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January 08, 2009


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sometime observer of investment types

I'm glad you brought this up because I thought about this article more than a few times over the past couple of days.

It was a fairly simple task you laid out, forcing myself to forget about the fact that one of the co-authors is a very successful and wealthy hedge fund manager when I read the essay: I had no idea who he was. I'm not sure if this disqualifies me from commenting or makes me uniquely qualified to comment.

I found the article quite thoughtful. It did not principally aim to identify a set of distinct causes of the current financial crisis, to prove any cause in fact. If you read the article with that objective in mind, and evaluate it on that basis, then I can see how it comes up short. The article attempted, instead (and I argue it succeeded), to take a step back from cause and describe for readers an overarching and more essential motivation of the current crisis: self-delusion. The instrumentalized self-delusive devices that the authors mention (SEC, rating agencies, CEO incentives) illustrate just a few ways in which we tell ourselves that we are fixing problems, protecting people, making the world more prosperous as a whole, so that we sleep soundly even as we enrich ourselves at the expense of others. It's a much simpler, and, therefore, much more effective and accurate message.

You are right that some of these things have gone on for a long time. Yet, they haven't Always been true. For credit agencies, perverse incentives kicked in when they started charging issuers for ratings. Relative to their long lives, (Moody's / S&P anyway), this was recent (ealry 80s? admittedly, a guess). CEO stock options took off in the 90s. And I don't see your point re: Amb. Kennedy. Perhaps because I was not aware that Kennedy went on AFTER the SEC to secure a lucrative position on Wall Street--I thought the point of appointing him was to use a crook to catch a crook. The door opened one way, and he went on to the maritime commission, his ambassadorship and philanthropy. It doesn't matter. In any event, from my reading of the article, these well-intentioned things, and many others not mentioned in the article, evolved and combined to create this perfect storm self-delusive constructs.

The main contribution of the article was not its attempt to identify causes, and it did an excellent job demonstrating the power of self-delusion over raw avarice as a motivator, by highlighting some manifestations of the self-deluding motivation. The main contribution came in the form of actual constructive suggestions for going forward--the regulatory reforms and the plea against reacting to a crisis of confidence by fabricating an alternative false confidence. This is what I think the authors refer to in their discussion of short v. long term considerations. Not some reference to a long term economic plan, policy, ideology, but just the recognition that a little painful medicine now, or measured out in small doses along the way, is better than a big pain later. The article, like this comment, is a long winded proverb--do not put off until tomorrow what you can do today, or some other such pearl.

The Lewis/Einhorn bit was highly readable for a non-expert, described some complex relationships, but still got to the heart of the matter. If you don't like the article because it's obvious, that's fine, but then you miss the point of the article. What is self-delusion after all? Someone, sometime has to say what's obvious.

As a side note: Yesterday I went to a prospectus writing meeting, and securities law partners noted that the SEC used to get annoyed with the inclusion of sections in MD&As on risks that affected everyone, like the end of the world. So they wrote Dear CFO letters to ask them to pare down their submissions. Duh, of course the end of the world could happen. You're wasting space. You're wasting our time.

Maybe one day people stopped thinking that it could happen because they didn't want to believe it, and because people were asked not to state the obvious, the obvious ceased to be obvious? Surprise, now companies are being asked to discuss end of the world risks.


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Thank you! I didn't know they picked up on it until I saw your comment.

מכון שמיעה

Yes, the SEC is a revolving door between the public and the private sector, but that's from Ambassador.

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