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WallStreet View--- Food for Thoughts

spectrader

spectrader

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New York Times

October 14, 2009


OP-ED CONTRIBUTOR

Wall Street Smarts

By CALVIN TRILLIN


€œIF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence. €

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend. €œBut I have to buy you a drink to hear it? € I asked.

€œAbsolutely not, € he said. €œI can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening. €

He did indeed look capable of buying his own drinks €” one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late €™50s or early €™60s €” a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts.

€œO.K., € I said. €œLet €™s hear it. €

€œThe financial system nearly collapsed, € he said, €œbecause smart guys had started working on Wall Street. € He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over.

€œBut weren €™t there smart guys on Wall Street in the first place? € I asked.

He looked at me the way a mathematics teacher might look at a child who, despite heroic efforts by the teacher, seemed incapable of learning the most rudimentary principles of long division. €œYou are either a lot younger than you look or you don €™t have much of a memory, € he said. €œOne of the speakers at my 25th reunion said that, according to a survey he had done of those attending, income was now precisely in inverse proportion to academic standing in the class, and that was partly because everyone in the lower third of the class had become a Wall Street millionaire. €

I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge €” earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks.

€œThat actually sounds more or less accurate, € I said.

€œOf course it €™s accurate, € he said. €œDon €™t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren €™t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn €™t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht. €

€œSo what happened? €

€œI told you what happened. Smart guys started going to Wall Street. €

€œWhy? €

€œI thought you €™d never ask, € he said, making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini.

€œTwo things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they €™d have so much money they could then become professors or legal-services lawyers or whatever they €™d wanted to be in the first place. That €™s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That €™s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds. €

€œBut you still haven €™t told me how that brought on the financial crisis. €

€œDid you ever hear the word €˜derivatives €™? € he said. €œDo you think our guys could have invented, say, credit default swaps? Give me a break! They couldn €™t have done the math. €

€œWhy do I get the feeling that there €™s one more step in this scenario? € I said.

€œBecause there is, € he said. €œWhen the smart guys started this business of securitizing things that didn €™t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn €™t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness. €

€œSo having smart guys there almost caused Wall Street to collapse. €

€œYou got it, € he said. €œIt took you awhile, but you got it. €

The theory sounded too simple to be true, but right offhand I couldn €™t find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. €œI think I need a drink, € I said.

He nodded at my glass and made another one of those eyebrow gestures to the bartender. €œPlease, € he said. €œAllow me. €


Calvin Trillin is the author, most recently, of €œDeciding the Next Decider: The 2008 Presidential Race in Rhyme. €


 
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NotGoing2GoBald

NotGoing2GoBald

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spec,

what do you make of this explanation? Do you buy it? Your in the industry, & as such I'm sure you have some strong opinions on the matter. I'd be interested to hear your thoughts.

This explanation doesn't take into account the government pushing mortgages for low income households, who never truly qualified & as such they defaulted on the loans which from my understanding played a major role in the bank failures. Mae & Macs' portfolios were off the charts. I don't recall the exact #'s, but their principal to loan ratio was entirely unequitable.

Wasn't this also the first time mortgages were effectively treated like stocks? They were choppped up, bundled together, packaged, sold & resold in portfolios, correct? What I don't understand is why would any of the whales - banks/investment firms - be stuck holding the note on such (overly) leveraged investments? I would think they were too smart for this (?).
 
spectrader

spectrader

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Smart geeks with formulas. Just to prove my absence from involvement )(_::

On a more serious note-- The simple version is that the bubble mentality was put into hyperdrive by the "smart people" that found a way to reprice risk and take the risk off the table for banks and it was other "smart people" that kept buying the newly repriced risk and then even more "smart people" that made bets against and also insured that risk.
 
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