Instant Classic:


Here’s a relevant Bailout Nation excerpt:

Which raises the question: Why wasn’t there ever runs on semis or software companies? The short answer is their business model does not depend upon a belief system — of solvency, liquidity, profitability or risk management.

It wasn’t a crisis of confidence that did the iBanks in, it was a crisis of competence.

That was the element CEOs like Dick Fuld, Hank Paulson, Stan O’Neal and Jimmy Cayne  failed to consider: When you are a bank, your existence depends upon the confidence of your clients, investors and counter-parties. Anything you do that puts that at risk is extremely dangerous. If you want to run lots of leverage, push the envelope, well, then, you better hope nothing else goes wrong. At 35X, you do not leave any room for error.

It is inexcusable that the investment CEOs did not seem to realize this. It was unconsionable that the firms had been purposefully put into a risk taking position in extremis. That the CEOs blamed short sellers and rumors, but exonerated themselves, only serves to emphasize their own failures, their lack of comprehension of what they had dome to themselves. It was their own incompetent stewardship that purposefully and unknowingly placed these firms at such grave danger of destruction.

As is so often the case, it was the opportunistic infections, and not the underlying disease, that did in the patient.

Category: Bailouts, Corporate Management, Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “On Risk & Solvency”

  1. Mannwich says:

    But we already know from our libertarian friends that if these virtuous geniuses were only allowed to operate in a true “free market” environment without the meddling of those pesky government regulators, they, and by extension, we, would all be sitting in a big circle, holding hands, playing hacky-sack, and singing “Kumbaya” together. It would be peace, love and frisbees (add in a pony too) for all.

    The End.

  2. jrhyno says:

    That the CEOs blamed short sellers and rumors, but exonerated themselves, only serves to emphasize their own failures, their lack of comprehension of what they had DOME to themselves.

    Make sure that this is spell checked!!

  3. Stuart says:

    Good excerpt and to add that all their deliberate efforts at deceit, fraud and obfuscation in order to cover-up their losses continues to this day.

  4. Chief Tomahawk says:

    Sir Larry Kudlow just dropped “Bailout Nation” lingo at the top of the broadcast. I thought he was about to say “… and we have Barry Ritholtz coming on …”

  5. Chief Tomahawk says:

    I wonder whether an appearance on The Colbert Report looms once Bailout Nation hits the open market?

  6. albnyc says:

    The fact that this is “news” to so many shows the extent to which we had (have?) allowed the ethical underpinnings of this nation to be looted.

    Bernard Madoff, Poster Boy.

  7. Winston Munn says:

    Does it make more sense that so many of these institutions rewarded incompetents with the CEO position or that some set of widely held beliefs led many CEOs to make bad assumptions? The greatest mal-assumption made was that “risk was contained”, that a new “risk-model” would spread risk to those best able to bear that risk. Was that incompetence or failure of systemic innovation?

    It is important, I believe, to understand that while so many investment banks were increasing leverage positions, other enterprises were also engaging in extreme behavior – covenant light agreements, PIK agreements, Leveraged Buyouts… me that suggests a more system-wide belief in stability.

    “As Minsky observed, capitalism is inherently unstable. As each crisis is successfully contained, it encourages greater speculation and risk taking in borrowing and lending. Financial innovation makes it easier to finance various schemes. To a large extent, borrowers and lenders operate on the basis of trial and error. If a behavior is rewarded, it will be repeated. Thus stable periods naturally lead to optimism, to booms, and to increasing fragility.

    A financial crisis can lead to asset price deflation and repudiation of debt. A debt deflation, once started, is very difficult to stop. It may not end until balance sheets are largely purged of bad debts, at great loss in financial wealth to the creditors as well as the economy at large.”

    I don’t know. The Minsky explanation does seem to be awfully prescient. Perhaps we discount it because the time necessary for the cycle to play out is so long? After all, it’s been almost 80 years since we last reached this zenith of denial….

  8. wally says:

    The patient may have been done-in, but we have bailed out the disease.

