Deceit & Delusion
When I began a grad job at a London Investment Bank, credit derivatives and for the uber finance geeks, securitisation, were all the rage. The Weekend FT was full of embarassingly glowing stories of how the demigods from JP Morgan & Co planned this bright new era of sophisicated and ubiquitous credit while sipping champagne by the pool at Boca Raton. Greenhorn Oxbridge types made weak references to arcane products they likely never fully understood and bandied about all the key terms that hopefully convinced others they could act the part. Not that dissimilar to a traders role in the brokerage houses anyway you might think. That’s true, and as such I use it to gauge the level of complicity amongt the rank and file of the sellside in this credit squeeze.
One conversation I will always remember that for me typifies what went wrong was with a debt markets guy who shall remain nameless. As usual I was giving it the big one about equities in general (I never really got the alleged sexiness of the more exotic debt instruments as it just seemed to be a repackaging of the same boring fixed income cash flows) and he was giving me one of those “you’re just one of those dumb market traders” looks. Obviously that just threw fuel on my fire. But anyway when he was explaining away his debt fetish for selling things off in tranches the following line stood out:
What I like is being able to outsmart someone. I don’t want to take on any risk, so if I can take a product and package it up in such a way I can take a guaranteed cut from it’s sale then that’s the best way to do things.
(Presumably Ex-)Debt Markets guy, circa 2005
So the new kids on the block thought it was cool because it made them feel smart. No one bothered to point out this newfangled method of repackaging was resulting in triple A assets backed by single A backed by junk. A great big house of cards that neither the buy side nor the sell side nor the ratings agencies bothered to question. The deceit was in selling it to the public (via that perennial medium of unquestioning bluster, the press) as an example of everyone’s-a-winner financial magic. But more worrying was the ability of the great & the good in the financial sphere to believe their own hype. You can count on your hand the number of market participants willing to bet against the tide of cheap debt.
Fundamentally it was the willingness of those hired to make important & complex decisions for themselves & the money they were in charge of to shirk that same responsibility in favour of doing the fashionable thing & feeling smug about it, that brought about the situation we find ourselves in.
The markets as a whole most resemble an infinitely large field of sheep. At any one time the sheep can be found grazing or whatever it is they do, in a number of flocks. These flocks pick an area according to several reasons that can be found by the use of confirmatorial bias, however in reality it is a completely arbitrary decision upon which the flock then acts. After a while the patch of grass disappears and it’s time to move on. But the sheep being stubborn don’t move on in an efficient manner; they proceed to kick the arse out of it until they’re feeding off nothing more than their own delusion that here lies a perfectly lush grassy veld. Eventually the flock, disillusioned with finding only assorted tree roots and babies heads, moves off to the next arbitrary stance where the process begins anew.