The Financial Crisis: A Victimless Crime?

As any good detective might tell you, in order to catch a criminal, you must have a crime and in order to have a crime, you must have a victim.

This week the US Senate released a 650 page report, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”.  Of course the metaphor in the title lies in the reference to “anatomy” and the indirect reference to a “corpse”.  In this tragedy, the role of the corpse is played by the Global Economy (except China and Brazil, we suppose).  The problem with this casting is that the actor (i.e. the Global Economy) is simply too big to get one’s head around it; not unlike standing 6 inches from an aircraft carrier and trying to take in all its subtleties (not an easy thing to do).

Nevertheless, if you cast the Global Economy on one side, you would seem to need an equally large villan in the other leading role.  In comes Wall Street in all its high office tower, private jet flying, five-star resort staying, Gucci wearing best to the rescue. 

We fear that the reality doesn’t live up to the Hollywood casting.

The New York Times had an interesting article today, asking the question “Where are all the prosecutions?”.  The general theme seems to be based on the prevailing conventional wisdom that “Everyone knows that Wall Street bamboozled their customers and stole billions from their innocent clients”.  Has to be true, right? 

If it is true then another popular conventional wisdom is there to support the argument; namely that “This fraud was so sophisticated and so well thought out that it will be next to impossible to pin the blame on the Wall Street bankers”.

On the other hand, we would prefer to have folks consider the following:

No doubt there were bad transactions being put together by Wall Street bankers.  That is simply a fact that cannot be disputed.  However, if they were so smart and if they were so cunning, as to make sure they weren’t caught, what happened to Bear Stearns, Lehman, Merrill Lynch, UBS, etc, etc?  We suppose they didn’t get the memo.

*  Are we really to believe that many, maybe most, of the investors in complex MBS, CDO and other structured programs were not “sophisticated” investors?  Who’s kidding who?  So many of these folks started their careers on the sell side at those very same Wall Street banks.  Many others are simply too smart or capable to have to work for a large public company, like a Wall Street bank, where their ideas and strategies would be too constrained.

We have in the past offered a different analysis of the events and actions that led to the collapse of the global credit markets:

1- The entire market, including everyone from issuers to arrangers, to rating agencies, to law firms, to accounting firms and to investors fell into the same trap that has been a major component of every major market collapse since the dawn of time; namely, too many people became too lazy and relied too heavily on the work and opinions of others.  No matter how sophisticated we might become, we will always be vulnerable to complacency and no Basel III or Dodd-Frank is going to completely solve that problem.

2- If we want to narrow the focus to the US market (since it is the linchpin in the Global Economy), we would prefer to look where the majority of all that extra liquidity and cheap capital wound up from 2000-2007.  Most of it wound up in the pockets of consumers and many plowed their money into the US real estate market.  This “social movement” was engineered by our Government (and we voted for them) in the late 1990’s and rubber stamped by US regulators in the early 2000’s. 

In our view, if you want to find a villan in this tragedy, it will be hard to do so.  That’s because, in addition to all those Wall Street bankers that seem so obvious for the part,  this casting call will need to include the thousands of small time mortgage brokers and bankers who bent the rules, the regulators who turned an eye and even the politicians who thought they knew better.

How about this as an answer to the New York Times question……..  Maybe the reason that there has been a shortage of criminals in this movie is that there really isn’t a victim here…… And as we mentioned above, if you don’t have a corpse then you don’t have a crime.

About markferraris
Managing Principal Orchard Street Partners LLC

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