Remember Capt. Renault’s famous line in “Casablanca?”
“I’m shocked, shocked to find that gambling is going on in here!”
Given the hand-wringing about the stunning revelation that motorcycle cops have ticket-writing quotas, triggered by the revelation that a couple of low writers (bad pun intended) had been faking it, you’d think that Colorado Springs residents are as naïve as kindergartners.
In case you kids haven’t noticed, the streets are full of speeders, stop sign runners, illegal left turn makers, inattentive texters and aging incompetents. Absent aggressive enforcement of traffic laws, speeders would go faster, stop sign runners would stop less frequently and merrily inattentive miscreants would run amok.
And for cops who have a problem finding folks to ticket, here’s a helpful tip: Just lurk along any major or minor arterial and you ought to be able to write a ticket every 10 minutes — that is, if you target only the most egregious offenders. Don’t bother with the drivers who are going 43 mph in a 35 mph zone — just pop the ones going 50 or more. You can’t entirely suppress the anarchic tendencies of Springs motorists, but every little bit helps.
It’s interesting to imagine a city without traffic enforcement of any kind: no cops, no street lights, no stop signs, no speed limits — just thousands of bold lunatics motorvatin’ along, trusting in luck, providence and the mysterious synchrony of an unregulated system to protect them from their own folly.
That’s a pretty good description of the American financial system during the palmy years of the late, lamented stock market/real estate boom.
Powerful segments of the business and financial communities managed to convince politicians that regulated securities markets were, like, so last century. Out the door went the Glass-Steagall Act of the 1930s, which separated banks (which took deposits and loaned money) from investment banks (which underwrote securities and advised companies).
So-called derivatives, meta-securities derived from other securities, took root and flourished. The market for derivatives gave birth to products so complex and arcane that even their creators scarcely understood them. It was a world of collateralized debt obligations, structured investment vehicles, credit default swaps and thousands of others.
And, as we now know, it was — and is — a fragile, unstable environment, where de facto national policy was made by a handful of young investment bankers. But unlike the crabby public servants who used to regulate and manage the nation’s financial system, the young Turks who fashioned the most profitable and, as it turned out, the riskiest derivatives had only one thing in mind: mo’ money!
Now, the regulators and politicians who were asleep at the wheel while the scammers and scoundrels took over important segments of the financial markets are looking for ways to deflect the blame. It’s all because of globalization and wicked Russian/Swiss/Arab/European speculators! Or it’s our fault — we should have known better than to accept low interest/low down payment mortgages! And, like Capt. Renault, they’re shocked! Shocked! Who could have foreseen such outcomes?
Here’s what Warren Buffet wrote in an annual letter to Berkshire Hathaway stockholders:
“I view derivatives as time bombs, both for the parties that deal in them and the economic system. Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values … unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counter-parties to them. But before a contract is settled, the counter-parties record profits and losses — often huge in amount — in their current earnings statements without so much as a penny changing hands.”
And, he continued, “The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear … In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
When did Buffet write these prescient words? Six years ago, when Wall Street’s “masters of the universe” ruled the financial roost and prudence was trumped by recklessness.
Can the system be reformed? The facts on the ground suggest that we can’t — at least not without a great deal of pain.
Take Citigroup, for example.
According to its most recent financial report, the bank has $1.1 trillion in off-balance sheet assets, including $760 billion in “qualifying special-purpose entities” and $363 billion in “variable interest entities.” The bank’s maximum exposure is thought to be (by the bank, that is) a mere $140 billion, significantly more than the company’s current market value.
And what are QSPEs and VIEs? They’re instruments that were created to get around tighter regulatory standards that were enacted after the Enron debacle.
Want to know more?
The sage of Omaha, according to a recent report, recently considered the prospects of an unidentified investment bank by reading its 270-page annual report. He said he couldn’t understand 25 pages of the report and decided to pass.
If Buffet can’t understand such shenanigans, what about you and me?
Maybe we’d better confine our risk-taking behavior to going 5 percent over the speed limit — they say you’ll never get a ticket.
John Hazlehurst can be reached at John.Hazlehurst@csbj.com or 227-5861.