Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

Liar’s Poker and Indefensible Men

April 12, 2010
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I started reading a new book last night, although I really don’t have time for it. But it came with a high recommendation from my roommate and assurances that it wouldn’t take too long to read, so I decided to give it a whirl. The book is Liar’s Poker, by Michael Lewis. Anyone very familiar with finance will probably have heard of this book. In it, Lewis chronicles the world of high stakes bond traders at the Salomon Brothers investment bank during the 1980’s.

These were critical years for Wall Street, as Lewis explains, because the Fed Chairman at the time, Paul Volcker, decided to loosen up monetary policy and let interest rates float. As a result of this decision, bond prices began to fluctuate much more than they had at any time in the recent past. At the same time, borrowing exploded on the American scene as the government, corporations and individuals began borrowing at record amounts (this is about when the groundwork began to be laid for the 2007-2008 financial crisis).

Even more interesting than the history though is the culture that Lewis describes. The bond traders and salesmen are made to be almost inhuman. They verbally, emotionally and at times even physically abuse the firm trainees as well as their fellow colleagues. The bluster and bravado described is almost unbelievable. And the sense of entitlement about why these people deserved to make so much money is also somewhat mind-bending. Of course, this was the mid-1980’s, a very different time in American culture, but from what I’ve read about the culture of modern day Wall Street, it doesn’t sound as if the industry had advanced very far.

Yves Smith over at Naked Capitalism had a great post about the very same culture that drove Wall Street over the brink during the last few years. Here’s a key graph from that essay, titled Indefensible Men:

Although the word “entitlement” fits, it’s been used so frequently as to have become inadequate to capture the preening self-regard, the obliviousness to the damage that high-flying finance has inflicted on the real economy, the learned blindness to vital considerations in the pay equation. Getting an education, or even hard work, does not guarantee outcomes. One of the basic precepts of finance is that of a risk-return tradeoff: high potential payoff investments come with greater downside.

The whole essay is much longer, but very much worth the time to read to get some insight on the corrosive culture of Wall Street and how it helped land us in this current mess. Liar’s Poker is also highly recommended. Check out the reviews on Amazon.

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Monday Morning Quick Hits

January 25, 2010
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These are tumultuous times we are living in. On to the links:

– Sam’s Club, a retail division of Wal-Mart, is set to cut 10,000  part-time positions following a decision to  hand marketing promos over to a third party vendor.

– Major Wall Street investment banks set aside nearly $40B for compensation, yet this astounding number actually came in well under expectations due to political pressure from the public and the White House. Don’t expect that pressure to yield anytime soon.

– In another sign the broader economy is struggling, corporate bond yield spreads widened for the first time in two months as investors feared the recovery was stalling.

– The war of words between China and the US over internet chicanery continued on Monday morning. The Chinese rebuked a call by the US to investigate hackers accused of probing US computers.

– Apple continues to gear up for the mass release of its tablet computer device.


    Obama’s Strategic Gamble

    January 20, 2010
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    Watching the Massachusetts Senate race has been fascinating on a number of levels, but there’s one in particular tossing about my brain, and it concerns President Barack Obama’s strategy for tackling major issues when he was elected. Obama has long been known to play strategy over tactics, and it’s the major reason he was able to defeat Hillary Clinton for the Democratic nomination in 2008. He takes the long view.

    Looking back to Obama’s nomination we can sketch a basic outline of Obama’s domestic agenda. First, stabilize the economy. In early 2009, we didn’t know if we were going to fall off a cliff. While he took a lot of criticism from both the right and left, Obama managed the $787B stimulus that likely prevented our economy from sliding towards a second Great Depression.

    Then, instead of approaching financial reform and staying focused on the economy, Obama chose to tackle health care reform. Obama knew the time was ripe to act considering Democrats had just earned a 60-seat majority in the Senate and a large majority in the House, and with a decisive Obama victory, they had the necessary political capital to burn.

    You can see the logic in Obama’s thinking. If the Dems could finally pass health care, they would have a signature accomplishment to point to. In addition, this bill would help millions of people. Once voters could have a year or two to let the effects of the bill sink in (i.e. no more denial of coverage for pre-existing conditions, extension of coverage to 30 million+ people), then they would be much more amenable to further legislative action. Health care reform would truly be a landmark. And from there Obama would have an improved ability to work on other major issues such as financial reform, environmental reform and education.

    Almost a year later, Obama’s gamble is on the verge of failing. The ineffectiveness of the American legislative system has still not produced a signed health care bill. To the contrary, the bill has undergone such criticism from both the right and left that not even 40% of the nation supports the bill in its current form. And with Scott Brown’s victory tonight in Massachusetts, it appears as if House Democrats will now wilt on trying to pass the legislation.

    Even worse, the economy has continued to be miserable. While Wall Street prepares to pay out tens of billions in bonuses, the unemployment rate remains above 10%. Populist anger is real, and it has increasingly become pointed at the current administration. While Reagan, Clinton and Bush may have dug this hole, the public is expecting, fairly or unfairly, for Obama and the leadership in Congress to pull us out. When they fail to see results, they take out their frustration at the polls.

    With Brown’s election to the Senate, the chances of health care passing have dimmed considerably, and Obama’s strategic gamble looks like it will come crashing down on him and the Democrats. Unless some version of health care gets passed soon, the left will lose faith in Obama and Congress, and the Republicans will become increasingly oppositional to any other legislation going forward.

    Hindsight is 20-20, but I wonder what would have happened if Obama had chosen to pursue financial reform first and then gone after health care. The people needed to see effective government in action to buy into Obama’s campaign pledges. And the last year of hapless governing by the Democrats and obstinate opposition by the Republicans is what we have received.


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