Bankers Bawl

Michael Lewis rocks.

How Bernanke's Banker Rescue Spells Their Demise: Michael Lewis Commentary by Michael Lewis

June 10 (Bloomberg) -- One of the many consequences of the Federal Reserve's bailout of the subprime-mortgage market is the sudden urge felt by Fed Chairman Ben Bernanke to let everyone know he won't be making a habit of the practice.

``Once financial conditions become more normal,'' he told a Fed conference on May 13, ``the extraordinary provision of liquidity by the Federal Reserve will no longer be needed. As (Walter) Bagehot would surely advise, under normal conditions financial institutions should look to private counterparties and not central banks as a source of ongoing funding.'

I don't know if Bernanke actually believes that his words will make any difference, or if he's just hoping out loud. But he might as well save his breath because his actions have spoken for him.... [I]f the Fed's money is implicitly on the line every time Lehman Brothers or Goldman Sachs or Morgan Stanley make a trade, one of two things must now happen: Either the Fed permits nature to take its course and allows investment banks to get themselves into trouble all over again. Or the Fed regulates the risk-taking ability of the traders inside the investment banks.

Either Lehman Brothers, Goldman Sachs and Morgan Stanley will use the implicit government guarantee to underwrite their relentless pursuit of incredible sums of money for themselves -- and thus create problems for the Fed and the financial system that will make the undoing of Bear Stearns seem trivial. Or some government agency will explicitly prevent them from taking those risks.

[T] here's no chance that Wall Street investment banks, operating with a government guarantee, can be controlled by anything short of new rules. Even without a government guarantee their risk-taking has proven all but impossible to monitor.

One of the unsettling traits of our financial markets is the inability of its putative authorities -- a group that includes not just the Fed chairman and the Treasury Secretary but also the chief executive officers of the big firms -- to understand what the people inside them do for a living.

Another related trait is the near total absence of stigma attached to risk takers who lose large sums of money. There's status to be had from huge trading losses: The guy who lost the fortune must know something or he would never been put into the position to lose it. Brian Hunter breaks a world record, blowing through $6.8 billion betting on the direction of natural-gas prices at Amaranth Group Inc., then turns up a few months later, inside his new hedge fund, running other people's money. No, once the government guarantees the debts of a big Wall Street firm it must inevitably also seek to control the risks that firm runs. And so while the bailout of Bear Stearns may seem like a gift to the big Wall Street firms, it's really not. Limit the risk that these firms run and you also limit the sums of money they can make. For some time now the action has been moving out of the big Wall Street firms and into hedge funds. The quality of financial information, and the ability to act on it, is better outside the big firms than inside of them, even, it now appears, when the information concerns one of the big firms. (The Security and Exchange Commission's investigation into the run on Bear Stearns that preceded the crash has identified three alleged culprits and two of them are hedge funds: Citadel Investment Group and Paulson & Co.)

That trend is about to accelerate, as the golden age of the Wall Street investment bank draws to a close. The glorious 25- year run of these firms will have ended not with a bang, or a whimper, but with a government guarantee.

And the investment banker himself will have taken the final step on the journey to becoming, in all but name, the worst thing he can imagine being: a commercial banker. Last Updated: June 10, 2008 00:05 EDT