Monday, June 09, 2008

As Father's Day Approaches

Excuse me for taking a short break from writing the last episodes of “THERE MAY BE TROUBLE IN RIVER CITY”, but I was watching CNBC this morning, a channel to which I had become somewhat addicted after my retirement. This morning the commentators were in a tizzy about Lehman Brothers 2.8 Billion loss and their need to raise 6.0 billion in capital. How could the Chief Financial Officer not know said one commentator? Lehman had said all was fine not too long ago.

Before I begin, let me make my bias clear. I was against the Bear Stearns bailout notwithstanding the claims by the sophisticated that it was necessary to prevent financial collapse. I have a similar position on attempts by the government, of all forms, to deal with the housing crisis. We got there without government help; we will just have to get out of it without government help.

So how did we get here and what does my father and grandfather (on my mother’s side, my Dad’s father died before I was born) have to do with this? Neither was well educated. My father completed high school and my grandfather who emigrated from Italy did not make it that far. They certainly would not been able to carry on a conversation with graduates of Harvard or Wharton Business Schools. But to paraphrase the wizard in the Wizard of OZ, what did they have that the graduates of these schools did not have-“common sense.”

What they were not able to do, or perhaps unwilling to do was to engage in semantic calisthenics to disguise the obvious. Let me share with you how I think they would have redefined the standard terms used to describe the present and continuing financial crisis.

“EXOTIC FINANCIAL INSTRUMENT": My father and grandfather would describe this as lending money at an unusually high interest rate to a borrower who had no hope of servicing the debt or repaying the principle.

“COMPLEX AND NOVEL FINANCIAL INSTRUMENT": My father and grandfather would describe this as a lot of people lending a lot of money at an usually high interest rate to a lot of borrowers who had no hope of servicing the debt or repaying the principle.

“CREATIVE ACCOUNTING": My father and grandfather would describe this as ignoring the fact that you had lent a lot of money at an usually high interest rate to a lot of borrowers who had no hope servicing the debt or paying back the principle.

“WALL STREET BONUS": My father and grandfather would understand this to mean getting paid an amount of money they could not imagine any human being needing or productively using in their lifetime for selling a lot of “Complex and Novel Financial Instruments” to people who because of the education you would expect to know better.

The sad thing about this is that there were no doubt many in our profession who participated in this activity and should have known better as well.

-Larry Salibra
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Anonymous said...

Larry, I think you have inherited the "common sense" genes of your father and grandfather.


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