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A Lesson the Markets Ignored

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By Richard Cohen
Tuesday, September 23, 2008

Of all the self-proclaimed experts I wanted to hear from about the financial crisis, the one I looked forward to the most was Nick Leeson, late of Britain's Barings Bank. In 1995, he bet hugely on Nikkei futures (whatever they are) and lost something like $1.4 billion. Leeson was 28 years old and often drunk, Barings was 233 years old and in fiduciary senility. Leeson went to prison, Barings went bust and Wall Street, without so much as a pause, went on its merry way.

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Sadly, Leeson did not have much to say about the current financial crisis. Writing last week in the Guardian, he instead expressed bitterness that the former owners of Barings went on with their lives while he spent 4 1/2 years in prison. What he did not say, to the regret of us all, is how once again the kids were allowed to play with huge amounts of money without any adult supervision.

"I was astonished that nobody stopped me," he wrote in his book "Rogue Trader." "People in London should have known." Indeed.

The theme in the current financial crisis is not, as John McCain would have it, greed, since that, like lust, will be with us forever. Instead, it is transparency. Leeson, you may recall, was dealing from Singapore in exotic derivatives that his bosses in London little understood. All they knew was that Leeson was putting huge profits on the books, not that those books had anything to do with reality.

Somewhat the same thing happened on Wall Street. The complicated, exotic and downright erotic financial instruments cooked up at the investment houses were, in fact, little understood not only by the buyers but also by the sellers. You can see that from what they said and from what they did: Lehman Brothers, Bear Stearns, AIG and others all held on to financial instruments that were worth less than they once thought. This was truly a case of the blind leading the blind.

"The problem is that nobody knows what any institution owns and what the terms of the securities they own are and what they're worth," New York Mayor Michael Bloomberg said Sunday on "Meet the Press." He's saying what others on the Street having been saying for some time: Nobody knows what these things -- securitized mortgages, etc. -- are worth. And, just to darken the mystery (and maybe your mood), no one knows the value of the underlying real estate, either.

I started with Leeson for a reason. He is the personification of a generational gap in the finance industry. He was young and computer-savvy, and his bosses in London were neither. That was true on Wall Street, too. The very top guys really had little idea of what was going on below. Everything was going right. They were making lots of money, which they deserved -- in their wonderful circular reasoning -- because they were making it. This, I tell you, is the true magic of the vaunted market: It justifies both stupidity and greed.

Now the government is proposing another pig in a poke. The huge federal bailout is necessary, but Democrats are right to insist on detail and oversight. For too long, the financial markets have operated without much of either. Now the Bush administration is asking Congress for a blank check, what New Jersey Gov. Jon Corzine calls the "moral equivalent" of the congressional resolution that wound up authorizing the Iraq war. Corzine, a former Goldman Sachs chairman (not to mention U.S. senator), is a voice worth heeding nowadays. When I talked to him, he had just gotten hold of the two-page administration program. Two pages! This is another exotic financial instrument.

The wise words of William Goldman, the screenwriter, should echo in Congress's ears. He not only coined the phrase "follow the money" for "All the President's Men," but he expressed the sum total of knowledge about the making of movies with: "Nobody knows anything." The same has been true about opaque financial instruments. It's up to Congress to fix that.

The lesson of Leeson has yet to be learned. Financial markets have moved well beyond the trading of things that could be seen or measured or weighed. On Wall Street, older men employed the lingo of younger men to pretend they knew what was happening -- but they didn't. Now, Congress is being asked to do something similar. That won't do. Bear down. Ask questions. Don't be afraid to regulate. Act as if you're the government, for crying out loud. Because if you don't do this right, you soon won't be.

cohenr@washpost.com


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