Three Book Reviews: Naked Bankers, Mute Watchdogs, And Youthful Luchre

Just in time for summer vacations, I’d like to offer three books I’ve recently read for your consideration.

The new paperback edition to The Bankers’ New Clothes by Stanford University professor Anat Admati and Martin Hellwig of the Max Planck Institute says the book “focuses mainly on bankers and lobbyists making false or misleading claims and on the politicians and regulators who listen to them and collaborate with them.” That should give you a feel for the tone and politics of this book about what happened before and after the crisis. I found little to disagree with in the cogent prose and even more to wonder about.

Why do we keep debating possible solutions to issues that facts, data and statistical analysis, as well as history, already give us the answers to? (Climate change comes to mind…)

Perhaps it’s because the answers, while easy to see if you’re looking, are often politically or personally distasteful to the “Madding Crowd”. According to Admati and Hellwig, it’s quite plain what should be done:

Our main message is that by taking simple steps to reduce excessive risks and excessive risk taking, our banking system can become safer, healthier, and better able to support the economy. For example, healthy banks can become more resilient by reinvesting their profits or by selling new shares to investors, as is routinely done by other companies.
Some banks may no longer be viable. A cleanup of such banks and of the financial system is important even if it means eliminating or shrinking some banks. Hiding from reality and providing public support to banks that cannot otherwise survive or which are too big and too complex to control, as governments all over the world are doing, is dangerous and expensive.
I was quite flattered to find out after the book was published that my work in American Banker is mentioned.  See Note 40 on page 286 of the hardcover version for the discussion. (In February I was a guest lecturer at Stanford for F332/Law 725, Finance and Society taught by Professor Anat Admati.)
Dean Starkman is an editor and Kingsford Capital Fellow of the Columbia Journalism Review. Starkman has written The Watchdog That Didn’t Bark. He’s not talking about auditors but investigative journalists and what he believes was a softening of coverage by the business press leading up to the financial crisis.
Chapter 4 and then Chapter 8 talk about a journalist I have had the pleasure of meeting, Michael Hudson. In 2003, Hudson published “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South” for Southern Exposure, a “muckraking magazine published by the Institute of Southern Studies, a think tank for grassroots organizers and community groups…”
To call the article, which won the Polk Award, a beacon is to assume others suddenly saw the light and started digging. On the contrary, says Starkman.
The Wall Street Journal, Forbes, Fortune, and Financial Times—when they were not publishing profiles of Wall Street Leaders such as Citigroup’s Chuck Prince and Merrill Lynch’s Stan O’Neal, profiles that were generally flattering and in any case stuck in old paradigms—conveyed problems in mortgage lending in terms of unsustainable housing prices, “the bubble,” and poor quality mortgage products. An entire journalism subculture could perceive the problem only through investor or consumer-oriented frames—frames set by the financial services industry.
Hudson saw it for what it was: a question of misaligned incentives and asymmetrical information—in short, systematic corruption.
Starkman blames the negligence, to some extent, on the fact that a period of disruption and disempowerment of the media business, as a result of the impact of the Internet, occurred at about the same time as the “super-empowerment” of the financial services industry.
“Mainstream business coverage of major financial institutions from 2004 through 2006 was trapped in old narratives, trapped in New York, trapped in the Wall Street paradigm, trapped in a spinning hamster wheel of increased productivity requirements, trapped in its comfort zone of risk, strategy and interfirm competition.”
I certainly saw that tendency in October of 2006 when I started writing this blog. The major news story in the accounting/audit industry was stock option backdating but that was waning. No one wanted to talk about Enron and Arthur Andersen anymore because the Sarbanes-Oxley Act of 2002 had supposedly eliminated corporate fraud and given the auditors the backing to stand up and put their foot down when executives started fiddling the books.

Instead, I saw the beginning of the subprime crisis in early 2007, which morphed into the credit crisis in 2008 and the full blown financial crisis after the failure of Lehman Brothers. I repeatedly tried to inject the external auditors into the story and no one would allow me to. It wasn’t until the Lehman Bankruptcy Examiner’s report was published in March of 2010 that anyone was willing to admit the crisis was about fraud and that the auditors may have been part of the problem not part of the solution. The Big Four auditors certainly weren’t standing idly by on the side, like Switzerland.

I haven’t had a day off since.

Dean Starkman’s book is a necessary addition to the financial crisis library and one that should cause business journalists to pause and reflect. How do we make sure we are “watchdogs” not lapdogs, that we remain mindful of broad societal concerns, and seek sources outside of the bubble of the same old investors, analysts and executives represented by public relations? In one of his final chapters, Starkman gives us a lesson we should learn from the crisis: An “access journalism” view did not see the problems in subprime because it was always looking up at the executives. The “accountability” or investigative muckraker’s view like Michael Hudson’s saw it because he is willing to look around and even down.

I met Kevin Roose, author of Young Money, at the Tiki Bar of the Beverly Hills Hilton in 2012. We were both covering the Milken Conference. By that time he was two years into his research for this book.  Roose write that in 2010 he started “embedding” himself with young finance professionals, the kind that graduate from Ivy League colleges and go to work as analysts at investment banks. His goal? To understand if the next generation of American Capitalists, coming of age, in his words ‘in an era of tremendous shock and upheaval” knew what they were getting themselves into. What impact had the financial crisis had on the hopes, dreams, and view of the world most had previously taken for granted?

The book is full of great stories and anecdotes, some of which have been reported widely.

Recently, our nation’s financial chieftains have been feeling a little unloved. Venture capitalists are comparing the persecution of the rich to the plight of Jews at Kristallnacht, Wall Street titans are saying that they’re sick of being beaten up, and this week, a billionaire investor, Wilbur Ross, proclaimed that “the 1 percent is being picked on for political reasons.”

Ross’s statement seemed particularly odd, because two years ago, I met Ross at an event that might single-handedly explain why the rest of the country still hates financial tycoons – the annual black-tie induction ceremony of a secret Wall Street fraternity called Kappa Beta Phi.

“Good evening, Exalted High Council, former Grand Swipes, Grand Swipes-in-waiting, fellow Wall Street Kappas, Kappas from the Spring Street and Montgomery Street chapters, and worthless neophytes!”

It was January 2012, and Ross, wearing a tuxedo and purple velvet moccasins embroidered with the fraternity’s Greek letters, was standing at the dais of the St. Regis Hotel ballroom, welcoming a crowd of two hundred wealthy and famous Wall Street figures to the Kappa Beta Phi dinner. Ross, the leader (or “Grand Swipe”) of the fraternity, was preparing to invite 21 new members — “neophytes,” as the group called them — to join its exclusive ranks.
As Kevin might say, “You can’t make this sh*t up!”

It saddened me to realize that some of the mutterings of the young analysts reminded me too much of what I hear from some young Big Four audit professionals.

“So, if you want to know what kind of overachiever goes to Harvard and joins a student-run hedge fund, there’s your answer: a person who is turned off by Goldman Sachs because it’s too charitable. “
“It wasn’t that working on Wall Street was inherently immoral. For most analysts, it was exceedingly rare to be asked to rip off a client, or concoct a bald-faced lie about a deal. What Wall Street was, I heard over and over again, was completely amoral. It had no regard for whether a given deal represented a net good or net loss for humanity.”
“Make no mistake: financial firms will never have a problem filling their ranks with smart, capable, twenty-two year olds. Among the young and ambitious, Wall Street is still a draw. But at the margin, for the first time in decades, the big banks are beginning to lose their grip.  And that’s good for us all.”
Substitute “The Big Four” for “Wall Street”, “financial firms”, and “big banks” and “audit” for “deal” and you have it.
The kind of rationalization that produces Tom Flanagan, Scott London and the lead partners on AIG, Bear Stearns, SemGroup, Taylor Bean and Whitaker, Lehman Brothers, New Century, Citigroup, Colonial Bank, and MF Global but also the beginning of the end.

Of the three books I’ve talked about here, Young Money is the best candidate for a beach read. It flows, it’s fun but it still has a point, a very big point.