My idle thoughts on tech startups
The state of our financial system
I’d be remiss if I let this week pass without noting the current state of our financial system and the furor this has caused among nearly everybody.
In my humble opinion, it is unfortunate that the remedy which has been proposed by the Treasury Department has become embroiled in politics from all points along the political spectrum. I personally have limited interest at the present time to try to apportion blame for the politization of this process.
Similarly I have limited interest in the present moment for attempting to discern who is “at fault” for our current crisis (Note #1). Objectively speaking some element of the blame can be laid at a wide swath of participants in our economic and political system including:
- Certain consumers – who took mortgages and other loans that in their heart of hearts, they knew they couldn’t really afford.
- Certain real estate agents – who told consumers that home prices almost never go down and encouraged them to buy more home than they could afford (if not outright speculate and buy lots of homes), yet knew in their heart of hearts that the fun couldn’t last forever.
- Certain mortgage brokers – who employed shoddy lending and underwriting procedures knowing in their heart of hearts they were simply gaming the securitization process.
- Certain investment banks – who created securities of such complexity that they knew in their heart of hearts could not properly be valued or understood by their buyers. Compounding this problem is that in some cases these banks ended up buying some of these securities either on their own balance sheet or through opaque off-balance sheet vehicles, exposing themselves to the complexity and risk of their own creations.
- Certain investment rating agencies and bond insurers – who improperly gave higher ratings of creditworthiness to various mortgage-backed securities, but in their heart of hearts were more interested in the fees they got from the investment banks than their fiduciary duty to objectivity.
- Certain institutional investors – like banks, pension funds, and others who in many cases bought investments they didn’t understand. They were motivated to get a little extra return versus safer alternatives, even though they knew in their heart of hearts they were taking on additional risk (risk they didn’t understand and underpriced) with these investments.
- Certain government sponsered enterprises (GSEs) – like Freddie Mac and Fannie Mae who were ostensibly “private” companies, but who knew in their heart of hearts they had an implicit guarantee from the Federal gov’t. The management of these GSEs took a plethora of risks and used the companies profits to heavily lobby lawmakers on both sides of the aisle to ensure this guarantee never went away and expand the purview of their risk-taking behavior.
- The accounting standards board (FASB) – who in the wake of the Enron collapse imposed “mark to market” accounting without fully appreciating its unintended consequences when markets freeze, but in their heart of hearts didn’t care so long as their SARBOX business kept growing and we didn’t have another Arthur Andersen type implosion.
- Federal & state regulators – who in many cases where outgunned from the start, but ultimately failed to grasp the gravity of the escalating credit crisis which began over a year ago.
- Politicians of all stripes – who in most cases take lobbying dollars from any variety of the parties above who will provide them. Who in most cases lack the perspective and depth of understanding of our current situation to be able to opine cogently on it. Who in their heart of hearts should know that the right thing to do now is figure out a solution, but instead spend most of their cycles blaming each other or some combination of the groups above.
- Anybody from one of the groups above who broke the law – and incontrovertibly there were folks in virtually every group above who have. But in reality there are not singular bad actors you can point to and the number of people in any of the groups above who actually violated laws is probably a small minority of the total. Virtually everybody in the food chain here benefited from inflating this bubble, which became self-sustaining as it drove real estate prices higher, so almostly nobody had incentive to try to stop it.
o attend to these tasks.