Sympathy for the Investment Banker

Who killed Bear Stearns? After all, it was you and me.

Tim Cavanaugh from the July 2009 issue

(Page 2 of 2)

The emergency opening of the discount window allowed investment banks access to very large medium-term credit lines, with interest rates more attractive than you or I, no matter how good our credit scores, will ever see in our instant of life on Earth. Schwartz’s argument for opening the window to investment banks long preceded the March crisis, and it made sense—that the partial repeal of the Glass-Steagall Act in 1999 allowed universal banks such as Citigroup access to the Fed’s credit line while still barring investment banks like Bear Stearns. But it’s not this inconsistency Cayne has in mind when he rants against Geithner’s supposed delay in opening the discount window: “The audacity of that prick in front of the American people announcing he was deciding whether or not a firm of this stature and this whatever was good enough to get a loan,” he gripes to Cohan.

What comes across is not Cayne’s rage, but his sense of entitlement, his expectation that a firm in default, a firm that is deadbeating on its debts, a firm that has been deserted by its customers and judged unworthy of investment by its counterparts in the private market, should enjoy any better credit treatment than an apprentice landscaper getting a payday loan. It’s the usually unreflective Bamber, interestingly, who best captures the lesson about the discount window that his boss has missed: “This, to my mind, was how the Fed dealt with the moral hazard in the market; this was the point of the lesson they were trying to teach us all.”

So if it wasn’t Goldman Sachs alumni who did in Bear Stearns, who was it? Bamber and Spencer give this question a special flavor, because their narrative is one of blindness, a week in the life of a middle manager who is getting no guidance from his bosses and hearing louder and more convincing rumors of disaster. Bamber engages in who-is-Moriarty wool-gathering (“We were fighting an invisible enemy”). He blames the media (“the Bloomberg agency was, in their own little way, already lining up the nails for our coffin”). He considers unscrupulous short sellers (“I was contemplating the bizarre scenario I’d concocted whereby Bear had somehow fallen victim to some kind of Wall Street scam artist who was waging a rumor attack designed to destroy the firm”). At one point he calls all the suspects into the drawing room to announce that he will get to the bottom of this: “Were this a murder trial, the prosecution would have no burden to prove motive.”

The search for a killer is ultimately hopeless, though, for reasons that become clear as you work through Cohan’s moment-by-moment narrative of a week when it was already too late to save Bear Stearns. I kept hoping for an Oedipus Rex ending, in which one of the heroes would find out that he was himself the criminal. An even more apt antecedent would be Murder on the Orient Express, in which all the suspects are guilty.

But even these outcomes would lack a certain grandness, a recognition of a larger truth that makes both books already dated. To see the full story of the credit collapse is to understand what a small role Bear Stearns really played in it. The real star turn was shared by millions of people, and the whole superstructure of careless lenders, eager bond buyers, and willing underwriters existed merely to service the base unit of the collapse: the ordinary American deadbeat. Every time your local paper tells the moving tale of some poor soul who ended up in foreclosure, mysteriously owing $220,000 on a house that originally closed at $63,000, you’re finding out who killed Bear Stearns. (I’m not making those numbers up. They came from the opening anecdote in a recent A1 trend piece in my local rag.)

It’s hard, much harder than understanding the plot twists of an investment bank’s demise, to grasp the full measure of greed and venality involved in Main Street’s predatory behavior toward Wall Street. But it helps to consider the scale of seemingly real economic activity generated by the phantom economy of Americans living beyond their means: the way recycled mortgage-backed securities inflated house appraisals, the degree to which foolish auto loans kept Detroit on life support, the amount of gainful retail employment that was created through abuse of consumer credit.

As this economic acromegaly recedes (we still don’t know how big the monstrous growth was), it seems frivolous and beside the point to condemn Wall Street firms that merely delivered the bounty we all wanted. Consider that according to Federal Reserve “flow of funds” data, the United States lost $11.2 trillion in household net worth in 2008. The next flow of funds report, due in June, will tell us how much value was vaporized in the first quarter of this year, and the sum is likely to be substantial. At some point, this depreciation will bring the inflated-asset economy back into line with a more manageable reality—or at least that’s what we hope. In this context, the entire corporate history of Bear Stearns looks like what it was: a hill of beans in this crazy world.

Don’t expect to read that in a bestseller. Blaming Wall Street moguls for their devastating heedlessness is easy. Asking yourself why you didn’t see where all this was heading, or offering to reduce your inflated salary in the service of a sustainable economy, is hard. If you want a compelling rendition of the fall of a once-proud investment bank, Bear Trap and House of Cards are both worth reading. But if you want to know who got us into this mess, you already have your answer: You got us into this mess.

Contributing Editor Tim Cavanaugh ([e-mail]) is a Los Angeles–based writer.

Comments

|6.15.09 @ 3:09PM|#

I had no idea that Jimmy Carter and Louis Rukeyser had a love child.

Xeones|6.15.09 @ 3:12PM|#

Is that Jimmy Cayne? Goddamn, what's wrong with his face?

The Extispicator|6.15.09 @ 3:24PM|#

no wonder he felt entitled ... he feels God owes him an apology

Inkstained Wretch|6.15.09 @ 4:36PM|#

Tim, I am guessing that this is the A1 story from your local rag that you reference in your review:
http://www.latimes.com/news/nationworld/nation/la-fi-dollarhome12-2009apr12,0,1284522,full.story

Geez, what a clusterfuck ...

|6.15.09 @ 5:39PM|#

Cavanaugh - you're a top-notch financial reporter... Acromeglamy? (sp?) get my dictionary out!

