WASHINGTON — The phenomenon of opulent Wall Street investment
wizards contributing in large numbers to the Democratic Party,
often to the left-wing of the Democratic Party, has until recent
years struck me as perverse to the utmost. During the 2008
election cycle, 60% of the donations made by employees of the top
Wall Street firms went to Democrats. Surely these Wall Street
donors had to realize that the left wing of the Democratic Party,
which dominates the party, is utterly ignorant of the economic
system that has allowed the Wall Streeters their opulence. Yet as
the imbecility of Citigroup and AIG and all the rest is revealed,
it has become obvious that those who write checks for Madame
Pelosi and for the enthusiasms of Al Gore actually know very
little about free-market capitalism. If they did they would have
realized that in capitalism the bubble always bursts and the
chain letter always runs out of suckers.
Reviewing the fall of these impossibly leveraged investment
firms, it is apparent that their leading executives had no
respect for prudent risk management or for prudence in general.
Lending standards were foreign to them. Their laxness would have
been spotted easily in decades past by prudent lenders. Yet for
several decades now standards of all sorts have been wasting
away, for instance, entertainment standards, intellectual
standards, investment standards. Where there was once Ella
Fitzgerald there is now Britney Spears. Russell Kirk has been
replaced by Arianna Huffington. Walter Wriston gives way to
Robert Rubin. Obviously when investment standards are abused the
consequences are more immediate than in the realm of
entertainment and intellect. Financial loss is real and cannot be
denied for long.
From our vantage point in early 2009, we can see that critics of
Alan Greenspan were right when they said he had dropped interest
rates too far from 2001 to 2004. But what about the products that
the Wall Street wizards were selling? They were called — in
hushed tones of awe — “complex derivatives.” Actually they were
sausages stuffed with junk loans, mediocre loans, good loans, and
sufficient spice to sucker the credulous. These sausages were
sold all over the world and every time a transaction was made
those in on the transaction made money, even the vegetarians,
even the economic ignoramuses. It was a kind of gigantic chain
letter. Government regulators did not take heed. The politicians
did not take heed. Those investment bankers who did and who spoke
out were ignored.
As one of the now discredited wizards, former CEO of Citigroup
Chuck Prince, put it in an interview with the Financial
Times: “When the music stops, in terms of liquidity, things
will be complicated. But as long as the music is playing, you’ve
got to get up and dance. We’re still dancing.” He said that in
July of 2007. He was off the dance floor by early November. There
was a time when such insouciance about excess “liquidity” would
be unthinkable for a responsible Wall Street banker. Yet as I
say, in recent years there have not been a lot of responsible
officers in the Wall Street investment houses and those who were
responsible were not listened to.
On Wall Street, in London, and wherever else the madness took
hold, huge salaries and bonuses were heaved around, even after
the bubble had burst and the chain letter was seen for what it
was. Now my worry is that the rogues of Wall Street will be
replaced by the rogues of Washington. A fundamental problem of
our time is a widespread insouciance to prudent standards. Such
standards would have restrained the opportunists who danced when
they should have practiced due diligence. Now let us hope the
politicians will return to prudent standards in fashioning their
resolution of the financial crisis. Thus far there is little
reason for optimism.
