Playing Poker with Lewis

Look on the Bright Side
By michael.lewis


One of life's rules is that there's bad in good and good in bad. The total collapse of the U.S. financial system is no exception. Even in the midst of the current financial despair we can look around and identify many collateral benefits.

A lot of attractive office space seems to be opening up in midtown Manhattan, for instance, and the U.S. government is now getting paid to borrow money. (And with T-bills yielding 0 percent, they really ought to borrow a lot more of it, and quickly.)

And so as Morgan Stanley Chief Executive Officer John Mack [2] blasts short sellers for his problems, and Goldman Sachs CEO Lloyd Blankfein [3] swans around pretending to be above this little panic, we ought to step back and enjoy the positives.

To wit:

1) We finally get to see what's inside these big Wall Street firms.

We've just witnessed the largest bankruptcy in U.S. history and we know neither the inciting incident (though there is speculation that sovereign wealth funds decided to stop lending to Lehman Brothers Holdings Inc.), nor the deep cause. But there's now a pile of assets and liabilities [4]smoldering in New York awaiting inspection.

The assets include subprime mortgage-backed bonds and no doubt many other things that aren't worth as much as Lehman hoped they might be worth. But it's the liabilities that are most intriguing, as they include more than $700 billion in notional derivatives contracts. Some of that is insurance sold by Lehman, against the risk of other companies defaulting.

The entire pile might be benign, but somehow I doubt it. We may well find out that Lehman Brothers, in liquidation, has a negative value of hundreds of billions of dollars. In that case the natural question will be: How much better could things be inside Morgan Stanley and Goldman Sachs, both of which were engaged in the same lines of business?

2) We are creating the financial leaders of tomorrow.

Remember when everyone believed in Alan Greenspan [5]? When John McCain [6], running for president in 2000, said that if Greenspan died he'd have him stuffed and propped up against the wall at the Federal Reserve, where he'd remain chairman?

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He's left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

And there's nothing like a government bailout to create new public-sector heroes. Hank Paulson [7], 62, is probably too old; in any case, he's tarred by his association with both George Bush [8] and Goldman Sachs. But 47-year-old Tim Geithner [9] at the New York Fed is perfectly positioned to make Americans feel as if their financial system is in good hands for many years to come.

I have no real idea if Geithner knows what he's doing and he may not either. (``Bail out that one. No! Not that one -- the other one!'') It doesn't matter. He's in the middle of great events and should, by the end of them, know more about what happened than anyone.

Whatever happens to the U.S. financial system someone is bound to get the credit for something even worse not happening and, as no one really understands what Geithner does, he's the obvious choice.

3) Ordinary Americans get a lesson in low finance.

It's been expensive but, then, so is kindergarten.

Our willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences. It underpins Wall Street's brokerage operations, for instance, and leads to a lot more people giving out financial advice than should be giving out financial advice.

Thanks to the current panic many Americans have learned that the experts who advise them what to do with their savings are, at best, fools. Merrill Lynch & Co., Morgan Stanley, Citigroup Inc. [10] and all the rest persuaded their most valuable customers to buy auction-rate bonds, telling them the securities were as good as cash.

Those customers will now think twice before they listen to their brokers ever again.

Many, I'm sure, are just waiting to get their money back from their brokers before they race for the exits and introduce themselves to Charles Schwab.

Bank of America Corp. will soon discover that the relationship between Merrill Lynch and its customers isn't what it used to be, but Bank of America's loss is America's gain.

4) We have lots of new houses [11].

Not all of them have people [12] in them, sadly, but that's a minor detail. Even better, no one has had to pay for them, and probably never will. I'm betting that the U.S. government will soon have no choice but to take the final step and guarantee every bad mortgage loan ever made by Wall Street.

I can hear you thinking: Doesn't that mean the taxpayer foots the bill? That's so negative! Sure, one day some taxpayer will foot the bill but if the government does what it does best, and continues to borrow huge sums from foreigners, it doesn't have to be you or me.

5) Huge numbers of Wall Street executives will have the time to raise their children.

For years now Wall Street has been far too lucrative for a certain kind of energetic and ambitious person to justify anything but the most perfunctory personal life. Now that the market for his services has collapsed, he has time to go home and figure out which of the children roaming around the mansion are actually his.

In time, he will learn to love them and they him, and they will gain the benefit of his wisdom and experience. Perhaps one day they will put it to use as traders and investment bankers, on the Wall Street of the future, where they will report to those exalted creatures of high finance: loan officers.

There, slowly, they can earn the money they will need to pay off the mortgages defaulted upon by their forebears.