FROM THE MOUTHS OF BABES

I'm fortunate in having a couple of pretty bright kids. It's a gene thing. The wife is pretty smart. Anyway, #2 son called the other day with an idea,; in fact he had a couple of pretty good idea. The first one is (and I'm pretty much quoting him here) is that the most effective regulation in the free market is self created. He went on to say that the most staunch rule of all is to avoid past mistakes. He then went on to more or less quote his old man who often told him that no banker ever made a bad loan (unless he was a crook) but most bankers have made loans that went bad...once...because one tends to learn from experience or one finds a new way to earn a living. I'm now going to quote him directly.

"Unfortunately, the market suffers from a short term memory because a premium is placed on youth while experience is often ushered out for new blood. This creates a largly academic environment where principals, formulae and algorithms are assumed and assigned predictable outcomes, ignoring factors such as human nature which can drastically change results. Mistakes are repeated because their rationale is always the same and because history has been ignored."

"We have created a smart workforce, not a wise one. While the academic qualifications of the workforce has increased, so has the rate of turnover in areas of critical production. The technicians are crunching the numbers with little to no real world experience, creating idealized data for decision makers with the result being flawed assumptions leading to disastrous consequences."

I sat and listened to him and read what he had written and realized that he was absolutely correct. The industry has no institutional memory. None. These guys have never met Mr. Murphy and there is no one around to tell them that he really exists. There is no one left standing in our largest institutions that can advise that a property bubble in Asia in 1987 is very little different from a housing bubble in the U.S in 2006 or for that matter a dot.com. bubble in the stock market in 1998. Worse yet, the manner in which we are attempting to correct and not repeat mistakes of the past is through regulations written by individuals who have even less memory, probably less intelligence and certainly less knowledge of the business than the practioners for who the regulations are being written. Plus ca change, and as Joe Nocera has recognized, it will happen again.

To really get one thing my son and I ask would you place your future in the hands of a lawyer or a doctor whose last contact with learning his or her profession was the day of graduation? Probably not. Which is why, despite having been admitted to the practice of law sometime last century no one will allow me to practice today because of the absence of continung education. I don't know what I shoud know, it's that simple.

In the past I have spoken of Banking in London at the time of the great international expansion of the 60ties and 70ties. A foreign institution coming to the UK was required to take on its staff a senior banker--the "Bank of England Man"--just to make sure that thngs were done properly...that is to say the manner in which the Bank wanted things done. It worked brilliantly. We need more than that. We need a mandatory program for the industry whose mission would be to create and maintain standards, privide a guideline of "best practices," review structures and provide various levels of managers with an institution history designed to avoid mistakes of the past. It is interesting to note that one of the best run businesses in the country--indeed in the world--the United States Military has just such a program. The Army War College and the Command and General Staff School are absolutely essential and mandatory to the advancement of senior officers. Other branches have the same and high on the list of objectives in every case is the avoidance of past mistakes. After what we have learned over the past two years is the financial industry any less important? I/we think not.

We're off to see #2 and the grandkids tomorrow but I'll have further ideas next week. Thoughts would be greatly appreciated. The Pack 27, Pitt 17. See you later

WADDYA KNOW JOE...

That was a song title back in the 40ies. The answer was, "I don't know nuttin'." Funny song but in the case of the N.Y. Times' Joe Nocera, he figured it out last week.

Joe actually read the Financial Crisis Inquiry Commission's ("FCIC") report--or at least parts of it. You see, Joe gets paid to do things like that whereas I don't. Then again, while Joe may not have an instinctive understanding of what goes on in the business, as his last week's article proves, he's a pretty good, quick study. I'm not going to go through his analysis for it is best if you read it for yourselves, but Joe does come to two very correct conclusions:

1. The report is a hodgepodge of facts and figures which reaches no definative conclusion and, indeed, may raise more questions surrounding the events of 2008, and
2. It's going to happen again.

Now there is a show-stopper! Where have we heard that before...on these pages perhaps? Guilty as charged I'm happy to say. Joe and I agree because we have both reached the same conclusion: the fault was not in a rush to deregulate leading to a lack of regulation; we had plenty. It was not due to a cascade of fraudulent practices...although there were plenty of those. It was not due to new products that were created; but they facilitated what happened. It was not due to the actions of Fannie and Freddie; although they clearly exacerbated the crisis. It wasn't even due to the prolificacy of the Fed...although God knows it couldn't have happened without it, or the rating agencies or the accountants. In fact, we are not entirely to blame as this was a global disaster. All of these things are important but to use Mr. Nocera's words, the real cause was hiding in plain sight: It was the human condition.

The events of 2007 and 2008 were not unusual. We have had financial collapses throughout history although none, perhaps, as devestating or as globally comprehensive as this one. Every one, however, has remarkable similarities. There is generally an asset involved be it tulip bulbs or ocean front property in Boca or Santa Monica or Las Vegas. There is always an excess of liquidity. There is generally a period of prosperity. There is many times a preferred asset class of investment as witnessed by the dot.com. period of the nineties. There may be governmental stimulus or directed investment or consenual oversight as there was in the seventies following the oil shock as banks operated as disinteremdators on behalf of sovereign borrowers. And there is always, ALWAYS, a delusion on the part of all participants that what has gone up will NEVER come down or that any downturn will be "mannageable." It is in our stars, always has been, always will be.

Mr. Nocera figured this out and good on him. Some of us have known this for quite some time. Some of us have actually witnessed this manifestation of humanity on multiple occasions and have actually spoken out and warned against a repeat of history. And all of us have, for the most part, been ignored. I have no idea how much the work of the FCIC cost the taxpayers. A lot would be my guess, and while an interesting exercise it was more or less a wasted effort, except for the fact that I suspect there are a few more Joe Nocera's out there who have figured it out which may lead to something different that the Barney/ Chris the Crook monstrosity that is supposed to save us from ourselves. With a bit of help that I have received I'm going to try to help out with a few thoughts tomorrow. Stay tuned.



Ed. Note: This is being posted a day late. I have no idea what happened yesterday