Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [107]
If the Fed feels investment bankers have learned anything from the Bear Stearns debacle, it might consider Jim Rogers’s point of view. “You don’t see any 29-year-old cotton farmers driving around in Maseratis,” he observed,“but you see a lot of 29-year-olds on Wall Street driving around in Masseratis.This is not the way the world is supposed to work.”9 Warren Buffett put it another way: “Wall Street is going to go where the money is and not worry about consequences.You’ve got a lot of leeway in running a bank to not tell the truth for quite a while.”10
The securitization markets presented a high potential for fraud known as the fraud triangle: need, opportunity, and the ability to rationalize one’s behavior. Many financial professionals have great needs: the need for a larger house in the Hamptons, the need for a large yacht, the need for a rare Patek Philippe watch, the need for a multimillion dollar annual bonus. Lax oversight provides the opportunity. Intelligent people with broken moral compasses—can’t they afford a new ones?— provide the rationalizations.
SEC Chairman Cox testified that the SEC was investigating whether there was unlawful manipulation of Bear Stearns’s stock that led to a run on the firm. Cox did not refer to earlier statements (early 2007 earnings reports) made by CEOs and CFOs that may have propped up stock prices, but he might want to look into it.11 How do we explain the SEC’s poor reaction time to the securitization problems at the investment banks it regulates? Could the SEC’s conflicts of interest have anything to do with it? Former SEC staffers often seem to land very lucrative jobs working for law firms that represent investment banks, working for law firms seeking expert witnesses to defend investment banks, or working for investment banks needing a new general counsel. Some SEC officials often end up affiliated with a huge private equity fund or start a fund of their own with fundraising help from investment banks. I am sure there are many rationalizations for this.
Warren Buffett is among those that felt the Fed action with respect to Bear Stearns was probably necessary: “Just imagine the thousands of counterparties having to undo contracts.”12 I disagree, but I could be wrong, and there is no way to prove this either way since the bailout already occurred. Banks will bid on all or part of a derivatives book. It is a pain in the neck, but it has been done successfully several times in the past. I agreed with Bernanke when he said in testimony: “Normally the market sorts out which companies survive and which fail, and that is as it should be.”13 I wish Bernanke had stuck to that.
Federal chairmen may not want to bite the hand that may feed them in future. Jeremy Grantham wrote in his April newsletter that a Federal Reserve chairman may find that on the retirement lecture circuit “grateful bailees . . . hire you for $300,000 a pop.”14 Charles I. Plosser, president of the Philadelphia Federal Reserve Bank, and Jeffrey M. Lacker, president of the Richmond Federal Reserve Bank, also expressed concern. Plosser said the Fed might be “sowing the seeds of the next crisis.”15 Lacker said the credit hand-out to financiers “might induce greater risk-taking.”16
Congress embraced The Emergency Economic Stabilization Act of 2008, the bailout bill proposed by Paulson and Bernanke, with weak oversight and no requirement for using market prices. William Poole, the retired president of the St. Louis Fed, finds it “appalling” that the Fed is “a backstop for the entire financial system.”17
If the Federal