Major Bankers and Financiers, Litigation and “Litigation Reform”
With today being a holiday in the US for Dr. King’s birthday, I decided to take a holiday on the usual torts in favor of a little excursis on bankers, litigation and “litigation reform.” The main point? Recent events exemplify why some but not all of the “litigation crises” in the financial sector may be laid squarely at the door of major bankers and financiers.Therefore, one might well conclude that it’s wise to think critically before drinking too much Kool-aid poured from the pitcher full of “litigation reform.” It also seems wise to drink – carefully – from the pitcher full of real regulatory reform.
Today, the focus is on litigation and crises in the financial sector. A stunning body of evidence continues to mount to prove that litigation in the financial sector keeps growing because too many highly placed business persons consider litigation just natural fallout from money making activities. They see litigation and crises as just a part of the process, and really don’t give a damn because the reality is they are making money from present deals, and don’t care what happens in five years because by then they will have made a huge pile of cash, and may have exited the scene.
Proof ? Start with Paul Krugman’s January 15 ”Clueless Bankers” column in the NYT that dissects as follows some of last week’s Congressional testimony from various leading luminaries on the Street:
“There were two moments in Wednesday’s hearing that stood out. One was when Jamie Dimon of JPMorgan Chase declared that a financial crisis is something that “happens every five to seven years. We shouldn’t be surprised.” In short, stuff happens, and that’s just part of life.
As an aside, it was also startling to hear Mr. Dimon admit that his bank never even considered the possibility of a large decline in home prices, despite widespread warnings that we were in the midst of a monstrous housing bubble.
Still, Mr. Dimon’s cluelessness paled beside that of Goldman Sachs’s Lloyd Blankfein, who compared the financial crisis to a hurricane nobody could have predicted. Phil Angelides, the commission’s chairman, was not amused: The financial crisis, he declared, wasn’t an act of God; it resulted from “acts of men and women.”
Was Mr. Blankfein just inarticulate? No. He used the same metaphor in his prepared testimony in which he urged Congress not to push too hard for financial reform: “We should resist a response … that is solely designed around protecting us from the 100-year storm.” So this giant financial crisis was just a rare accident, a freak of nature, and we shouldn’t overreact.”
To quote Colonel Potter: it is “horse hockey” to suggest the causes are not known and were not foreseeable. Numerous books and articles have documented the realities – I like best Judge Posner’s book – A Failure of Capitalism. It seems pretty plain we need to listen when a University of Chicago “free markets” guru is telling us that the markets failed us and we need meaningful reforms. To Judge Posner and others, it’s quite plain that the financial fiasco was predicted by some (who made a lot of money from doing so), it did arise from bankers and lawyers severing risk from responsibility via CDOs and various derivatives, it did arise from rating agencies issuing groundless ratings, and it did arise from AIG and other entities buying and selling purported contracts without regard for whether the parties could honor the obligations. And, all of that does not even address the outright frauds and intentional cheating exemplified by Parmalat, Madoff, Galleon, Enron, and so many others, not to mention the subprime scandals from the various banks that knew they were selling real junk.
I’ll also cite a good friend who is probably one of the smartest people in the world when it comes to understanding and managing risks. He spent some 20 years in incredibly senior positions in banking and finance where he put to use his stunning grasp of math, combined with common sense and humble roots. His view? Much of the Street is rotten to the core (especially AIG) and it was eminently obvious to anyone smart who bothered to look (at the time, he was looking at g AIG’s 2008 SEC filings and finding them completely inscrutable). He also says the financial system will melt down again “soon” unless derivatives and other like contracts are forced onto regulated exchanges.
A final piece of proof ? Go to the Epicurean Dealmaker’s latest priceless and candid post. The theme ? He largely accepts Mr. Krugman’s rant about super giant financial entities taking society back towards future a financial fiasco, but then draws a line that only makes things worse According to the Dealmaker, the global bankers are far from clueless. Instead, he says, most investment bankers simply don’t give a damn, and will work hard to find a way around the milk toast reforms presently on the table, as is set out in the following excerpts from the post:
“Wednesday, January 13, 2010
I’m Dancing as Fast as I Can
“Good morning, class.
