Thursday, September 18, 2008

It's Gordon's World -- We Just Live In It

"Greed," Gordon Gekko proclaims at a stockholders meeting in the movie Wall Street, "for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

Maybe that's what the executives of Lehman Bros., Merrill Lynch, Bear Stearns, IndyMac and who knows how many other banks, brokerage houses and investment firms were thinking when they sold their souls to that devil called the subprime mortgage market. Even the very word "subprime" masked the danger, hinting something below standards could still carry the mark of quality. How wrong they were.

And shame on them for not learning. A decade ago we saw Barings, the rock-solid bank brought down by derivatives. Wikipedia defines them as "financial instruments whose value changes in response to the changes in underlying variables." That's just a polite way of saying you're making a bet with your broker about something in the financial world. As 60 Minutes found in 1995, it can be something as simple as cattle futures, or something as complex as a fund tied to the value of several international currencies. Derivatives can make you stinking rich or flat broke. All too often, it's the latter.

Watch CBS Videos Online

But what motivated people to design these high-risk investments? Ask Gordon Gekko. When the plain-Jane stocks and bonds and funds don't sell, it's time to revamp the product line. In step the wizards with their computers to design the next generation of high-gain financial opportunity. Risk, schmisk.

After Barings fell, derivative sales fell with it, but a new analyst came into prominence: the financial forensic investigator. This is someone paid lots of money to figure out how and why your money disappeared in an investment you probably didn't understand in the first place and probably shouldn't have bought.

The risk-schmiskers moved on to the next deal: real estate. Hey, it's tangible, it's understandable, and it actually exists somewhere besides paper. Sounds like a good bet. But we need buyers, and we need fewer barriers. This sounds like a job for Congress.

So people who have no business getting a loan are living the dream... until the wrath of ARM. Sale signs stand at attention up and down those promising young suburbs as keys jingle through the mail back to lenders. We see the stories on the news of disillusioned families who bought too much house. Scorn festers for the greedy mortgage companies. But what about the buyers who allowed themselves to be conned into the housing bubble, who now can't understand why they're upside down on their property, who couldn't be told -- politely and firmly -- "no"?

So this is where we are: investment firms wanting more and leaving all of us with less. The government is now backing up Fannie and Freddy and AIG. At least it had the stones to let Lehman twist in the wind. A guest lecturer in my college economics class introduced me to the principle that some banks were too big to fail. And they can't, lest the system get fouled up more than it already is.

It happened with the S&L debacle and the derivative scandals and now it's happening again. But nobody learns a darn thing. The honchos who paved the way get out with their skin and a few million and it's back to the golf course and the next deal. As Gekko put it, "I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it."

No comments: