Wall Street, as we know it, is dying. The masters of the universe are turning into mendicants. I think there is a semblance of sanity dawning over this iconic street. Starting with the demise of Bear Stearns, now Lehman, most certain death of Merrill (owned by BOA now), things have turned so ugly that the last of the Mohicans Goldman and Morgan are being converted to corporate banks. Thats the final nail in the coffin for the sexy world of investment banking. For some reason, I-banking had a glamor unparalleled by any other profession. Big ticket deals, high profits and cuts of successful trading, sex appeal of M&A, etc etc have all built an aura on Wall St. As one of my best friend has pointed out recently, this episode has shined light on the WASP model of capitalism. Profits are private, losses are public, how disgusting.
These ivory tower, ivy-league educated bankers come up with the most esoteric and exotic derivative transactions, make big cuts from them when the going is good and keep spreading the greed. They are the role models for younger generations in undergrads. The stylish I-bankers tying their laces on the way to work, with a starbucks in hand and ready to bite the ass of the bear. Whey they face the comeuppance for their rotten transactions (which most of the exotic deals such as Mortgage Backed Securities, IOs, POs, complex derivatives, securitized assets are anyway), they beg Govertment to bail them out. Actually, if Govt. doesnt bail them out, its us the common investors who get screwed since there will be a systemic collapse. Bottomline, greed makes people blind to reason. Gordon Gecko is wrong, greed isnt good!
There is no value creation from these exotic transactions. Nothing positive happens to the society. Warren Buffet has always insisted on the perils of these derivatives. Its high time we realize them. In school they taught me that derivatives are used for hedging, well yeah and I am Batman. They are almost always used for speculating and the underlying is stock or bond or bullion or commodity and hence everything is tied together in a complex mess. The undoing of one is the undoing of the other. No synergies created here, only a zero sum game!
I am happy the shine is lost from the sex appeal of I-banking. The Goldmans and Morgans of the worlds will now be like the State Bank of India or Bank of America or Bank of Nigeria etc. Goldman and Morgan will now take deposits and you can have checking accounts in them. They will now report to Fed Reserve and not SEC. They will just become banks, only a little bit more sophisticated in look and feel from ordinary banks. Which Ivy leage B school grad would want to work for, say Syndicate Bank?
Check this. The US Govt. is going to spend a staggering $700 billion to salvage this home loan mess. This monster that Wall St. created is going to cost the Americans a lot of money. Some facts now. The deficit for this budget year, which ends on Sept. 30 2008, is expected to rise to $407 billion, a figure that is more than double the $161.5 billion imbalance for 2007. The Bush administration is estimating that the deficit for this budget year will hit $482 billion, a record.
And that forecast doesn't include the $200 billion the administration committed to spending two weeks ago when it took over the nation's two biggest mortgage companies, Fannie Mae and Freddie Mac, the $80 or so billon the US Govt. put into AIG, and the $700 billion the administration is now seeking to soak up the bad mortgage-backed securities. The legislation Congress passed this summer that gave the authority to rescue Fannie and Freddie boosted the limit on the national debt by $800 billion to a mind-numbing $10.6 trillion and the new package the Govt. is working on will further the debt limit to $11.3 trillion. Now think about the Iraq war (cost upwards of $2 trillion according to various estimates) and imagine the mess the US Govt. is in. All that glitters isnt gold. It takes a lot of hard work now to fix the American financial system and its important, very important that someone fixes it sometime soon because the world needs a healthy US. Its time to look at the problem square in the eye. I sincerely doubt war-mongering McCain is the man for the job and I have no doubt that Obama has the right intentions if not the vast experience. But sometimes, all it needs to fix a mess like this is chutzpah and not experience.
Remember the post-Milken S&L crises? The US Govt. stepped in then too, to undo the wrong doings of Wall St. That tab was around $700 billion again and it was a mess. But this housing bad loans seems a bigger mess and might take longer to resolve. Maybe, the title of Sin City should move from Las Vegas to Wall St., perhaps Sin Street! The smart bankers who wrote this mess and orchestrated this economic crime should have some shame when they look at the mortgage valuation mess they made. Someone somewhere said this and I quote "If these guys were so smart, why couldn't they value a mortgage properly and insist on proper documentation and collateral?".
No comments:
Post a Comment