Spero Consulting

Posts Tagged ‘Bear Stearns’

Or – to seri­ously mix our metaphors – falling head-​over-​heels for the wolves’ claims that the “sky is falling.”

Our favorite line from the play and movie, A Man for All Sea­sons, is Saint Thomas More’s state­ment at his trial in which he gen­tly belit­tles one of his per­jur­ing accusers, Richie Rich:

“Why Richard, it prof­its a man noth­ing to give his soul for the whole world…Ahh, but for Wales?”

Mr. Rich received an appoint­ment from Henry VIII in Wales for his efforts.

After per­form­ing a short and cur­sory search of the web, we’re not sure – and it seems that no one else is, either – as to whether the mar­tyred Saint actu­ally made that statement, or whether it is an apoc­ryphally placed by the play­wright, Robert Bolt.

Nonethe­less, it so beau­ti­fully expresses the wry, amused, and con­sid­ered insight of a thought­ful, yet con­demned, man, who by quot­ing scrip­ture (Mark, 8:36), makes clears Rich’s Faus­t­ian bar­gain, and for what?

The Scared: We have been reminded of that 16^th cen­tury, court­room scene sev­eral times dur­ing the past sev­eral weeks, includ­ing today when we read Kim Strassel’s poorly-​reasoned, col­umn on in today’s WSJ, What Lead­er­ship Looks Like, and yes­ter­day, when we read The Wall Street Jour­nal’s edi­to­r­ial, enti­tled, “Free AIG.”

Yes­ter­day, the Journal’s the edi­to­r­ial staff seemed to regain – at least tem­porar­ily – their free-​market prin­ci­ples long enough to crit­i­cize the Fed­eral Reserve’s seizure of AIG in mid-​September. Unfor­tu­nately, the edi­tors have failed to take that same logic and apply it to the larger finan­cial cri­sis, as does Ms. Strassel and her subject, Congressman Paul Ryan.

Indeed, while claim­ing to be for “free mar­kets and free peo­ple,” they seemed awfully will­ing to for­sake it for a smidgen of a promise of secu­rity and stability.

Reg­u­lar read­ers know that we’re morally opposed to the plan for sev­eral rea­sons, includ­ing that trade-​off of free­dom for secu­rity and our doubts that it is nec­es­sary despite the many, many pleas of exi­gent cir­cum­stances, falling skies, and wolves.

Furthermore, as we have writ­ten exten­sively dur­ing the past two weeks, we believe that there are harm­ful imme­di­ate and long-​term impli­ca­tions of the bailout and that it will fail.

So, the promised secu­rity and sta­bil­ity will be illu­sory – a mirage, per­haps – as all such promises have been since at least the takeover of Bear Stearns in the early Spring. See any of these recent posts: The Finan­cial Bailout, Reverse Auc­tions and Mark­ing to “Mar­ket”; Moral Haz­ard and Another Prob­lem with Illiq­uid Assets; If ‘If’s and ‘But’s Were Candy and Nuts…(#2); Big­ger Is Not Nec­es­sar­ily Bet­ter; OMG! OMG! OMG! Largest US Bank Fail­ure Ever!; The Cri­sis and Free Mar­ket Crit­ics; The Uncer­tain Value of Mort­gage Secu­ri­ties; Sorry Mr. Bush, We Respect­fully Dis­agree; Could a “Bailout” Pro­long the Finan­cial Cri­sis?; Idio­syn­cratic and Con­cen­tra­tion Risk, Again.; and Pub­lic Bailout? Why Rush or Do It at All?. (Actu­ally most every­thing we’ve writ­ten dur­ing the past two weeks.)

In that regard, we have pro­posed our own privately-​oriented, market-​based plan, A Bet­ter Solu­tion (than a gov­ern­ment takeover), that requires only a few small changes in the tax laws to imple­ment. It is sim­i­lar to allow­ing accel­er­ated – well, imme­di­ate – depre­ci­a­tion of the cost or an invest­ment tax credit to the prospec­tive pur­chasers of cer­tain mort­gages and MBS and CDS issues. (Note: the cur­rent bill pro­vides invest­ment tax cred­its for risky R&D but not risky mort­gages. Does that make any sense?)

The Scary: in addi­tion, we ask the dear reader to con­sider this: if the cur­rent plan fails to alle­vi­ate the pan­ics, can he or she imag­ine how far the gov­ern­ment will fur­ther over­step its author­ity to solve what will then be a pro­longed cri­sis REQUIRING addi­tional gov­ern­men­tal inter­ven­tion, or have sup­port­ers not con­sid­ered that prospect?

The Sorry: the illu­sory nature of many such bar­gains and trade-​offs induced us won­der about the indi­vid­u­als – exec­u­tives, reg­u­la­tors, and employ­ees – who “cut cor­ners,” turned a “blind eye,” or just went along with some­thing in which they didn’t believe… in hopes of gain­ing the world or per­haps just a small bit, say, a lit­tle cor­ner of Wales or Long Island.

