bitterly argues, a bank that he believes was not insolvent taken out and shot?). In fact, that very “flexibilty” meant that the authorities seemed to be constantly overcorrecting in response to whatever criticism they had gotten on their most recent salvage operation.
“Flexibility and discretion” is merely putting a happy face on “we’re going to have to improvise our way through this one yet again.” Now a certain amount of improvisation is necessary (an old saying has it that no plan survives first contact with the enemy). But for an completely untested and untrusted regime, the authorities need to convey the ground rules and key mechanisms in advance, both to prepare investors and counterparties, and more important, to debug the plan on paper as much as possible in advance.
Let me address Ms. Smith's arguments, such as they are, point by point.
First, in what way does my use of the metaphor and phrase "break the glass" undermine my argument? Smith makes no observation more telling than the fact that Neel [sic] Kashkari used it to title an emergency plan which the Treasury never used. By what I assume to be Ms. Smith's implied "argument," then, does every sentence in German become pernicious because a certain Austrian housepainter used it? My use of the phrase dovetailed seamlessly into the larger metaphor I used later in the piece comparing the regulators responsible for executing resolution authority to firemen. It was neat, apt, and pertinent. Perhaps Ms. Smith was too exhausted to read that far.
Second, she dismisses my argument that any resolution authority should be vague because it will offer regulators valuable flexibility and discretion by pointing out that regulators always have those available to them. Uh, sorry, Yves, I read Too Big to Fail, too. And I distinctly remember several critical occasions when desperate officials from the Fed and the Treasury debated and then discarded potentially effective solutions to the crises of Lehman and AIG for the very reason that they believed they did not have the legal authority to execute them. These solutions, if memory serves, included among others the ability to abrogate or suspend contracts and securities provisions, which is one of the discretionary capabilities I specifically mentioned in my piece.1
Third, Ms. Smith objects that the often counterproductive and disastrous interventions which regulators made in the financial system during the dark days of 2008 argue against granting untrammeled flexibility and discretion to regulators. But the entire point of the Panic of 2008 (in government as well as the economy) was that regulators were operating without a plan, or even ground rules. That is why their actions were so inconsistent, uncoordinated, and haphazard. There was no agreed and accepted mechanism for dealing with the sequential failure or imminent collapse of several multibillion dollar financial institutions. That is what a resolution authority is supposed to be: a plan, a guide map, and a set of legal and regulatory tools and procedures to authorize and enable designated regulators to stem contagion and prevent economic collapse by systematically winding down large, highly-interconnected financial institutions. By stumping for regulatory flexibility, I am not advocating a return to the uncoordinated clusterfuck that Hank Paulson and Ben Bernanke presided over, for Christ's sake. Whatever species of knucklehead would think I was?
Next, Ms. Smith retreats slightly from her attack on regulatory flexibility to admit that "a certain amount of improvisation is necessary," but she wants "ground rules and key mechanisms in advance, both to prepare investors and counterparties, and more important, to debug the plan on paper as much as possible in advance." Ground rules and key mechanisms are fine. Investors and counterparties should be aware that regulators can swoop in, under carefully defined circumstances of heightened risk, and systematically demolish their contractual claims and obligations to preserve the integrity and functioning of the financial system. But I continue to maintain that the law authorizing the resolution authority—as opposed to the confidential working documents, plans, and intentions of the authority itself, which can and should be as specific as possible (and subject, of course, to constant review and revision in response to changing circumstances)—should be drafted at a very high and determinedly vague level.
I do not want legions of investors, lenders, and counterparties, much less financial institutions themselves, structuring their way around highly specific laws and procedures to evade the prophylactic and remedial powers of a resolution authority. And, whether she knows it or not, neither does Ms. Smith. The lawyers who work in and for my industry are just too good, and their job is to protect and advance the interests of their employers, the financial institutions, not the regulators, the government, or the taxpayers. For regulatory purposes, we must view them as the enemy. And if there is one universal rule of combat, Dear Readers, it's that you don't share your detailed battle plans with the enemy.2
Finally, Ms. Smith misstates and misunderstands my argument completely when she asserts
Another ED argument in favor of flexibility amounts to, "markets evolve too quickly, you can't really plan."
This restatement bears such little relation to what I wrote that it really makes me wonder how awake Ms. Smith was when she read my piece. What I did say was this: Because markets evolve quickly, and because the nature of each financial crisis appears to be different enough from its predecessors to make detailed planning in advance fruitless, the legislation authorizing a resolution authority should not attempt to catalogue in exhaustive detail the tools, procedures, and conditions under which said authority should operate. That doesn't mean that regulators should not keep track of "the evolution of markets, monitor exposures aggressively, and update emergency plans frequently," as Ms. Smith recommends. My article addressed Bob Teitelman's remarks, which focused on the legislative and political backdrop to the issue, not the day-to-day working brief of regulators in Washington, D.C.
In any event, I suspect Ms. Smith really objected to my post because it does not jibe with the regulatory proposals she has advanced in her own work, including in her newly published book. From her brief summary (I have not yet read the book), Ms. Smith appears to advocate "root and branch reform" of the system, which makes her, by definition, more radical than me. As befits my nature as an investment banker, I am a pragmatist and an incrementalist. I think the prospect of true root and branch reform of the domestic financial system—not to mention the global one with which it is inseparably interconnected—is such a vast and daunting task to undertake in our current sociopolitical environment as to be unlikely at best. Notwithstanding the theoretical attractions of radical reform—which I personally would favor, by the way—I would much rather cobble together a partially effective, imperfect resolution authority today than wait the ten or twenty years serious reform might take. If for no other reason than I think we cannot wait. The next financial crisis is just not going to loiter demurely offstage for a couple of decades until we get our act together.
