Arrogance and More Arrogance

As stock markets around the world are plunging, various financial executives are claiming before Congress that it really wasn’t their fault and that they deserved their multimillion dollar golden parachutes and million dollar salaries and bonuses. At least one former executive was being retained as a “consultant” at a million dollars a month while, days after the AIG bailout, AIG executives held a resort retreat in California, to the tune of something like $440,000. Now, admittedly, what’s a few hundred thousand after you’ve blown billions, but it does tend to make voters and taxpayers a bit irritated.

The Federal Reserve and the Treasury keep pumping billions into the system, and what happens? Not much, because, as of the moment, the banks in general still refuse to lend. That means that either they’re so far away from meeting their reserve requirements that they can’t lend or that they have decided that they can’t make loans because they can’t trust anyone. Either way, that suggests a certain lack of competence in bank lending departments. To get around this, the government is now beginning to lend to corporations directly, based on commercial paper, so that these corporations have the cash to meet payrolls and pay suppliers.

Many years ago, I knew a banker who made the statement to the effect that, “I don’t lend on numbers and financials; I lend on people.” Interestingly enough, his children still carry on the family tradition… and that modestly sized bank is also still quite solvent. Years ago, he knew what most modern finance types don’t seem to have learned — anyone can juggle figures. It’s harder to juggle character, but with all the regulations, it’s also more and more difficult to judge character without facing a lawsuit for some form of discrimination or another.

Even so, there’s more than one kind of arrogance behind the financial and credit collapse. In addition to the executive pride and arrogance and privilege and clearly undeserved multi-million dollar salary and bonus package mindset — call that personal arrogance — there’s another kind. It’s the arrogance of the financial analyst, and the technical types who were so convinced of their models and the fact that nothing could go wrong.

Except… it did… and so badly that the entire world is going to suffer. Pension funds have already, on average, lost 30-40% of their value; housing starts are the lowest in decades, while foreclosures are the highest; credit card debt and failure to pay are skyrocketing; state budgets are plummeting; and the economy is closing in on losing more than a million jobs this year, and that’s before more than half of the bad debt has even surfaced.

And these executives, seemingly to a man, and most of them are men, have the nerve and arrogance to claim that they did nothing wrong? Yes, Americans have been spoiled. As a nation we over-borrowed and overspent. BUT, none of those in charge of lending and finance ever spoke up and said, “Hold it. You can’t borrow any more.” Nope. Instead, they flooded the market with unasked for credit cards and marginal home equity lines of credit based on over-inflated housing values. They increased credit card limits, and often made home loan prepayments or refinancing impossible, all the time relying on finance models most of them, under questioning, couldn’t possibly even explain, let alone justify in practical or moral terms. They also created so-called hedge funds that were so highly leveraged that it appears most, if not all of them, will be out of business before the meltdown is over, all the time seeking higher and higher returns, and ignoring the simple fact that the stock market, as a whole, cannot grow, over time, much faster than the sum total of economic growth, inflation, and capital inflows.

And now, when it’s all coming crashing down, they have the arrogance to say that they did nothing wrong in lending more than the people of the nation could possibly repay and in profiting personally from those excesses. And the worst of it seems to be that the executives who’ve replaced the ones who failed seem to have inherited the same arrogance that caused the problem.