Friday, October 10, 2008

Heart of Darkness (part 1)

Some bloggers, and for that matter, just any writers, say things well with few words. Many say only a little bit about big subjects. The following will be broken up into 2 or 3 parts as I craft it.. I apologize in advance to those who may find it too long.

The Heart of Darkness

The 1979 film “Apocalypse Now” was based upon a book written by Joseph Conrad about a rogue Colonel (Walter Kurtz) who, upon seeing the futility of the Vietnam War, uses his relations and knowledge of the Hmong tribesmen to carve out a fiefdom in remote Laos. The book certainly takes liberties, but still is a poignant reflection of the gross ineptitude of the military leadership and growing apathy of the soldiers and even that same leadership about the endless war. This book was titled “The Heart of Darkness.”

As some may know, I work in financial services. I spent 10 years or so working for a major US Bank, as a technology project manager. In this role, I was peripherally exposed to the products and motivations of various lines of business within a large corporate bank. Thus, I know little compared to the experts, but perhaps more than those who do not work in banking.

I moved then into a two year (plus) stint as a consultant at a large brokerage firm in the Twin Cities where I implemented a brokerage to bank sweep product. It was on this project where I learned what things like “Mark to Market”, “net asset value”, “FINRA” etc... meant. I was again, not an expert, but increasingly became more fluent in the vagaries and driving interests of brokered deposits and ‘cash products.’ I am grateful to those people who put up with my patently ignorant questions and educated the rough boy from IT about why ‘spread revenue’ meant more than the actual rate of compensation.

The past several months I have worked for a Washington D.C. based banking services firm. I have come to know several very smart, well connected people in the cash management of brokerage products world. They include a former head of the OCC, a vice chairman of the Federal Reserve, and another of the FDIC, a senior OTS regulator, and several others. They have been very kind and patient with the ‘farm boy from Iowa’, and have helped to bring me from neophyte, to merely na├»ve’.
It is with this understanding I am going to attempt to express my feelings about the financial disaster looming for the United States. I don’t pretend to know all, anyone, other than maybe someone like Warren Buffett or Henry Paulsen, who would do so is at best a deluded fool.

The path we have willingly walked down for the past 30 years or so is one where we have accepted as fact that unions had vastly overreached, where the stock market was the best measure of the health of the economy, where one change in valuation of inflation, unemployment, or debt, which masked the comparative and relative underperformance of the economy was entirely acceptable. We had a nation where productivity climbed 50%, but wages adjusted for hours worked and evaluated based upon the advancing age of the American workforce, fell 12%, including benefits like healthcare coverage by employers.

We saw a vast shift in the division of the profits of the fruits of labor, going from 75% (or so) going to labor in a recovery, to around 39%. We saw dramatic motivation for those with large capabilities to accumulate power and wealth, pass tax cuts which incented them to do ever more to capture and hold on to larger shares of profits. We saw CEO’s convince first their peers, then shareholders, then the people that profitability was king, and compensation tied to short term spikes in cash flow were both warranted and wise. We saw a world look with confusion and then growing angst as we became ever more focused on short-term gain at the expense of long-term sustainability.

And so, in 2001, we passed further tax cuts, following on the heels of further bank deregulation, whereby those with vast fortunes had more cash, but had little reason to invest in jobs in the US. The promised ‘rising tide’ never arrived. It was less costly and more profitable to instead invest in building factories in China or India or Indonesia. No thought was given to the loss of jobs, and thereby purchasing power, as the technology jobs fled overseas. The assumption by each company was that such losses, on a macro scale, would never impact them. There would still and always be the ability to purchase at a high price, the goods produced offshore so cheaply. The impact of overseas labor on wages was a good thing, not bad, in their eyes, as it lowered production costs, and increased the pattern of putting more money in their (ownership’s) pockets at a higher and higher rate. The ‘golden goose’ of the US economy, the middle-class, was assumed immune to the twin pressures of offshore labor creating stagnant wages, and ever higher healthcare, daycare, food, and energy costs.

The funds accumulated at the high end needed a home – a home outside China, and so as good investments became saturated with capital. As more stable areas for investment became saturated, and demands for ever higher returns became the rule of the day, less stable products, with both high return potential and high risk, were seen as acceptable. Partly this was because there was a vast ‘secondary market’ where such risk could be quickly offloaded, and partly this was because real estate was seen as likely to continue to increase in value, making any default risk mitigated by the appreciation of the real estate under lien. No one much heeded warnings that a decade of low interest rates during rapid increases in wages in the 1990’s, was a potential recipe for an inflated real estate market. Few worried about the impact of requiring the GSE’s of Fannie and Freddie to purchase FHA loans that had been initiated by risk lenders. Fewer still questioned Alan Greenspan, or the market's use of confusing vehicles like securities derivatives and credit default swaps.

(To be continued...Part 2 is in the works)


  1. Worry not about length. As long as it's interesting (and to me this is interesting), I'll read it.

  2. Penigmna, did you actually apologize for something running too long? Did you see this?