09-18-2008, 09:09 PM
From The Times
September 17, 2008
Wall Street is a financial Head-Smashed-In, where ego carries the hordes over the precipice
Carl Mortished: World business briefing
Head-Smashed-In is a buffalo jump in Alberta, Canada, a communal kill site where the Plains Indians drove herds of North American bison off the edge of a cliff. Over thousands of years, the Plains tribes developed the skill of goading buffalo towards a precipice. As the animals thundered towards the drop, those in front would try to stop but the sheer weight of the stampeding herd pressing from behind would force the buffalo over the edge.
Unesco has designated the buffalo killing ground a World Heritage Site. It seems odd to venerate a place that played a part in the near-extinction of those glorious animals. It is right to do so, however, because it tells us how the Plains Indians once lived in periods of food abundance, just as the abandoned trading floors at Lehman Brothers tell us how extravagant Americans and Britons lived by the reckless accumulation of debt in the early years of the 21st century.
Wall Street is as worthy of World Heritage Status as the bison boneyard at Head-Smashed-In. Americaâs financial centre is not yet extinct, but people are calling time on the investment banks. Two have failed â Bear Stearns and Lehman â and a third, Merrill Lynch, has been swallowed up by an old-fashioned lender, Bank of America, which fancied owning a big stockbroker.
In a matter of days, it has become the fashion to say that the investment bank model is dead. These free-standing institutions that combine corporate advice, lending, stock trading, underwriting and wealth management lack the comfort of millions of retail depositors â the advantage of Bank of America.
They must, therefore, borrow from other banks and, when credit markets stall, their elaborate gaming strategies in complex financial instruments become unsustainable. Soon, the oracles predict, the remaining investment banks Morgan Stanley and Goldman Sachs will disappear into the giant maws of dull high street lenders.
The regular supply of cash is a problem for investment banks, but it is not the root of the problem. The ownership of Merrill Lynch by Bank of America wonât insure against a further outbreak of excess. It will simply shift the risk of excess to the shareholders of Bank of America, who may not have bargained for it.
We can see the tensions between retail lending and fancy investment banking at UBS, which let its own tribe of pinstripes loose to play in the mortgage derivative markets, with catastrophic results.
We now know that the sub-prime securitised mortgage market was little more than a giant pyramid selling scheme in which simple transactions, loans to buy homes, were packaged, bundled, sold, refinanced and the credit risk insured by myriad institutions. None of the bankers who grabbed the passing parcels had any means of ascertaining the solvency of the ultimate borrowers, nor any idea of the true value of the bricks and mortar that underpinned the loans.
If we want to know why some bankers behave like bison racing to the cliff-edge, we need to remember where they came from. The guts of an investment bank is the broker-dealer model, the merging of two types of business: brokers â people who act as agents for investors, buying and selling securities on their behalf â and dealers â who act as principal, trading securities for their own account.
Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobberâs pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.
Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Todayâs broker-dealers have no skin in the game â they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.
The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchantâs compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.
Itâs difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bankâs balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directorsâ service agreements â with generous severance terms â and joint and several liability.
Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.
carl.mortished@thetimes.co.uk
September 17, 2008
Wall Street is a financial Head-Smashed-In, where ego carries the hordes over the precipice
Carl Mortished: World business briefing
Head-Smashed-In is a buffalo jump in Alberta, Canada, a communal kill site where the Plains Indians drove herds of North American bison off the edge of a cliff. Over thousands of years, the Plains tribes developed the skill of goading buffalo towards a precipice. As the animals thundered towards the drop, those in front would try to stop but the sheer weight of the stampeding herd pressing from behind would force the buffalo over the edge.
Unesco has designated the buffalo killing ground a World Heritage Site. It seems odd to venerate a place that played a part in the near-extinction of those glorious animals. It is right to do so, however, because it tells us how the Plains Indians once lived in periods of food abundance, just as the abandoned trading floors at Lehman Brothers tell us how extravagant Americans and Britons lived by the reckless accumulation of debt in the early years of the 21st century.
Wall Street is as worthy of World Heritage Status as the bison boneyard at Head-Smashed-In. Americaâs financial centre is not yet extinct, but people are calling time on the investment banks. Two have failed â Bear Stearns and Lehman â and a third, Merrill Lynch, has been swallowed up by an old-fashioned lender, Bank of America, which fancied owning a big stockbroker.
In a matter of days, it has become the fashion to say that the investment bank model is dead. These free-standing institutions that combine corporate advice, lending, stock trading, underwriting and wealth management lack the comfort of millions of retail depositors â the advantage of Bank of America.
They must, therefore, borrow from other banks and, when credit markets stall, their elaborate gaming strategies in complex financial instruments become unsustainable. Soon, the oracles predict, the remaining investment banks Morgan Stanley and Goldman Sachs will disappear into the giant maws of dull high street lenders.
The regular supply of cash is a problem for investment banks, but it is not the root of the problem. The ownership of Merrill Lynch by Bank of America wonât insure against a further outbreak of excess. It will simply shift the risk of excess to the shareholders of Bank of America, who may not have bargained for it.
We can see the tensions between retail lending and fancy investment banking at UBS, which let its own tribe of pinstripes loose to play in the mortgage derivative markets, with catastrophic results.
We now know that the sub-prime securitised mortgage market was little more than a giant pyramid selling scheme in which simple transactions, loans to buy homes, were packaged, bundled, sold, refinanced and the credit risk insured by myriad institutions. None of the bankers who grabbed the passing parcels had any means of ascertaining the solvency of the ultimate borrowers, nor any idea of the true value of the bricks and mortar that underpinned the loans.
If we want to know why some bankers behave like bison racing to the cliff-edge, we need to remember where they came from. The guts of an investment bank is the broker-dealer model, the merging of two types of business: brokers â people who act as agents for investors, buying and selling securities on their behalf â and dealers â who act as principal, trading securities for their own account.
Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobberâs pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.
Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Todayâs broker-dealers have no skin in the game â they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.
The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchantâs compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.
Itâs difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bankâs balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directorsâ service agreements â with generous severance terms â and joint and several liability.
Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.
carl.mortished@thetimes.co.uk