In the process, not only did they bear high per­sonal costs, but in many cases, the gains, e.g., the value of their stock grants or their new titles, turned out to be illu­sory. (Cromwell was guil­lotined a few years after More’s trial, too.)

We sym­pa­thize with them – not the amoral ones; they don’t care and would only mock our sym­pa­thy. No, we mean the folks with con­sciences, who knew right from wrong, but couldn’t resist and traded their decency (and in many cases their self-​worth) for the lure of a few dol­lars more or a lit­tle less aggra­va­tion. That near-​universal weak­ness is the rea­son that we and many oth­ers admire Sir Thomas, even if we can’t always emu­late him.

The Final Irony: All such sac­ri­fices (and gov­ern­ment direc­tives) are designed to lead one or one’s peo­ple to Utopia. By the way, who wrote that book?

On Tues­day, the Chair­man walked into the office and asked whether we thought the losses and uncer­tainty in the finan­cial mar­kets were wind­ing down. We replied that we doubted it and, in addi­tion, we hoped not. 

Our response was not out of envy or due to any schaden­freude. Instead, it was based upon what we believe to be our mature, con­sid­ered and Catholic reflec­tion. Despite the mag­ni­tude of losses to date, given the observed lev­els of egre­gious­ness, care­less­ness, will­ful igno­rance, glut­tony, and greed it does not seem that a suf­fi­cient level of jus­tice has yet been meted out. No, not yet. We write this post while we con­tinue to com­pose an essay on the over­all lack of effec­tive risk man­age­ment and con­trol in finan­cial ser­vices as well as the per­va­sive lemming-​like behav­ior and ratio­nal­iza­tions that we hear to jus­tify invest­ment and busi­ness plans, includ­ing the over-​reliance of con­trived mod­els (that may have been sup­plied by the sellers).

Because the out­comes are empir­i­cally indis­tin­guish­able, we can­not tell for cer­tain whether senior man­agers were cyn­i­cal or naïve (igno­rant) while over­see­ing efforts, but we point inter­ested par­ties to the new tes­ta­ment para­ble of faith­ful and unfaith­ful ser­vants (Luke 12:41 — 48), which cov­ers both cases, any­way. (The con­clu­sion: the self­ishly cyn­i­cal deserve a thrash­ing, but igno­rance is not a defense; so, the unknow­ing are due at least a light beat­ing, too.)

We were spurred to write this post because the Chair­man entered the office today with the front sec­tion of today′s The Wall Street Jour­nal and showed us an arti­cle about Bear Stearns: Pros­e­cu­tors in Bear Case Zero In on Email. See the arti­cle for details, but two Bear employ­ees faced crim­i­nal charges related to, but not lim­ited to, misleading their fund′s investors. The key piece of evi­dence is an e-​mail that one sent the other that describes cer­tain secu­ri­ties as “toast,” but nei­ther men­tioned such a view at a sub­se­quent investor con­fer­ence call. 

Now, as far as we can deter­mine, the author of the e-​mail did not write that the two should offer a “toast” to the won­der­ful secu­ri­ties they owned or men­tion that these secu­ri­ties were like good, thick French “toast” with pow­dered sugar and fresh straw­ber­ries, and real, whipped cream: all just right, like at a nice Sun­day brunch when one tires of Bel­gian waf­fles. No, it seems that he used “toast” pejo­ra­tively, as in these secu­ri­ties are like dry, hard­ened, black­ened bread where futile attempts to spread but­ter result in ashen par­ti­cles show­er­ing the counter-​top and stick­ing to the knife as it scrapes the bread. As it turns out, it seems to be against the law to describe and sell the for­mer kind of “toast” when in fact you have rea­son to believe that it might be the lat­ter kind.

While we don′t approve of such behavior, we must admit that that in our mind, the alleged deceit is not the most egre­gious aspect of the case. Instead, that falls to the use of e-​mail to com­mu­ni­cate. Yes, yes, we read that it was their pri­vate, home e-​mail accounts, but had these men never heard of Enron? Had they not heard of mail servers, clients, local files, forwarding?

Or, did they know about the per­ma­nence of such elec­tronic files? In which case, it seems rea­son­able to con­clude that such behav­ior was habit or modus operandi. That, possibly, it so nor­mal, so ingrained, and so devoid of pre­vi­ous neg­a­tive impli­ca­tions that it was rea­son­able to con­clude that there would never be reper­cus­sions. That they were invin­ci­ble, untouch­able, and so very, very clever. That, dear reader, is the prob­lem of induc­tion (and pride), and who bet­ter than St. James (4: 13 — 17) to address the non-​empirical and prospec­tive aspect of induction:

Come now, you who say, “Today or tomor­row we shall go into such and such a town, spend a year there doing busi­ness, and make a profit”—

you have no idea what your life will be like tomor­row. You are a puff of smoke that appears briefly and then disappears.

Instead you should say, “If the Lord wills it, we shall live to do this or that.”

But now you are boast­ing in your arro­gance. All such boast­ing is evil.

So for one who knows the right thing to do and does not do it, it is a sin.

Amen.