* * *
I recalled this quote to mind today when I read Paul Krugman’s latest broadside against all things–and people–financial in The New York Times. In his jeremiad, “Bankers Without a Clue,” Mr. Krugman picks apart the recent testimony by four Wall Street CEOs at the Financial Crisis Inquiry Commission and asks the rhetorical question
Do the bankers really not understand what happened, or are they just talking their self-interest?
He concludes that it does not matter, and answers his own question thusly:
Wall Street executives will tell you that the financial-reform bill the House passed last month would cripple the economy with overregulation (it’s actually quite mild). They’ll insist that the tax on bank debt just proposed by the Obama administration is a crude concession to foolish populism. They’ll warn that action to tax or otherwise rein in financial-industry compensation is destructive and unjustified.
But what do they know? The answer, as far as I can tell, is: not much.
By happy coincidence, I enjoyed a quiet morning in the office this past Wednesday free of client obligations. I took advantage of my liberty to view a good chunk of the televised testimony of Messrs. Blankfein, Dimon, Mack, and What’s-his-name on C-SPAN. I have to admit that I too was underwhelmed by the bankers’ grasp of and ability to explain the recent crisis. At one point, for example, Commissioner Johnson asked Jamie Dimon why the financial industry had attracted so many bright and talented individuals away from other, presumably more productive pursuits. The lackadaisical and uninformative reply Mr. Dimon returned revealed in stark detail a critical fact: he neither knew nor cared to know the answer.
And this example cuts to the heart of the matter: it’s not his job to know such things.
* * *
Let there be no mistake: Mr. Dimon, Mr. Mack, and Mr. Blankfein are not stupid or uninformed. (The jury is still out on What’s-his-name.) They are damn smart; scary smart, in fact. You don’t get to the top of the greasy ladder of a major global investment bank’s executive suite by being dull, incurious, or lethargic. People like that get sliced to ribbons and thrown into the chum bucket in my industry before they reach Managing Director, if they ever get inside in the first place. These guys got game, people. Serious game. You would be foolish to doubt it.
But they also have absolutely no interest whatsoever in the whys and wherefores of the financial crisis, the proper size and role of banks and investment banks in the domestic economy, or the moral imperatives inherent in stewarding the financial plumbing undergirding the daily lives and livelihoods of six billion people. For one thing, they don’t have time to worry about such things. Most of a senior bank executive’s time is consumed competing against other scary-smart investment bankers and executives at other firms, who are hell-bent on grinding his bones into dust beneath their bloody heels, while trying to prevent his own firm from flying apart under the internal stresses generated by thousands of egotistical prima donnas all scrapping for more than their fair share of the pie. There is too much going on, and unrelenting change comes too fast and furious to allow quiet contemplation of the order of things.
Most thoughtful people would agree: it’s not wise to try to classify boreal flora and fauna when you have a tiger by the tail, much less think about how you would like to turn the forest into a time share resort.
For another thing–and because the volatile, high velocity nature of the business attracts such people–the people who go into the industry are not really interested in thinking deeply about why things are the way they are. You will almost never find an investment banker “sicklied o’er with the pale cast of thought.” It’s just not in their genetic makeup to be reflective, introspective, or speculative in an intellectual sense. Investment bankers have almost no interest in why things are the way they are. Rather, they spend all their considerable intellectual and psychological resources on understanding how they can take advantage of the way things are.
This explains not only their obvious lack of intellectual curiosity about the sources of the crisis–nothing remotely unconventional or even interesting on that topic left the mouths of any of the CEOs present at the hearing–but also their resistance to any major change in the way the industry or the markets are regulated. Why should they support change? It’s hard enough just trying to keep ahead of the buzz saw of unbridled competition and unrelenting demands for profitability from lenders, shareholders, and employees without having to cope with changes in the rules as well. Of course they want to preserve their current profitability and size. Who wouldn’t? But they do not assume–and neither, Dear Reader, should we–that changing regulations will necessarily make the industry less profitable. Investment bankers have well-justified confidence in their ability to turn new regulations to their advantage. It’s just that, being in an industry that is constantly creating, reinventing, and destroying itself, investment bankers have a very healthy respect for change. You might even say we fear it.
So yes, Mr. Krugman, you are basically right. Don’t look to investment bankers for answers on how we got here. We don’t know and we don’t care. We take the world as we find it and try to make money.”
So, tell me again: why it is our nation offers the financial sector the protections of Iqbal/Twombly, CAFA and other “reforms?