Wednesday, September 24, 2008

Spengler on Leverage

"It is remarkable that the US authorities, exhausted from their efforts to bail out the mortgage guarantors and other firms, have left Lehman to its fate. An enormous hoax has been perpetrated on the global financial community during the past 10 years. ... Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage. ... Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It could only be allowed to collapse. ... The aging pensioners of Europe and Asia must find young people to pay interest into their pensions at home. ... But one-fifth of Germans now are on the threshold of retirement and half will be there by mid-century. ... There is nothing complicated about finance. It is based on old people lending to young people. ... Never before in human history, though, has a new generation simply failed to appear. ... It is tempting to see in the failure of Lehman Brothers and the forced merger of Merrill Lynch with Bank of America a failure of 'corporate culture'. In the case of a great financial firm that has weathered many storms, the failure of a business culture contains more information. ... Lehman''s culture was held up as an exemplar, a beacon to the ambitious and avaricious. Lehman's demise is a minor event next to the travails of America's mortgage guarantee agencies, which required a government bailout last week, to be sure, but it is a landmark in the unravelling of American corporate governance. ... Bear was a group of scrappy outsiders, led by Jews of no social pedigree. ... Bear proudly rejected corporate culture and management philosophy as a matter of scruffy pride. ... [Jimmy] Cayne was not our class, dear; the jumped-up refugeee from a junkyard had risen too high and received his comeuppance. ... Everyone may like Dick Fuld, who presides over a socially-connected, politically-involved, army of networking specialists who have one of Wall Street's best stock of favors done and collectable in return, But no one likes Fuld well enough to buy his firm. ... What took both firms down, rather, is a sudden break in the chain of expectations between the present and the future", Spengler at, 15 September 2008.

I looked at Fannie's Board of Directors. Wow. It's 12 members include: a former FBI director, an accounting professor and seven persons in the "finance" industry. How much do these people know? As for corporate culture, whatever that is, bah humbug, see my 29 February 2008 post on Stephen Cutler.

Connie Yu, are you listening yet? Come home. Go to work for Exxon USA!

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