The entire OpEd section of the Sunday New York Times has been taken over by an article jointly written by Michael Lewis and David Einhorn, titled The End of the Financial World As We Know It.

Its this morning’s must read piece . . .


“OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest…

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda…

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.”

I would add to this the contributory factor of the disastrous rein of Harvey Pitt as S.E.C. chairman. He took an SEC that had some serious problems and damaged it enormously.

A Bailout Nation excerpt:

“In an era of corporate accounting scandals, Pitt had close ties to the accounting industry. And for inexplicable reasons, Pitt met with the heads of companies under active SEC investigation. As a Wall Street lawyer, Pitt had “recommended that clients destroy sensitive documents before they could be used against them – advice that seemed to find echoes in the SEC’s investigations into Enron and its shredder-happy auditor, Arthur Andersen.” Pitt had to recuse himself from many of the SEC’s votes — they were frequently about the clients he had represented as a defense attorney. By July of 2002, Senator (and future GOP presidential candidate) John McCain was calling for Pitt’s resignation.” Pitt, not surprisingly, demoralized the agency. To investor advocacy groups, having Pitt as SEC chief was like putting Osama bin Laden in charge of Homeland Security.


The End of the Financial World As We Know It
NYT, January 3, 2009

How to Repair a Broken Financial World
NYT, January 3, 2009

Category: Bailouts, Credit, Derivatives, Legal, Really, really bad calls, Regulation

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.

29 Responses to “The End of the Financial World As We Know It (and I feel fine)”

  1. Bruce in Tn says:

    The end of rational thought at the Fed:

    Fed has abandoned monetary policy, critic says

    Remember the days of long ago, when men were men, and women were pretty….? In those days of yore, the Fed would cut rates, and ACTUALLY wait longer than 48 hours to see what effect those rate cuts had produced?

    Now we are throwing the kitchen sink at our problems, and we have thrown in the bathroom sink, the guest bedroom sink, Barry’s toes, the butter and egg money, our children’s pain-free future, the value of the dollar, and all in a period of….let’s see…September through the end of December….4 months….

    To me the credit crisis is not the astounding thing here…it is the lack of realization of what is to come…

    Time to go watch Network again….

  2. da_rubberbandman says:

    Goldman Good old boys club strikes again!!!!

    Private-equity investors led by Steven Mnuchin, a former Goldman Sachs Group Inc. executive, agreed to buy IndyMac Bank from the Federal Deposit Insurance Corp. and inject $1.3 billion in cash, a rare purchase of a failed financial institution by non-bank buyers.

    The sale to a group of firms run by ex-Goldman bankers as well as hedge-fund managers John Paulson and George Soros was the least costly option, the FDIC said in a statement yesterday. The FDIC agreed to share losses with the group on a pool of IndyMac loans.

    The FDIC, which seized the Pasadena, California-based institution in July after a bank run, was forced to open bidding to non-bank investors after failing to find a buyer among the lender’s stronger rivals. The current market for selling assets is “challenging,” the agency said in the statement. Regulators closed 25 banks last year.

    “I am not impressed with the amount of capital being put in,” Bert Ely, chief executive officer of Ely & Co. Inc., a financial institutions consultant in Alexandria, Virginia, said in an interview after the announcement. “Why didn’t any bank buy it? IndyMac doesn’t strike me as a very viable bank.”

    The investor group and the FDIC signed a letter of intent for the transaction, which the agency said in a fact sheet was valued at about $13.9 billion. The investors will inject about $1.3 billion in cash into the new company when the deal closes, later this month or in early February, the agency said.

    Mnuchin Becomes CEO

    The FDIC agreed to share some losses on a portfolio of loans, with the new company assuming the first 20 percent, the agency said.

    FDIC spokesman David Barr declined to comment beyond the statement.

    Mnuchin, 46, a former Goldman Sachs executive vice president, will be chairman and chief executive officer of a new holding company to run IndyMac, the FDIC said. Mnuchin founded Dune Capital Management LP with former colleagues from Goldman Sachs, David Neidich and Chip Seelig, after a stint at billionaire Soros’ hedge fund. Dune’s investments included stakes in Viacom Inc.’s DreamWorks LLC film library, and the 802-room Hyatt Regency hotel in San Francisco.

    “We will inject significant private capital into IndyMac so that it can once again effectively serve its customers and communities,” Mnuchin said in a statement yesterday.

    The FDIC has since 1991 infrequently sold failed institutions to buyers without a bank affiliation. In 1993, it sold shares in Brooklyn-based CrossLand Federal Savings Bank to institutional investors in an initial public offering that raised $332 million. Two years earlier, the FDIC’s sale of Boston’s failed Bank of New England to Fleet/Norstar Financial Group involved a $283 million minority investment by Kohlberg Kravis Roberts & Co., the New York-based private equity firm.

    Flowers, Stone Point

    Several other IndyMac investors have connections to Mnuchin through Goldman, the New York-based investment bank. J.C. Flowers is run by former Goldman banker J. Christopher Flowers; Stone Point Capital’s chairman is Stephen Friedman, Goldman’s former managing partner; and Silar Advisors LP was founded by Robert Leeds who used to trade mortgage bonds at Goldman.

    Flowers, 51, specializes in investing in banks, insurance companies, and other financial firms. One of his previous bank investments, in Japan, has been hailed by David Rubenstein, co- founder of the Carlyle Group buyout firm, as perhaps the most successful private equity deal in history.

    Flowers bought the Long-Term Credit Bank of Japan Ltd. for 121 billion yen ($1.1 billion) in 2000, renaming it Shinsei. The group sold two-thirds of the company in 2004 for 532 billion yen.

    Paulson, Soros

    The buyers also include Paulson, the hedge-fund manager whose bet against the U.S. housing market helped earn him an estimated $3.7 billion in 2007, and a fund controlled by Soros. MSD Capital LP, a fund that manages money for Michael Dell, the founder and CEO of personal-computer maker Dell Inc., also is investing.

    The deal could still fall through, Ely said. “Usually when the FDIC announces a deal, it’s a done deal,” he said. “This is a letter of intent.”

    The FDIC seized IndyMac after unpaid mortgages left the lender short of cash, triggering a run by depositors that drained $1.3 billion in the 11 days before the July 11 takeover. The bank was among 25 to collapse, the highest toll since 1993.

    IndyMac’s failure will cost the deposit insurance fund, which is financed by fees paid by banks, about $8.5 billion to $9.4 billion, the agency said. The agency insures deposits at 8,384 institutions with $13.6 trillion of assets.

    Regulatory Changes

    Deutsche Bank AG and Barclays Capital Inc., the investment banking unit of London-based Barclays Plc, advised the FDIC on the sale. Merrill Lynch & Co., which was acquired by Bank of America Corp. on Jan. 1, advised the buyers.

    In an effort to entice more potential buyers of failed lenders, the Office of the Comptroller of the Currency, the Federal Reserve and the FDIC in 2008 changed rules that may help spur investments by private-equity firms, a potential pool of capital for banks.

    “We’re likely to see more deals where private-equity firms buy banks,” Josh Lerner, investment banking professor at Harvard Business School, said in an interview Dec. 30. “Many of the surviving large banks have made large acquisitions in their own right and feel they have their hands full digesting them. So that provides an opening for private equity.”

    IndyMac’s capital deteriorated and market value plunged almost 90 percent in the 12 months before its collapse, spokesman Evan Wagner said Dec. 30. The bank, once the second-biggest independent mortgage lender behind Countrywide Financial Corp., cut 4,000 jobs, closed 150 loan production offices and stopped most lending a week before regulators seized the assets.

    To contact the reporters on this story: Zachary R. Mider in New York at

  3. larster says:

    This strikes me as too many egos to make this deal work for the long term. Therefore, it must mean that they see a slam dunk in this investment. Someone also thought that there was a slam dunk investment in WaMu.

  4. Bob the unemployed says:

    > A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.”

    An excellent illustration of this concept is described here.

    “In a recent interview, SEC whistleblower Gary Aguirre offered his insights into the regulatory failings that allowed the Bernie Madoff scheme to reach such enormous proportions for so long.

    Aguirre places particular blame upon the “revolving door” culture that hangs over the SEC’s workforce, with its attendant promise of a lucrative move to the private sector in store for those whose approach to regulation is deemed acceptable to the regulated….”

  5. Steve Barry says:

    Slowly but surely, smart thought leaders are realizing what happened…and it’s nowhere near over. The mountain of debt that threatens us dwarfs the only other one on the charts (1930′s) by quite a lot and it has not even started to contract yet. That longer term issue is now this debt elephant in the room and our leaders still don’t see it. It’s not just the Detroit auto worker suffering…it is small businesses I see shuttered up and down affluent towns. Anecdotally, doctors and Wall Street people I personally know are now on austerity budgets…they have lost half their retirement eggs and home equity…some who had stock options in WS firms lost most they had saved and worry about sending kids to college now, where before they had not a care…and I’m sure some will start losing jobs soon..not to mention the mortgage broker I know who is in trouble.

    Our biggest innovation, aside from the Internet, was financial engineering…the comparison to Madoff has merit…afterall, a Ponzi scheme will always work in the short run…I’ve heard all the regulators say they will never catch a dliberate fraud right away. Still, the actions of guys like Pitt and all those Wall Street people was totally within reason, given the system they played in…almost anybody would have done the same (and did). The system, and for the most part “person”, who created this moral hazard over 25 years is to blame. It was false prosperity based on debt. Are you really a millionaire if you “own” a million dollar home, but there is a 900K mortgage on it and its value is falling? No, you may end up with zero net worth…remember:

    Assets = Liabilities (debt) + Owner’s Equity (net worth)

    So by pumping up debt, it looks like you are growing assets…but flip it around and

    Net Worth = Assets – liabilities.