  9. VoiceFromTheWilderness says:

    The only problem with that comment is that the semi’s and the software companies are dropping like rocks — not just stock, sales, and profit as well. Meanwhile the ex-CEO of Goldman is now the dispenser of money for the US government. I’d be willing to bet anything that the CEO of Intel would much rather be in Paulson’s job, or better yet a ‘friend of Paulson’, than stuck selling pieces of sand that no one wants. As for Scott McNeally, ya gotta figure he’s thinking ‘how stupid of me to be making things, I should have been making money’.

  10. semperfido says:

    Minsky’s cycle and incompetent CEOs aren’t mutually exclusive. The cycle is a given. Its severity is not. And its severity in this case is clearly related to reckless levering by CEOs who ought to have known better. What I wonder is: will the CEOs and their compliant boards and executive committees get blamed, formally? And how? Will they be charged? And will they have to pay? And how? I had a securities lawyer in my office the other day ranting that Fuld et al should go to jail. At the very least he wants a couple of bonus-bought vineyards ceremonially sold and the proceeds returned to their rightful owners. Maybe some new president should appoint Patrick Fitzgerald, out of Chicago, as a special prosecutor to hunt the bad ‘uns down.

  11. larster says:

    One of the big contributors that led to this bull market in incompetence is the concept of “team building”. All major orgs in the ’80s emphasized team building which resulted in managers surrounding themselves with an echo chamber. One need only look to the White House for an example of this. How many people on Wall St knew we were headed for disaster but did not speak up for being branded as “not a team player”. On the top mgt side a large bonus structure put the golden handcuffs on the disidents. Look at the Army and the Shinseki incident. Does anyone think that he was the only general to understand the need for more troops to maintain order after the war? Everyone sat on their hands dreaming of that cushy job w/ a defense contractor, as we bumbled and stumbled into a mess.

    We need to develop some game changers but the “system” does not breed them.

  12. I don’t get why you think customers of chip companies don’t have to have faith in those companies? Why don’t investors in Intel and Texas Instruments have to have faith in all aspects of its management? Apple is all about belief and cult.

    If I don’ believe in a company’s ” solvency, liquidity, profitability or risk management,” why would I work for that company, buy its products or services or invest in it?

    So, I’m questioning the basic assumption of the opening post.

  13. mpavan says:


    what do these CEOs care ? They are making money beyond the dreams of avarice, if they do well or fail. They have none of their own skin in the game. Even if things go BK, they are sill fabulously weathly and set for a lavish life. Its all upside, no downside, and I mean that in monetary terms, not mean-nothing things that reputation. Contrast that to a small-business owner who won’t eat if his/her business fails.

    really, let’s be serious. It is so brain-dead obvious it stuns me that people are shocked.

  14. mkkby says:

    It is naive to think management was working for the good of the business. They manage for their own personal interests. If it was for the shareholders, they would pay most of their profits as dividends, like a royalty trust. They are NOT incompetent. They are deviously ingenious.

    It is a no brainer to milk a company for all you can get, then cry bailout or “too big to fail” when it fails. Heads you win, tails you don’t lose. See?

    The brokers all destroyed themselves when they went public. As partnerships, they were managed for the benefit of the owners, and never would have taken the huge risks they did.

  15. donna says:

    I think the question is what did they think they were financing. Finance companies ought to finance things that are real, not fictional. The expectations of impossibly high returns were the real problem, and the lack of any connections with a real, tangible product.

  16. debreuil says:

    Having been 20 years in the software industry, let me just correct the idea that software isn’t based on a ‘belief system’. Most never even get completed, what does tends to be crap, and the concept was usually useless to start with. Fashion is the number one element in the decision making process. What ends up being ‘good’ stagnates and is defended more by lawyers than improvement. There is good software that adds true value, but the money tends not to sniff that crotch, why would it? There is more money in software based on hype and ‘belief’.

    If the dot com bust wasn’t a run on software, then that just means the writer has a narrow definition of ‘run’. It was the sudden realization that 99% of it was, at the core, shite scented vapor.

  17. wunsacon says:

    |- I’d like to give a Keanu-Reeves-like “~~whoa~~” shout-out to debreuil.