Damn, brotha! WTF?

Quantitative easing is fucking all the Austrian brothers up.... too bad. They suck because its fucking working!!!!

Oh - and Rush Limbaugh is the redneck hero!

Selah - motherfuckers!

|6.15.09 @ 6:12PM|#

They suck because its fucking working!!!!

How? The bond market is continuing to collapse. (For those, like shrike, who don't know what QE is, its the Treasury buying its own bonds at auction to keep the price up).

|6.15.09 @ 6:34PM|#

Avalon Hill may be my favorite Reason reference of all time.

|6.15.09 @ 6:39PM|#

Gold is falling, silver fell 10% without its gold "mystique bullshit" premium, the dollar is holding or upping, and the Obama haters continue to dive into aborto-freak dustbins squalling for their hollow GOP teat.

RC, I wish I could bet against you for a living.

Elphalpo|6.15.09 @ 7:48PM|#

"Or if you're partial to the Warren Spector alternative-history plot..."

Did Tim actually mention the creator of Deus Ex, the most awesomest PC game of all time, in the article, or is there some other Warren Spector I'm not aware of?

Joel|6.15.09 @ 8:07PM|#

[I]f you want to know who got us into this mess, you already have your answer: You got us into this mess.

Okay, since I see nobody else has said it yet, I will. Bullshit, Tim.

|6.15.09 @ 8:15PM|#

Bill O'Reilly is a cum-guzzinging cocksucker. I aonly wish to meet this cocksucking whore 1-on-1.

|6.15.09 @ 8:36PM|#

Sorry, I am not responsible, I have no personnel debts now and have paid off all previous personnel debts.

Also while I agree that deadbeat debtors bear large part of the responsibility, there are two sides to a debt. If you are dumb enough to lend to someone who can't pay you back then you are part of the problem too. They failed in the no.1 rule of business, make sure you get paid.

|6.15.09 @ 8:51PM|#

Christ - faggotry is endemic in North Ga.

Just the facts, maam,

kiff|6.15.09 @ 9:00PM|#

Wow, is Shrike for real? Or is he some kind of insane flame-troll?

kiff|6.15.09 @ 9:03PM|#

Also, I'm with Joel. I don't believe in this collective guilt, we-have-all-sinned-in-our-hearts crap. I have never defaulted on anything. Never even had a late payment.

|6.15.09 @ 9:21PM|#

Wow, is Shrike for real? Or is he some kind of insane flame-troll?

Nahh, I hate racist assholes - so fuck you too.

Brian Reilly|6.15.09 @ 9:49PM|#

Anyone who did not see the unsupportable debt structure being built was not paying attention. A simple look at housing and new car prices versus income levels and incurred debt (public and private) was all the information that any thinking person of any political persuasion needed to be fully informed that a huge scam of some sort was being perpetrated.

I know nothing about Bear Stearns, and do not care much. Ditto for the Fed, Long Term Capital, or bridge. I can do arithmetic, and saw a long time ago that something phony was going on, and everybody seemed to want a piece of it.

Suck it up, at least we do not live in North Korea... yet.

Jay |6.15.09 @ 10:26PM|#

The more I look this problem over, the more inclined I am to think of this as something done on purpose, by somebody.

I'm just some schlub who reads the economist. But as this was all building up I was looking around at all these insane people who assumed that all housing prices would double every 5 years. And the appraisers who would appraise for whatever the property needed, so a good LTV could be reached. There are too many people on the ground who had too perverse of incentives, which became a self reinforcing cycle.

Rich|6.15.09 @ 10:40PM|#

The sin I *might* buy into (sorry) here is one of omission: not massing with like-minded folk early on and, um, insisting that certain crap be stopped and certain people make reparations. Oh, well.

threeofclubs|6.16.09 @ 9:13AM|#

"Main Street's predatory behavior toward Wall Street"
one of the oddest things I have ever read.

I do think journalists should go on and on about the massive amounts of corporate welfare that many investment bankers want.

Mike|6.16.09 @ 10:58AM|#

I worked in residential construction during the middle of the boom. We all thought the damn thing was a bubble, and just hoped we could weather the collapse when it eventually dropped. Mostly I never expected it to keep bubbling up for as long as it did.

Speak for Yourself|6.16.09 @ 1:46PM|#

"Asking yourself why you didn't see where all this was heading, or offering to reduce your inflated salary in the service of a sustainable economy, is hard ... But if you want to know who got us into this mess, you already have your answer: You got us into this mess."

I was an attorney in a white shoe Wall Street lawfirm from 2000-2006. My wife and I bought a condo in the NY area in 2001. We came to the following conclusions very early on:

1 - My ridiculous salary was completely decoupled from reality and was only a result of the fact that anyone smart enough to go to a top tier law school could also get a top tier MBA (even by the outrageous hours I worked); and

2 - Our condo price doubling every 2 years could not last.

So we lived within our means (not assuming that the gravy train would stay on track forever) and saved our pennies for the years that I slaved away, and sold our condo in 2006 (for more than double what we paid). We are debt Free.

So speak for yourself Tim.

Tremors|6.16.09 @ 9:04PM|#

Very counterintuitive, Tim. "Edgy," even.

As has been said, the bankers HAD to know something would give. They preyed on the ignorance of the regular folks with high-school diplomas. Regular-folk greed certainly played a starring role, but to damn the marks and exonerate the predatory banks bespeaks a rare degree of capitalist autism.

Oh, you were too smart to fall for it? Here's a cookie.