Sunday, August 30, 2009

Where Are We Now?

I've just finished "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers," and I want to take some time to digest it and put it into context. I find that we're in a curious position right now, where there are still forthcoming books "explaining" the roots of the financial crisis. So, we're still looking back. Reading McDonald's book, along with many other presentations, it seems to me that the causality and chain of events is quite clear, as we've written about many times. McDonald tells the story from the trader's viewpoint, which is at the center of the storm, and it's quite a tale.

Meanwhile, while we are still looking back, it seems as if notions of regulatory reform, elimination of moral hazard, shrinking the size of the financial sector, and the need to regulate the creation and trading of lethal financial instruments in a casino environment have conveniently been forgotten. Remember "TBF" (too big to fail)? Psychologically, it's not hard to figure out why. I think it's "crisis fatigue." 24x7 coverage of the issues by talking heads and blathering Congress persons has numbed interest and critical thinking. Realistically, most of us are worried about employment and personal finance issues.

Taking advantage of this, the Federal Reserve has now shifted its own commentary from financial market and central banking issues to the shape of a recovery. Now, we're arguing about "V" versus "W" shaped recoveries. This is easy and fun, because everyone can have an opinion and nobody is responsible for where the Dow goes. "How 'bout those Yankees?"

In McDonald's book, it's ironic to hear a hugely successful trader of distressed debt talking about the lunacy of unwinding Glass-Steagall, even though it has allowed his desk and Lehman Brothers to makes tens of millions of dollars in profit in a day. Yet, this foundational issue is now lost in the reading of stock market tea leaves. Barney Frank, who fiddled in his role as head of Congressional oversight, has now quietly also slipped out of the spotlight.

Finally, we read that the new head of AIG is seeking wise counsel from the former CEO, who constructed the house of cards that threatened to incinerate the world financial system. It's too much irony for me.

No comments: