A key part of the problem as I understand it is investment banks and related institutions (like insurance giant AIG) didn’t properly label and assess the risk of trading structured products like mortgage-backed securities.
Imagine if Don the Banker sold you a paper airplane and said that it was safe to fly it inside of your apartment because he’s confident in the components that made up the paper airplane.
And imagine if Bill the Insurer happily sold you paper airplane insurance without keeping a cash reserve in case you had a problem with the airplane and needed the insurance money–because in the past, the chances that the components of a paper airplane (glue, paper, ??) caused a problem was low.
But when the glue in the airplane combusts spontaneously, all Don the Banker could say is “I didn’t think that would happen.” And all Bill the Insurer could do was perhaps go out of business trying to pay you back.
And worse–imagine that you have $1000 wrapped up in the purchase of this airplane, you’d hope to keep getting an income off this plane, the income stopped AND you can’t sell it because noone will buy it?
Whew–one can only carry these analogies so far given how complicated this situation is. So I feel for Geithner.
Speaking as someone who familiar with calculating portfolio risk in the late 90’s/early 2000’s, it was possible that risk ratings were optimistic on products from some banks and possible that certain scenarios (like a mass mortgage default) wasn’t considered as a possibility. Not where I was, but at other banks of course.
So now we’ve got these products on the books of major companies that are like a cancer. What now?
Here’s where I hopefully can earn that $420B:
The Wall Street Geek’s Workable Plan to Solve the Banking Crisis
Step 1: President Obama announces that his top two priorities in 2009 are The Economy and National Security.
No longer does Wall Street feel like the neglected injured child watching the President appear to spearhead other initiatives such as stem cell research and healthcare. He’s got a team that can manage those details for him.
He can still speak to other initiatives. But at a presentation, for example, have another person on your team do most of the speaking (after getting them some media training).
Step 2: Geithner and our new CEO-in-Chief Jack Welch (plus a team of business people) visit key companies such as AIG, Citigroup, et al and talk with third level management–NOT the executives–to determine how those companies REALLY make money and what’s keeping them from making money/lending/etc.
Step 3: FIX IT! Start with the small banks and work your way up to the ones that are “too big to fail”.
If the small banks need capital so that folks in the town can borrow money and improve commerce locally, do it (within limits).
If a larger bank needs to sell part of itself to raise capital or adjust how it makes money, do it. And have a top economist act as project manager to ensure that the government isn’t overspending or harming other parts of our economy.
Line up the small successes and be orderly about tackling the problem, which may increase confidence with consumers and give the government the confidence to tackle larger problems.
Step 4: President should communicate consistently! Let people know what your team is going to do, what they’re currently doing, and what they did. Ask your team to make a project plan if that helps with communication, with dependencies/budget/timelines and post it in financialstability.gov.
My point is rather than start from the top down by trying to define a solution on a macro level, understand the problem on a micro level and work from the bottom up on small, solvable pieces of the problem. Gain consumer confidence, and actually get things done and fixed in the process.
Take this with a grain of salt because if I really had a solution, I’d be standing shoulder to shoulder with President Obama and Larry Summers. But it’s better sometimes to put something out there and have it not be perfect instead of not put anything out there at all.
Early in my career when I was at Morgan Stanley, the head of my department gathered a handful of us “next generation managers” into his office.
There was a big issue that needed solving by fresh, young, brilliant minds…but he called us in instead
He wanted an action plan for solving the problem by the time the next senior officer meeting occurred in two months, at which we’d present the solution.
The division needed a solution. I can’t get into the details, but funding money for our division was riding on this solution. Not to mention the confidence of the people giving us this money.
And it was a tough problem that the senior managers couldn’t solve. But we were young, not affected by past failures and had energy. So a group of us met weekly for two months to draft a solution.
We talked to in-house experts to test ideas. We did the prototypical late-night Chinese-food-fueled brainstorming that you see in bad movies about corporate life.
Yet as confident as we were, we didn’t want to set a line in the sand at that meeting. What if we were wrong? Then the senior managers would laugh at us. So we kept it high level, putting our toe in the water with enough room to change course without appearing naive if they found a hole in our plan.
A week before the senior officers’ meeting, we presented the solution to the head: a forward-looking, 6-page document that outlined on a high-level what the next steps may be as we gathered more practical evidence.
Honestly, that thing was jammed-packed with SAT words and pushed the envelope on grammatically-correct sentence construction. Because honestly, we didn’t have a solution. But if we wrapped an idea with enough language, who would have the balls to say that they didn’t understand what we were talking about?
The next thing that happened demonstrates why business-types run businesses that make money, and government officials run the government which doesn’t have the same bottom-line accountability standards.
The head of the department ripped into us, pushed the senior officers’ meeting ahead two weeks, and demanded a precise plan that could be put into action the next day after that meeting. He wouldn’t even let us present what we had. It had to be a concrete plan.
Forced to develop a precise plan, we did–we drew the line in the sand. And you know what? At the meeting, it didn’t matter if we were precisely right or wrong. We demonstrated that we understood the problem well enough to present a solution that addressed the issues. That engendered a great deal of confidence–that hey, there’s a precise path forward that will lead to the discovery of something that may really work.
My jaw dropped when Secretary Geithner gave such a high-level speech on February 10th with the next steps in solving the financial crisis from the bank perspective. And the fact that he’d been on the job for 2 weeks doesn’t fly with me because you’re put in a senior position to deliver on day 1 based on your experience.
Put him in a Morgan Stanley or Goldman Sachs and he would’ve been ripped on even harder than the media has.
And don’t think poor Tim. We’re only pushing him because we know that he can deliver. He probably just needs to believe that he can.
So draw that line in the sand. Put together a Microsoft Project plan with dependencies, budgets and a timeline. And if you need help drop me a line. You can do it.
My beautiful and inspirational grandmother was sent home to the heavens on Monday. I flew to her small town in Louisiana this past weekend to say goodbye. Coming back to NYC, my main priority was my clients. So for the rest of this week, I’m focused on getting them through this market ride. Otherwise, I’d […]
…or so it seems! The Dow took a dive today into high-7000’s territory after Geithner delivered the much-hyped outline for TARP the Sequel. Honestly, I felt underwhelmed as I watched his speech. The speech was so hyped that I expected to hear specifics–for example, how exactly would the fund distribution be tracked. Geithner mentioned that […]
Tim Geithner is our new Treasury Secretary, the head guy on Obama’s economic team. He’s not a product of Wall Street, unlike Hank Paulson (former CEO of Goldman). A plus, because occasionally it wasn’t clear if Hank’s decisions regarding formal rival banks were personal or not (for example, letting Lehman go bankrupt potentially because of […]
After turning $1100 into $7015 in the stock market right out of college, the author of "The Wall Street Geek" worked for 15 years on Wall Street. In this investment blog, she gives investment tips and insights to help everyday investors be successful. Read More >>
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