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!

It was an interesting debate but since time was constrained I did not have a chance to outline my points so here they are in a nutshell.

1. We are not a capitalist country. In fact, there is no purely capitalist country. Ireland is a mixed economy. We have aspects of capitalism (private controlled enterprise) but some aspects of socialism (government controlled health care, transportation and some energy providers). Even the “there is no way in heck we will every have a remotely socialist policy” United States uses some socialist concepts. For example, military equipment suppliers are guaranteed a profit on everything they make for the US government. They are considered so important to national security that they cannot be allowed to go bankrupt. Poor Obama is also trying to socialise the health care system but those red-paranoid Yanks just won’t see the logic. 

2. Capitalism will never die as long as human beings live according to their true nature – people always want to better their situation.  They work out of self-interest, not some love of the common good despite what some communist and socialist regimes have said in the past.

3. Capitalism is changing.  Most people realise that capitalism is an unfair system that breeds inequity between the haves and have nots. Therefore, a new type of capitalism may be emerging. In the past, some people have called it the Third Way but I think we’re even beyond that concept now. Bill Clinton and Tony Blair are considered supporters of this concept. Read more here: http://en.wikipedia.org/wiki/Third_Way_(centrism) or http://www.cesj.org/thirdway/thirdway-intro.htm or http://www.fiu.edu/~mizrachs/thirdway.html

4. Capitalism is like a pair of shoes. Everybody likes different ones. Each capitalist nation has its own unique features. These countries leaders will continue to make choices about their economic system based on individual style and wear the economic system that suits their intended purpose. For example, you wouldn’t wear high heels if you planned to climb a mountain just as you wouldn’t wear ballet shoes at the Electric Picnic. Know why? You’d get muck absolutely everywhere.

We also talked about NAMA and but I’ll write about my objections to this – management, transparency, risk, timing, control and more – in a different post.

Brian Cowen "What should I do?"

Lectured some university students today in News Reporting and asked them to talk directly to the government – using Post-It notes. After class, I was going on BBC2 NI’s show Hearts and Minds as a guest along with Martin Mansergh. I told them I would give them to him after the show. It didn’t happen – he stormed out claiming I was a populist and he couldn’t believe someone with views like mine worked for the Irish Times! Basically, I asked him some hard questions, challenged his views and he did not like it. I guess he is not used to people standing up to him. See it at 7.30pm on Thursday.

Anyway, thanks to the students for the inspirational comments. Here is a small selection of “citizen journalism” and what they said in response to “What should the government do?”:

“Go four weeks without your pay or your ministerial cars, feed your family off the dole and then come back and realise that unless you cop on everyone in this nation, which is supposedly in your charge, will face that fate or worse unless you cop on.”
“Focus spending on education to guarantee the future stability of the country”
“Start actually doing politics, which is acting for the people, for the country which you are a part of. You are gambling with our future.”
“Get ideas from appropriate experts weighed up and acted upon ASAP.”
“Close down Anglo Irish Bank. Waste of money.”
“…Stop worrying about your jon and take some risks to get our economy back on track..”
“Join the commonwealth again…”
“If your economy is going to survive every single person who allowed this catastrophe to happen must be replaced immediately.  That includes your entire cabinet”