The problem with smart bankers

By Felix Salmon
October 14, 2009
Calvin Trillin, in his own inimitable way, has now weighed in on the causes of the financial crisis. It's great stuff:

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Calvin Trillin, in his own inimitable way, has now weighed in on the causes of the financial crisis. It’s great stuff:

“Don’t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

“So what happened?”

“I told you what happened. Smart guys started going to Wall Street.”

Trillin’s right. Bankers have made money for centuries, by doing essentially what their fathers and grandfathers did before them. (They’ve lost money, too, but nearly always in the same way: by lending money to people who can’t or won’t pay it back.)

Then Wall Street went go-go in the 1980s, and lots of smart, hungry, and highly self-regarding MBA types started flooding into big investment banks. When they started making money, they credited themselves, and their own intelligence. Which led to an obvious conclusion: if you did something even cleverer, you’d make more money still. Which, like most things in finance, is a strategy which works until it doesn’t.

Trillin’s also right that a large part of the problem is that senior management had no idea what was going on:

“When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.”

In fact, even the bankers from the upper third of the class — the likes of Bob Rubin, who famously had no idea what liquidity puts were until a bunch of them exploded right underneath him — fell into this trap: in his case, he was both the smart and scrappy arbitrageur who thought that he could turn brainpower into billions, and the baffled senior risk manager who gave his underlings far too much ability to blow up his bank.

Banking isn’t for outright dummies — conscientious underwriting, for one, is a difficult and highly-skilled job which requires good, well-paid professionals. But far too many bankers thought of that kind of income as boring money, and were much more excited by the higher rewards and sophisticated risk management being shown them by the rocket scientists on the structured-products desk. Maybe in future they’ll be more suspicious of things they don’t really understand, but I’m not holding my breath. That’s what regulators are for.

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