UNDER the stewardship of Dow Kim and Thomas G. Maheras, Merrill Lynch and Citigroup built positions in subprime-related securities that led to $34 billion in write-downs last year. The debacle cost chief executives their jobs and brought two of the world’s premier financial institutions to their knees.
In any other industry, Mr. Kim and Mr. Maheras would be pariahs. But in the looking-glass world of Wall Street, they — and others like them — are hot properties. The two executives are well on their way to reviving their careers, even as global markets shudder at the prospect that Merrill and Citigroup may report further subprime losses in the coming months...
The ease with which Mr. Maheras and Mr. Kim have put themselves back in play is a reminder that for many top Wall Street executives, humiliation and defeat need not result in a professional exile. And they aren’t the only ones. Zoe Cruz, the Morgan Stanley co-president who was forced to leave her job after $10.8 billion in subprime losses, has been approached by investment banks, hedge funds and private equity funds about a senior management role, people briefed on those discussions say.
“It is always an assumption on Wall Street that it is not the individuals that lose money; it’s the system,” said Charles R. Geisst, a Wall Street historian and a finance professor at Manhattan College. “You can fail big time, but you can also succeed big time.
“They think it’s bad luck,” he said, so the attitude is “let’s give them another chance.”
The quick comebacks of these executives stand in stark contrast to the plight of the hundreds of investment bankers who have received pink slips in the last two weeks. They also illuminate a peculiar aspect of Wall Street’s own version of a class divide. Senior movers and shakers often land on their feet, no matter how egregious the losses tied to them. The industry rank and file, however, from mergers-and-acquisitions bankers at Bank of America to sales executives in Citigroup’s hedge-fund servicing business, see their jobs eliminated despite being far removed from the subprime crisis...
Once again, the analogy of the American Way of business to a certain unsinkable ocean liner comes to mind.
But what's at work here? Ben Stein:
...the law was a total puzzle. Here would be one case that went for the appellant, but just a circuit away, or maybe even in the same circuit, there would be another case — with identical or almost identical facts — that went for the appellee.
I was puzzled. I sat in the Sterling library reading the cases over and over, but still could not get it. Then, one day, out of the blue, my learned brother-in-law Melvin, who had gone to Harvard Law School, asked me if I knew about “legal realism.” I didn’t, but I soon learned.
“Legal realism” said that the whole common-law system of abiding by past decisions was a fig leaf. What really happened, at the appellate level and probably at the trial level, too, was that judges made up their minds based on their predilections, their biases, which lawyer was their friend, what they had for breakfast that day. (I myself love peach Activia yogurt.)
Then, because a case that reached appeal always had some legal merit on each side, the judges, or their very young clerks, picked whatever precedent they wished to support their bias and pretended that they were bound by that precedent and could not have decided any other way.
The scales fell from my eyes, and I went on to finish law school in fine fettle. It was just all show business and personal bias and what’s in it for the judge. That made law school easy.
Time has passed in a big way. But the lessons of legal realism have always been uppermost in my mind when I think about law or about anything else important: Stated reasons are often not the real reasons.
Because I usually write about finance, I have come to believe in the theory of what I would call “financial realism,” or what might more accurately be called “trader realism.” Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the “buy” button or the “sell” button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them...
As I see it, this is what traders do all day long — and especially what they’ve been doing since the subprime mess burst upon the scene. They have seized upon a fairly bad situation: a stunning number of defaults and foreclosures in the subprime arena, although just a small part of the total financial picture of the United States. They have then tried — with the collaboration of their advance guards in the press — to make it seem like a total catastrophe so they could make money on their short sales. They sense an opportunity to trick other traders and poor retail slobs like you and me, and they generate data and rumor to support their positions, and to make money.
Mor than that, they trade to support the way they want the market to go. If they are huge traders like some of the major hedge funds, they can sell massively and move the market downward, then suck in other traders who go short, and create a vacuum of fear that sucks down whatever they are selling.
Note what is happening here: They are not figuring out which way the market will go. They are making the market go the direction they want...
These traders, not economists or securities analysts, can turn the world upside down, make governments tremble, give central bankers colitis and ruin the lives of ordinary men and women saving for their children’s college education or their own retirement. In America today, it is the traders, not the politicians or the generals or the corporate bosses, who have the power.
This is what has become of the America of Thomas Jefferson. Lucky for the traders. Sad for the rest of us.
And one thing’s for sure: With the traders running things, it won’t be a good time for amateurs until the traders cry “Switch!” and the market starts to rise.
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