I’m currently reading James Grant’s book "Mr. Market Miscalculates," and have become interested by what he has to say for two reasons: First, he is logical (that’s a rarity in a lot of market analysis); second, he has a different perspective from the herd. I’ve caught him a couple of times in interviews over the past couple of weeks, but was left looking for more after the lengthy interview with Consuelo Mack. As such, I went to my trusty source for (relatively) fresh opinions over at the Financial Crisis Inquiry Commission website; luckily, Mr. Grant took the time to talk with the FCIC, and an hour-long interview can be found on the website. This article is a summary of some parts I personally found interesting from that interview:
Question: Causes of the financial crisis?
Response: An important remote cause is the “socialization of risk;” you can track the tendency for "we the people" to bear the downside and the "lords of finance" to bear the upside. A prominent example is the transition of broker-dealers from GPs (general partnerships, which have an inherent focus on risk management among the executives) into the limited liability form (the last being Goldman in the late 90s). There has been too little emphasis placed on the shift from individual responsibility to collective responsibility; the consequence has been the "big shots" getting the upside, and the taxpayers getting the downside.
Question: Thoughts on low interest rates, one of the causes?
Response: The conduct of the Fed during these years strikes me as mystifying.
Question: What were the drivers of leverage?
Response: “Willful ignorance” was the great theme — for example, securities that were rated AAA and were anything but (temptation to underestimate risk, as fueled by the “socialization of risk”). In addition, the drinking of the Fed-brewed Kool-Aid that we had "put the age of cycles behind us" and that the "great moderation" was perpetual.
Question: Thoughts on the rating agencies?
Response: The phrase “willful ignorance” applies here as well — they are in the business of making money, and there was a dereliction of duty; it was an "extraordinarily lame intellectual effort." Yes, they did a bad job, but the guys who were making $10 million a year did a proportionally worse job by not asking more.
Question: Causes of the financial crisis?
Response: An important remote cause is the “socialization of risk;” you can track the tendency for "we the people" to bear the downside and the "lords of finance" to bear the upside. A prominent example is the transition of broker-dealers from GPs (general partnerships, which have an inherent focus on risk management among the executives) into the limited liability form (the last being Goldman in the late 90s). There has been too little emphasis placed on the shift from individual responsibility to collective responsibility; the consequence has been the "big shots" getting the upside, and the taxpayers getting the downside.
Question: Thoughts on low interest rates, one of the causes?
Response: The conduct of the Fed during these years strikes me as mystifying.
Question: What were the drivers of leverage?
Response: “Willful ignorance” was the great theme — for example, securities that were rated AAA and were anything but (temptation to underestimate risk, as fueled by the “socialization of risk”). In addition, the drinking of the Fed-brewed Kool-Aid that we had "put the age of cycles behind us" and that the "great moderation" was perpetual.
Question: Thoughts on the rating agencies?
Response: The phrase “willful ignorance” applies here as well — they are in the business of making money, and there was a dereliction of duty; it was an "extraordinarily lame intellectual effort." Yes, they did a bad job, but the guys who were making $10 million a year did a proportionally worse job by not asking more.
