Well, if President Obama’s opinions are anything to go by it’s not much.  Today he told an audience in downtown New York, where Lehman was  headquartered, that:

“Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” he was quoted as saying in the Irish Times. “So I want them to hear my words: We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis.”

Ah yes, reckless behaviour and unchecked excess. That would mean three things: the outrageous bonus structure, insufficient risk controls and lack of regulation.

Bonus bingo
Let’s start with the bonus structure. Even when I was there (working in marketing so not eligible for big money) it was normal for traders and sales people to have a relatively low base salary and a POTENTIAL bonus that was many, many multiples of that number.

For example, someone who made a 75k base salary knew that if they hit certain targets they could make up to 250k. Each year, the potential for larger bonuses multiplied. Year two it could be 350k or 500k or any “monopoly money” amount.

This was very, very seductive. As incomes rose, most people increased their spending so all those Wall Streeters have an addictive  lifestyle habit to support – private schools and ski holidays for the kids; big suburban houses, flash cars and servants for the spouse; exclusive golf club memberships, holiday homes and designer clothing, cigars and single malt Scotch for them. (Lots of my friends in New York live this lifestyle so I ain’t making it up!)

The point is that it became both very difficult for people to leave the industry - would you leave 500k sitting around for someone else to take? – and almost impossible to keep reaching the new targets. Plus, most of their friends worked at the same thing so the lifestyle – and the conflicts – seemed normal.

Playing risk roulette
When a shopkeeper runs out of things to sell, he needs to get some more. On Wall Street, they simply start to make new stuff up and call them derivatives. These financial instruments are bits of this and bits of that combined to create something new like: asset-backed securtites (See Sub-prime time or Abbatior of Debt story on this blog).

To feed the increasingly voracious market for derivatives, financial product designers went wild and created things that not even a nuclear physicist could decipher. It’s a bit like those mad outfits you see on the catwalk during London Fashion Week…entertaining and outlandish but with no tangible value in the real world.

Because these things were so darned complicated no one was able to assess their REAL risk.

Ropey regulation
Finally we come to the policemen, the gatekeepers, the regulators. They were duped but they were also incredibly lazy. If they did not understand how something was valued it was their JOB to keep asking questions. They failed us in so many ways. (See post on this blog: Toxic tips from D’Oh School of Economics)

So, if we have learned something from the collapse of Lehman Brothers we should see changes to the financial sector such as:
1. Total product transparency with clear description of risks
2. Abolition of bonus structures that reward unrealistic risk taking
3. Proper regulation of financial markets
4. Regulators who have the ability to understand – or demand explanations for – the products they are regulating

Don’t hold your breath!

No more dirty laundry party
Keep your hands outta my pockets party
The party’s over party
Accountability and efficiency party
No more jobs for the boys party
Eat my dole cheque party
We shall overcome the wankers party? No more wasters party Time to get a clue party Let them eat cake party/ We’re eating the cake party/ Cake crumbs party Reality bites party Cut the crap party Time to go party Repossession party Joined up thinking party Scarecrow party: if they only had a brain. Buy Cowen some Cohones party

Your suggestions so far by post, email, twitter and phone calls…
It’s my party and I’ll cry if I want to party
It’s my party party
We the innocent party
Hey everyone let’s have a party party
Soldiers of mess-tiny party
The search & rescue party
Be Brave Brian party
Clarity party

Best new political party name wins a job as party leader! Will post results on the blog.

BREAKING NEWS: Homer Simpson has been operating the controls of the international financial system for the last several years. Mr Simpson, normally the animated nuclear safety inspector at the Springfield Nuclear Plant, is known to spend much of his time eating doughnuts, spilling coffee on the control panels and falling asleep.

Financial watchdogs from America to Europe have been enticed by, and trained in, his devil-may-care management techniques at the D’Oh School of Economics. Simpson’s influence in economic circles is most obvious when regulators are listening to investment executives valuing their products.

When the small talk turns technical, a speech bubble appears above the financial speaker’s head saying: “Blah, blah, subprime, blah, blah, repackaged, blah, blah, bad debt, blah, by another name”.

Soon after, the bubble dissolves and the D’Oh regulators nod, stamp “Approved Investment” on the paperwork and go back to sleep at the controls.

Only in Homer’s cartoon world could it be possible for investment professionals to take bits of this and that – lint from Homer’s belly button, drool from Moe’s face and dandruff from Principal Skinner – call it some weird name and sell it for a tidy profit. Right?

This “repackaging of rubbish for sale to the suckers” is what happened in the non-animated world over the last few years and it’s no laughing matter.

Investment companies needed to satisfy an increasingly hungry market so they invented ever more complex financial products. Although the new investments probably looked viable in theory, it’s unlikely that even their inventors were certain of their daily value. (Would you know the value of a Porsche constructed using parts from an old Lada, a Ford Pinto and a Yugo?)

No one really understood how these derivatives were valued but they were too afraid to ask. Whether it was a conscious decision or not, these complicated products were certainly a good bet on human nature: nobody wants to be the guy in the room who says: “what does that mean?” or “I don’t understand”.

The world’s most famous investor, Warren Buffett of Berkshire Hathaway, wasn’t taken in by the slick talk. He’s a simple guy and only invests in what he understands. He said: “I don’t see any way that pooling a bunch of mortgages, changing the ownership, is going to change the viability of the mortgage instrument itself – whether people can make the payments or not.”

Jargon and techno-speak have the power to weaken our common sense filters and, in this financial meltdown, they contributed to uninformed – even dangerous – decisions by professional investors.

Ordinary people like us are the ones who will pay the price for this toxic thinking even though we can’t fully comprehend it yet.

No one seems able to explain what happened, why it happened and where we are going next, so we’re entering a nuclear winter of terminology. Simpsons-like phrases used by news organisations include: toxic debt, financial Armageddon and several other atomised terms.

Earlier this week, former Bank of England policy maker Willem Buiter even said that British prime minister Gordon Brown needs to approve a “toxic asset dump” to rescue the British banking system. “There should be a toxic asset dump in which public money is used to buy the toxic assets of the banks, but not at prices that imply a significant no-strings-attached transfer of capital to banks,” Buiter said.

Basically, the British government should follow the US model and give taxpayers’ money to the banks in exchange for bad debt? That’s a bit like a teenager asking mum and dad to take responsibility for their credit card bills when the debt collectors call.

Now is not the time for procrastination or inaction by investors. Franklin Delano Roosevelt was president during the Great Depression. In 1932 he said: “The country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.” Investors who keep their nerve will see the silver lining. For years, Berkshire Hathaway stayed out of the market. In 2007 it started to spend. This mess is an opportunity for savvy investors to stop talking rubbish and start buying what they understand.

Margaret E. Ward is a journalist and director of Clear Ink, the Clear English Specialists. Email: hello@clearink.ie