drieuxster (drieuxster) wrote,
drieuxster
drieuxster

What??? Socializing the Risk, and Privatizing the Profits notGood?

Michael Lewis believes that the seeds of our financial crisis were sown when Wall Street investment banks transformed themselves from partnerships to public corporations--that that destabilized their internal risk controls and incentives and made them go for variance.

He has lunch with John Gutfreund:
The End of Wall Street's Boom: John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.
[ cf How Did We Get Here? Michael Lewis's View.. ( emphasis mine )]
Feel free to read the rest of the article.

But it also helps explain the whole KULT of Market Fundamentalism as Mere Religious Blind Leap of Faith, rather than anything that would go by any other name....

We watched the so called VC's dumping Internet StartUps onto the Public, with IPO's, and everyone bought them, because it was the New Pink... Never mind the sobering reality that it was about passing the risk to the suckers, while picking up the profits before things went bad....

Then when the Frap Hit the SHAN, suddenly, folks like Faux News' BaBa O'Reilly is whining that no one told him that Enron was a trading company, or that it was doing energy trading, or any of that... It was as if he was shocked to learn that mere blind faith was not enough....

But fortunately no one really believes any of this lack of faith stuff, since clearly stopping Gay Marriages, is the Most Important reason for Capital Gains Tax Cuts, even in a time of Economic Prosperity like we are currently in, and will always be in...
Tags: economics, generic_fear
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