10 Mar The Moody’s Blues
The last entry in this journal was rather pessimistic. In it, we recounted what was likely to happen from the Fed’s irresponsible attitude towards cutting interest rates without a workable plan in mind about what to do next. Our verdict was that nothing good was to come out of it. However, that still left open the possibility that nothing bad would come out of it either. We were dead wrong, for the credit markets are now in an even bigger mess than they were 30 days ago.
This mid-life crisis of confidence is not going away any time soon, and politicians are now busy looking for whipping boys with names like Prince and Mozilo. As if these guys are single-handedly responsible for the excesses of an entire nation. These people, and their friends, were acting self-interestedly, and most of us would do the same if we had the chance. Who knows, maybe we will soon?
Besides, it’s a little late to look for culpability on Wall Street. You might as well hand out speeding tickets at the Indy 500. As things now stand, the people actually responsible for this mega-disaster have never truly been called to account. And who is that? How about the rating agencies?
The logic is simple and unavoidable. If there are a slew of bank robberies in New York, Mayor Bloomberg is not going to visit the headquarters of the NY Bank Robber Association and ask its management: what have you been doing, you busy, busy little bees? He will visit the NYPD’s headquarters and ask the Police Commissioner why he is not stopping those same robberies. It is not the fault of Wall Street when excesses take place. People working there are behaving totally consistently and rationally, as they have for 100 years by the way, in trying to make an honest and, alas too often, dishonest buck. It is that of those who claimed to act as the policemen for the credit markets, and who, in fact, were doing a fine job not too long ago. Those who could have stopped them, who should have stopped them, even assuming they ever knew how, were themselves playing the other side in encouraging the behavior they were sworn to prevent. It was not difficult to do in any event. You had to have been completely unconscious to ignore the warning signs, some as big as a managing director’s bonus check.
This crisis took years to unfold and it will take years to go away, until the next one that is. Unless Value in structured finance is conceptualized properly, which really means conceptualized at all, this crisis will teach us nothing, except that finance still remains in its infancy, somewhat like aerodynamics in the 19th century. Price and Value are incommensurate and can never be equated as a matter of definition. One is linear (Price) while the other is non-linear (Value). To define them as identical amounts to a quadrature of the circle, something that has eluded mankind since time immemorial. The problem is not so much that quadrature has yet to be discovered, for that will never and can never happen. The problem, rather, is the naïve belief in the outer possibility of Value.
The fault, dear brethren, lies not in our deals but in our selves.