Tuesday, July 21, 2009

When Being Right Means Nothing

Somebody just emailed to bring an interesting essay to my attention. The title "SLAP A LIMIT ON LEVERAGE--NOW."

Note this:
It's easy to lash out at [1998 hedge fund disaster Long Term Capital Management] and at hedge funds in general. And yes, new regulation is necessary--but not aimed randomly at the funds. Instead, regulators should focus on the high-octane "fuel" that powered LTCM directly into a brick wall. What is really to blame here is the excessive use of leverage, especially when investing in derivatives and currency. Whether such leverage be employed by a hedge fund or trading desks at a bank or securities firm, it is currently almost entirely unregulated.

and

True, limiting leverage may make some high-tech investment strategies difficult or impossible. It might also cut into the derivatives business of banks and Wall Street firms. If that's the case--well, so be it.
Not bad, huh? This appeared in Business Week, and the publication date is Oct, 12, 1998, ten years before the financial crisis.

I'm ashamed to say I wrote it, ashamed in the sense that I totally forgot about it, as did everyone else on the planet, until someone sent me a link today.

This commentary appeared in the largest business magazine, circulation 1 million. Nobody noticed at the time, or since. Even I forgot about it, and I wrote the dang thing.

This relates back to some points that have been made recently, such as by Dean Starkman at Columbia Journalism Review in his excellent article last May. Sure the media didn't do a particularly good job of writing about the conditions that led to the financial crisis, such as out-of-control leverage. But even if we did, nobody paid attention or cared.

Hey, that's the way it is, as Uncle Walter would have said. Journalism is not as powerful as some poeple think. Even if this had been a cover story, even if it had been a page one story in the Wall Street Journal or New York Times, even if everyone had gotten on the leverage bandwagon, in all likelihood the outcome would have been..... nothing.

Why? Because leverage was a potential problem at the time. It was a danger, and so it was until the bubble burst. And history proves, time and again, that our government does a crappy job of heading off looming threats, whether it be leverage or Al Qaeda.

It is the responsibility of government to adequately regulate the markets. Sure, we in the media can point the way, but, as Chris Byron once said, we're just "seeing eye dogs" for the blind regulators. If they choose to fall off a cliff, because that is what Wall Street wants and they are too captured to do anything about it, there is nothing the media can do to stop it.

The media have been hostile to one of my pet causes: mandatory arbitration of brokerage disputes. I've railed against it for years, and the big media have regularly described how arbitration stinks.

Do you think that has moved regulators by as much as one inch? Don't bet on it.

© 2009 Gary Weiss. All rights reserved.

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