Sympathetic or not, however, I would also like to caution Ms. Smith. Like many radical reformers, I suspect she would be surprised how little common ground she has with other would-be radical reformers. It is always a revelation to discover, as revolutionaries always have, just how little agreement you have with your peers when it comes to deciding just exactly which roots and branches of the ancien régime need to be trimmed.3
In conclusion, I would like to redirect my remarks to a slightly different but related issue. Ms. Smith took weak exception to a metaphor I used in my recent post. I would like to take strong exception to one of hers.
Like many other econobloggers opining on the state of affairs in the world of finance, Ms. Smith has gotten into the nasty habit of using the term "banksters" to refer to members of the financial services industry. (It is in the title of yet another post of hers today.) The overarching metaphor behind this coinage—which, I emphasize again, is neither original nor limited to Ms. Smith—is that commercial bankers, investment bankers, insurance company employees, and presumably everyone else in the financial industry are uniformly engaged in a vast, intentional, and irredeemably criminal enterprise. Ms. Smith reinforces this metaphor often, including in the post dissected herein (with the crack of "financiers [looting] taxpayers"), and implicitly in the title of her new book, ECONNED.
Now, I am all for the charms of expedient exaggeration. (Although mine tend to be limited to sarcastic and humorous uses, rather than bitter and humorless character assassination.) It can be funny, and it can emphasize important points. But uniformly and universally excoriating millions of people who work in finance as gangsters, thieves, looters, and con men is just fucking dumb. It's like saying all management consultants are morons, or everyone from Iowa is a hick. While there certainly must be examples of moronic management consultants and hayseed Iowans among the myriad constituents of each of those groups, no honest or intelligent person would believe all of them are that way. Why, then, do so many bloggers writing today tar the entire finance industry with the same tired, thoughtless old brush?
These casual, unthinking insults would not bother me if I did not think they lower and coarsen the important conversation we are having in society and the blogosphere about financial reform. Sure, investment banking has its fair share of crooks, but we are no different than the rest of society. Some of us, closer to the top and more successful, perhaps, probably do have a more highly developed sense of entitlement and aggressiveness than your average bear. But we are not criminals. We work the system, hard, to advance our own and our families' personal and professional interests, but 99.9% of us are not out to rape and pillage the commonfolk of their daily bread.4 To think otherwise is just plain stupid.
At the same time, there are plenty of things wrong with investment banking and the financial system at large. Big, important, pressing problems that contributed to the last financial crisis and threaten to make the next one worse. Making grandiose, nonsensical pronouncements that all bankers are crooks just doesn't help matters, and it focuses attention and energy away from real problems which need to be addressed posthaste. It poisons the dialogue, it stifles voices it would behoove us to hear, and it lowers the conversation to the lowest, cheapest common denominator of untrammeled, impotent rage. This is not the kind of contribution bloggers should be making to a rejuvenated public discussion of financial reform.
Anger has a personal cost, too. Unless it is leavened with reason, and moderated by the acknowledgement that no-one is perfect, hate and anger can be highly corrosive. Justifiable anger is a wonderful source of energy, and a marvelous spur to action. But nurtured, coddled, and sustained overlong, anger can constrict the vision, dull perceptiveness, and calcify the brain. It can blind you to the good in others, to the alternatives available to you, and, in the end, to the truth. If left untreated too long, eventually others tire of your stridency and self-righteousness, and you sink back into justified and bitter obscurity, another valued voice in the debated stifled by irrelevance.
And that is an outcome none of us should be aiming for.
1 And, to address immediately the potential objection that Paulson, Bernanke, et al. did indeed have authority to impose several potentially effective solutions but chose not to based upon an ideological bias against government intervention in free markets and their underlying principles, I would say this: Even good laws and good institutions can be corrupted or rendered ineffective by venal, cowardly, or pigheaded officials; that is to say, by politics. This is part of the human condition, but it is not a valid argument against trying to design good laws and institutions in the first place. If anything, it argues strenuously for the oversight and retrospective scrutiny of any government officials who exercise great discretion. This, careful readers may recall, was a key condition in my earlier proposal.
2 I also find Ms. Smith's apparent faith that one can "debug" a comprehensive rescue plan to stave off systemic financial collapse "on paper" both touching and amusing, in a management-consulty sort of way. Suffice it to say that I do not think anyone has a credible chance in hell of "debugging" the next financial crisis before it arrives, but that is largely an epistemological point of view. I presume Ms. Smith does not agree with me.
3 And, like revolutionaries also discover, neither revolution nor root and branch reform repeals human nature. Think the Soviet Union, Animal Farm, etc. This is a problem revolutionaries and reformers alike have yet to solve. See footnote 1, above: "Meet the new boss, same as the old boss."
4 The average investment banker's or finance professional's sins are exactly those of Everyman: cowardice, laziness, a modicum of greed, somewhat over-flexible morals, and situationally uncertain integrity. You will not be able to effectively reform my industry—or indeed any other industry, government or regulatory entity, or social norm or behavior—until you realize and adjust for this universal and ineluctable fact. It is not the real criminals who cause massive societal breakdowns like the recent financial panic. (Compare, e.g., Bernard Madoff to Dick Fuld.) Like Pogo said, "We have met the enemy, and he is us."
© 2010 The Epicurean Dealmaker. All rights reserved.