    As a country, we forget the liabilities part…net worth is much more important than asset value. The only way out is to pay down the debt or default on it…not create more.

  6. Bruce in Tn says:

    Quote of the day:

    Economists think we start to recover in the second half…..we’ve all heard this, right? NOT SO FAST MY FRIEND!

    SAN FRANCISCO (MarketWatch) – The idea that the U.S. economy is going to recover in the next six months is given little credence at a gathering of top academic economists here over the weekend.

    Boy I wish someone would make up my mind for me….all this thinking ahead stuff is burning up neurons…

  7. ottovbvs says:

    It’s hardly realistic to be surprised that there’s something of a revolving door between financial regulatory agencies like the SEC and wall street. This is an enormously complex area of law and often these are the only qualified people out there. The same phenomenon is observable in just about every other industry so you have people from the drug business at FDA, people at OSHA from the manufacturing industry. It’s the way the US system works as I can tell you from personal experience. Most “industry” regs are written by industry insiders from trade groups who tend to dominate these panels of all the “interested parties eg. labor/industry/govt. This is totally unlike the European system where the regs are largely written by bureacrats with input from others. Here they are written by business with input from the bureacrats and others. That’s one of the reason many of them are so vague, again unlike Europe, so they provide plenty of wiggle room for business, not to mention employment for the tort bar. That’s why the tone set from the top is so important. If you have people like Pitt or Cox running these agencies any restraint on a natural tendency to give the particular business whatever it wants disappears entirely.

  8. awilensky says:

    But wait, there us worse:

    CNBC and punditland routinely have Pitt on as a commentator to ‘illuminate us’, as to the ills of the markets and regulators. My L-rd, when will the madness end?

  9. ottovbvs says:

    Steve Barry Says:

    January 4th, 2009 at 10:29 am
    Slowly but surely, smart thought leaders are realizing what happened…and it’s nowhere near over.

    Of course it’s not over but the financial system is, I think, stabilized. There are possibly going to be some ill effects from that stabilization, it’s hard to believe printing money is not inflationary. But these are going to take years to play out and frankly people aren’t interested in what might happen at the moment. There’s clearly going to be a lot more grief this year but again it’s not unreasonable to believe with the further measure being contemplated that the wider economy won’t similarly have stabilized by the end of this year. I do think it’s going to take that long. In the meantime I made my own contribution to recovery by doing some shopping in NYC yesterday. You should do the same BR with your book advance.

  10. r says:

    How can any objective, intelligent person observe government’s track record and conclude we need more, bigger government?

    Well, the voters have spoken and we will reap what we sow.

    Go long until the inauguration, followed the next day with a signed stimulation package, then take $ off the table and go short.

  11. VennData says:

    I wonder if the people at the ‘President’s Committee on the Arts and Humanities’ get a gallery show of their splashes of paint on canvas, or their sharks in tanks …once they depart back into the arts community.

  12. Mannwich says:

    Well, I just read that and it made me even more depressed. We really are in worse shape than far too many of us think. It’s going to take A LOT of pain for people to truly wake up.

  13. leftback says:

    @ VennData: I predict an imminent fire sale in diamond-encrusted skulls and piles of bricks…

    I suppose it is good to see thoughtful pieces in NYT about the crisis and its causes, and it is great to see them talking to David Einhorn and Jim Grant finally. Of course, yet again one has to ask the question: WTF were they thinking about before this went down? NYT typifies MSM in being really remarkably focused on the rear-view mirror (see this article and the mea culpas by Ben Stein), or just simply inane, vapid and devoid of any intellectual content (see this week’s – or indeed any week’s edition of Fundamentally by Paul Lim, easily one of the weakest columnists I have ever had the misfortune to read).

    Happy New Year to everyone at TBP, and especially to Bruce, who grills a terrific burger.

    I have had a really nice run of trading from the long side since November and during last week’s rally but I am starting to get bearish again. The scenario suggested above by r and by Mish seems not unlikely to me. Of course Mr Market has a habit of dashing expectations…

  14. Bruce in Tn says:

    Hey Lefty….what do you think about Thurs and Fri’s move in TBT?

  15. ottovbvs says:

    r Says:

    January 4th, 2009 at 10:50 am
    How can any objective, intelligent person observe government’s track record and conclude we need more, bigger government?

    You believe the problems in the financial industry were due to “insufficient” regulation. An interesting view. One hears a lot of complaints about govt but it’s invariably the first port of call whenever things go wrong. Govt is necessary in a modern society, the aim has to be to manage it as efficiently as possible and in the interests of society as a whole. Even if that society doesn’t always know what’s good for them. BTW govt, state and federal, in the US has a budget of around 4.5 trillion bucks which is several times larger than the govt spending of any other govt of whatever political complexion in the world. So much for small govt.

