I was at a panel this evening on government intervention in financial markets. So as not to give away names, or to point fingers of my own, I will leave the venue, host and panelist’s names out.
One of the panelists, however, was the head of restructuring for a marquee private equity firm, and a high-brow veteran of Wall Street. In between some of his better ideas and comments, of which there were many, was some finger pointing at mortgage brokers, who from the sentiment provoked, were to blame for the entire financial mess.
What was striking about it, was the idea that it was not the Wall Street Ivy Leaguers who are to blame, but those state schooled hooligans who mucked everything up by falsifying loan documents and helping homeowners on Main Street lie about their financial positions. He briefly defended Wall Street as having done its job, and that everything would be fine if the three percent default rate expectations were honored by all market participants. Hah!
It was outstandingly arrogant to hear this view, which I imagine is probably shared by a host of Ivy League alumnus, many of whom work or have worked on Wall Street over the last five years. To borrow a phrase from Scooby Doo it felt like he was saying: “What we did would have worked, if it hadn’t been for those meddling kids.”
What stuck in my craw is that none of those Ivy Leaguers, content with their pricing and risk models, remembered snippets of micro economics, such as utility maximizing behavior, game theory and agency costs, or in simple terms that they weren’t the only ones preying on fear and greed.
It was in fact the Ivy Leaguers who created the financial and risk models and the liquidity for mortgage brokers to do their bidding, aided by the ratings agencies, mono-line insurers and one could argue a blind eye from regulators. But did the Ivy’s forget that left to their own devices sales people will do just about anything to make a buck? Didn’t they realize the agency problem embedded in the marketplace they were building? Did they really not realize the the perverse incentive system created a great race to the bottom of lending standards? I suppose for the large investment and commercial banks, it was kind of like being an arms dealer, and not taking responsible for the loss of life.
If you bring it back to the educators, and to those once aspiring students who became the robber barrons of recent time, one must consider how excited these kids were to learn about derivatives, modeling, and all the sexy Wall Street gear of yesteryear. Of course many of them were getting their degrees in the 1980’s and 1990’s. In all that hunger for the “fun” classes, I suppose the emphasis on the classics was lost.
I guess sleeping through micro economics has bitten us all in the butt.