Our Wonderful Financial Sector: Alchemy + Gotcha Capitalism
posted by Frank Pasquale
The PBS program NOW features an excellent discussion of the crucial role of the ratings agencies in the current financial meltdown–and a good page of background materials. Professors Frank Partnoy and Joseph Stiglitz discuss how “top PhD’s” and “math geniuses” seduced investors into accepting assumption-ridden models. Maria Hinojosa asks one of the rocket scientists: “You just said you didn’t have sufficient data to make [these] huge assumption[s]. This is astounding. If you didn’t have the data, and you’re a data-based credit rating agency, why not walk away?” The only answer: incredible revenue potential for rubber-stamping the bad paper. Hinojosa grills many players at the heart of the industry, and tells the full story behind the brazen email messages and IMs:
“it could be structured by cows and we would rate it”
“model definitely does not capture half the risk”
“let’s hope we are all wealthy and retired by the time this house of cards falters 
)”
That’s the essence of the Wall Street we are now spending untold (and apparently unknowable) billions to bail out–gloating emoticons over opportunistic profiteering. The three CEOs of the ratings agencies earned $80 million themselves over the past 6 years. As Nobelist Stiglitz has stated, we have a “peculiar form of capitalism” in America–”wizards of Wall Street walk away with the profits, and taxpayers are stuck with the losses.” CDOs were the new fool’s gold for Wall Street’s alchemists.
Meanwhile, if you listen to this podcast featuring Anya Kamenatz, you can hear about financial genius on a more pedestrian level–how banks use random rules, changing due dates for payments, and attrition to wring fees out of customers. Online payment systems’ sudden incapacity to apply payments on a weekend (generating untold late-fees) are particularly charming–it’s so nice to see the software get a day off for recreation. It’s “gotcha capitalism” at its finest.
So the next time I hear panic about the “nationalization of the US banking sector” when progressives propose conditions on the bailout, I have to wonder–what exactly is so great about keeping current finance executives free to practice business as usual? I want to hear about real financial innovations they’ve produced–not the types of manipulative paper pushing that appear to be at the heart of the “wealth creation” so ballyhooed pre-2007.
I am happy to say that some venture capitalists have a time horizon of years, not quarters. But real economic growth is going to depend on a fundamental shift in power over investment: from a Wall Street utterly discredited by self-dealing to a government capable of directing infrastructure, green, health, and education investment.
December 2, 2008 at 6:42 pm
Posted in: Corporate Finance, Securities
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Responses (2)
A.J. Sutter - December 2, 2008 at 10:14 pm
1. Venture capitalists (of the VC fund variety) have their own variety of self-serving mishugas. Relatively few of them take any interest in making sure a portfolio company can survive long after they exit. The goal of most VCs is (i) to earn money from fund management fees, (ii) in the case of IPO exits, to sell a story to Wall Street that will keep the price high for a couple months until the VCs can liquidate their holdings of restricted shares, and (iii) in the case of M&A exits, to persuade some acquirer that the start-up really is a strategic fit, which often means focusing on the buyer’s insecurity that it’s somehow “behind the curve” in the relevant technology or service. Corporate VC sometimes has somewhat different motivations, but in those cases the corporate investor’s goals will usually be in conflict with the above-mentioned objectives of the fund managers (been there). Having a longer time horizon doesn’t necessarily mean VCs’ motivations are “purer”.
2. I am surprised at your smug dismissal of software’s need for a day off. If an artificially intelligent agent is intelligent nonetheless, why shouldn’t it recreate? Just as the “virtual” economy is so much larger than the “real” economy, aren’t your prejudices in favor of flesh-and-blood intelligences a bit outdated? To say nothing of your species-ism in belittling financial instruments structured by cows. Just like that pioneering Wall Streeter you quote, if a bunch of cows presented me with a deal proposal, I’d surely read it with great interest.
joe - December 25, 2008 at 4:39 am
stock Market Timing Strategies -S&P and Nasdaq index fund traders and index fund timers, plus Bond and Gold timing strategies.
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