  16. Mannwich says:

    Bruce: FYI: I know you directed this to lb, but I got on that TBT bandwagon a month or so ago and quickly got off for a quick, small loss after realizing it was futile to fight the tide. Have been keeping an eye on it since then. Am wondering the same thing. Anyone else have any thought on TBT?

  17. Bruce in Tn says:


    I am sorely tempted here….sorely.

  18. mudpuppy says:

    When I read this article this morning my only thought was : How long will we, as American citizens, continue to take this bullshit?

  19. Winston Munn says:


    You do not grasp the significance that as our financial world has dissolved, nothing has changed – it shows our resolve to stay the course and not cave in to the financial terror that hates our freedom.

  20. leftback says:

    Bruce and Mannwich: I would buy PST/TBT for my grandmother, were she still with us, as insurance against the depredations that are bound to befall the unprotected as the US government rushes to protect the guilty and punish the innocent.

    I am long gold and short the 10-year note – as a core position – from here to eternity, or at least until we have sound money and a US deficit under control. Added to that I will trade around these positions with TBT and GDX. The December rally in Treasuries was almost all EoY cosmetics for bank balance sheets.

    At some point in Q1 we will probably take one last ride on the “D-train” – we will see liquidation in gold, oil and other commodities, P/E contraction, and a safety rally in Treasuries – I assume that there will be another period of forced deleveraging and hedge fund blow-ups are likely to be the trigger this time. I am going to try to stay long my core positions in VLO/COP and rare metals. After this phase is done, you can be “all-in” TBT/GDX or any other favorite reflationary vehicles. All aboard!!

    When you think about social security, the TARP and all of the other programs, it is really all over for the $, and the same dynamics apply to sterling as well. Germany will save the Euro by holding rates well above zero. Someone has to stop the insanity.

  21. Andy Tabbo says:

    I love that OpEd. These guys hit on my two primary solutions:

    1) Increase the social safety net to individuals and simply let the bad firms fail;
    2) Introduce counter-cyclical bank reserve requirements.

    Per 1), think about all the Trillions of Dollars we’re pledging and how much moral hazard we’ve introduced into our business landscape? Giving money to the losers at the expense of the winners. I think it would be far better to have just set up some massive DIP funds to handle the tsunami of bankruptcies while at the same time massively increasingly unemployment benefits. This would be a FAR more efficient means of dealing with the current economic shitpile we’re facing than this flailing-about, crisis-to-crisis, manic method of dealing with these problems.

    Per 2), during and economic expansion, why can’t we have banks INCREASE their reserves at some measured rate? And then when we have economic contractions, why can’t we LOWER those reserve requirements? I know this would be difficult to implement and arbitrary in nature. For instance, what would qualify as “expansion” v. “contraction”? However, it seems like an idea worth analyzing.

  22. karen says:

    I’m jumping up and down! (I’m a financial lunatic, afterall.) My favorite line, so far, from the piece: “Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.”

  23. Steve Barry says:


    I would argue the financial system is NOT stabilized. I think you may be basing that on gut feeling, not hard evidence. The montain of debt that de-stabilizes the system is growing, not shrinking, albeit it is growing at a slower pace and mainly via the government.

    The system is being socialized, not stabilized.

  24. Steve Barry says:

    When trying to figure out the proper P/E of a socialized stock market, should one take off a few integers? I mean if it were announced at the height of the market, Dow 14,000, that we would become more socialist, I think that would have tanked the market.

  25. DL says:

    Andy Tabbo @ 11:58

    “Increase the social safety net to individuals and simply let the bad firms fail”

    >>> exactly right

  26. DL says:

    leftback @ 11:33

    “At some point in Q1 we will probably take one last ride on the ‘D-train’ – we will see liquidation …”

    That’s why I’m a little afraid to be long gold or short treasuries at the moment.

  27. DL says:

    S.B. @ 1:02

    “The system is being socialized, not stabilized”.

    That’s it in a nutshell.

  28. Bruce in Tn says:

    Well, DL, in case you and Lefty don’t read the second half of this post…Janet Yellen,in that crazy language of economists, says, I think, she sees deflation ahead..

    “With an extended period of abnormally high unemployment in the forecast, it is increasingly likely that inflation will fall to undesirably low levels,” she said.

  29. DL says:

    Bruce @ 2:18

    Two points:

    (a) Yellen probably wants the Federal government to consume a much bigger share of GDP than is currently the case (and I disagree with that objective);

    (b) as for the question of inflation versus deflation, it’s a question of time frame; there’s also the matter of commodity prices versus housing prices, both of which go into the CPI.