The reason we have regulations for most of the activities in buying and selling is that we cannot be trusted always to do the right thing, writes Dorothy Rowe in ‘Why We Lie’ (www.4thestate.co.uk). Not that all of us are dishonest, but we do tend to get carried away by our ideas, especially where our greed, vanity and fear are involved, she adds.
Looking back at the recent financial crisis, the author wonders if Alan Greenspan – who had spent the most important part of his working life with men who had power, influence and money, men who took great pride in their power and position – had not seen them behave recklessly, without regard to the welfare of others, or to the possibility of an adverse outcome; or, had not been aware of the corrupting influence of power.
Or, had he never looked inside himself and used what he found there to understand other people, she asks. “Had he done so, he would have known that to trust men whose sole purpose in life is to make money always to behave honourably is as sensible as to swim with a great white shark and trust it not to eat you. Can it be true that, if Alan Greenspan had applied his intelligence to understanding himself, we would not have had this global financial crisis?”
Collapse of worldview
What happens to us when we discover that there is a serious discrepancy between what we always believed in and what actually is? We experience ‘that feeling of disintegrating, falling through infinite space, no longer existing, and the terror, the utter terror,’ describes Rowe. Citing the observations of Robert Reich, she notes that Greenspan experienced a collapse of his worldview when ‘the whole edifice of American prosperity of which he had been the architect began to crumble.’
Post such disintegration, putting ourselves back together again means assembling another set of ideas that give us our sense of being a person, the author explains. “For some of us this task means enduring a period of uncertainty while we search for ideas that more truthfully represent our situation. Those who do this emerge as much wiser people.”
Someone else to blame
Rowe cautions that, in the opposite, when people find uncertainty too much to tolerate, they try to reassemble themselves using their old ideas. “This assemblage will not hold together if they include in it the idea, ‘The disaster was my fault.’ So they discard that idea, and look around for someone else to blame.”
Eerily, this was palpable in the way the former Fed chief spoke a year after the collapse of Lehman Brothers, in a BBC interview. The book informs that he repeated what he had told the House Committee in the US, in October 2008; that he had expected that the bankers would never put the interests of their bank and the interests of their shareholders at risk. He said, ‘I was shocked into disbelief of a complete breakdown of that premise.’
What no one understood
On the credit default swaps (CDS) which were supposed to insure the traded packets of subprime mortgages, Greenspan’s take at the interview was, ‘It was a potential a very significant problem because I don’t see how anybody knew what the actual nature of the contracts were that were exchanged.’
If the Fed boss had not understood CDS, why had he not asked a banker to explain, Rowe demands. And, if the banker did not understand them, surely someone who was engaged in trading them could have done so, she suggests. “If the bankers and the traders did not understand CDSs, was it sensible of him to allow people to buy and sell pieces of paper, the meaning of which no one understood but might relate to something that did not exist in the real world, namely, a strong probability that people who could not afford a mortgage would pay that mortgage off?”
Perhaps, as Rowe postulates, Greenspan did not want to understand the CDSs, which had already become monstrously huge, at $62 trillion even by 2007. She reasons that he could not let himself know all this because he had adamantly and successfully opposed all the attempts by the Commodities Future Trading Commission to regulate this market. “His basic principle as chief of the Federal Reserve was that free, unregulated financial markets were essential for the American economy. He assumed that those working in these markets would have as their top priority the solvency of their firm. When the crisis came, both these ideas were shown to be wrong.”
We, the scapegoat
The author rues that in the BBC interview Greenspan chose as his scapegoat all of us, the human race, by saying that the question is not whether or not competitive markets function perfectly. “They do not. Regrettably, there is nothing better. Crises will happen again but it will be different. It’s human nature.” As he sees it, we are the cause of all future crises because we are incapable of learning from experience, Rowe writes.
While it is true that our progress can be attributed to our learning from experience, a major hurdle to that can be wilful ignorance of ourselves, she decodes. Wilful ignorance, she finds, stems from our dark, shameful secret of interposing another body, when even remotely faced with the threat of annihilation as a person. “We interpose a body when we scapegoat someone, or make use of someone. We do it when we choose to be selfish, uncaring. This happens in families, among friends and colleagues all the time. We do it when we refuse to accept responsibility for what we have done and instead blame someone else.”
Randomness in success
A chapter titled ‘Special fantasies: Beliefs and delusions’ cites Gillian Tett for the description of the people that made up the team at J. P. Morgan who created the credit derivatives that removed risk from the bank’s books. “They took credit for their success, and, in doing so, they changed their initially true assessment of their ability into a fantasy that they alone were responsible for their success in making money. They overlooked how much chance plays in our lives.” Nassim Nicholas Taleb’s apt quote warns: ‘Nobody accepts randomness in his own success, only in his failure.’
Insightful is the reference to ‘garbage in garbage out’ from the early days of computers, by Terri Duhon, a member of the team, who wanted to create a model that will predict the outcome of mortgages but hit a wall searching for good data to base the model on. When she tried to find data concerning mortgage defaulting that covered several business cycles, she found that there was none, narrates Rowe.
“The pattern of financing housing changed over the years. She discussed this with her colleague Krishna Varikooty, a gifted mathematician who wanted to get things right, but who sometimes infuriated those colleagues who were impatient to make deals.” Why so? Because, as the author recounts, Varikooty was concerned about what correlations there might be among the different risks of defaulting when a number of mortgages were bundled together. “If Mr Jones was unable to pay his mortgage, would this connect to Mrs Simth’s mortgage, making the chance of her defaulting greater or less, or would it be unchanged? House prices had been rising steadily. What would happen if, across the country, house prices fell? There was no data, so no one knew.”
Emperor’s new clothes
In a chapter titled ‘Varieties of lies,’ Rowe laments how senior bankers and politicians could not see the danger in the subprime mortgages, whereas it was common knowledge that in a mortgage you borrow money and pay it back with interest, and if you cannot pay, you lose your house. Mystifying names such as collateralised debt obligation (CDO) and structured investment vehicle (SIV) were doing the rounds, she reminisces. “The bankers who dealt in CDOs and SIVs and the like talked about them in their exclusive jargon. It was the story of the Emperor’s New Clothes all over again… They pretended to understand the jargon, and insisted that everything was under control.”
When people lie to us, they make it so much harder for us to create ideas with a strong possibility of being true, instructs the conclusion. “Lies undermine our security. The lies other people tell us and the lies we tell ourselves increase the amount of uncertainty with which we have to live. Lies destroy the trust we have in others and in ourselves, and thus increase our aloneness.”
The author’s advice, therefore, is that to live as easily as we can with the inherent uncertainty and aloneness of being a person, we must be truthful with ourselves and with others, no matter how difficult that may be.
Forceful discussion that serious finance and assurance professionals will find helpful.
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