The Business We've Chosen

The past few days have been a whirlwind in the capital markets. Lehman Brothers goes bankrupt, AIG is bailed out with an 85 billion dollar loan while giving the gov't warrants for an 80% stake in the company. Merrill Lynch was bought by BoA for 50 billion in stock, Morgan Stanley looks like it might merge with Wachovia (talk about your rocky marriage). Goldman itself is taking a beating on the market, although it looks very likely that it'll be the last indy investment bank standing before too long. Washington Mutual is also getting battered, it's in the process of talking to potential buyers as we speak. The Dow took a beating the past few days with back to back 400+ losses before rallying considerably today. The lax attitude which the federal government took towards Wall Street, primarily when it came to credit default swaps and the rest of the unregulated derivatives market (thanks Phil Gramm) has finally caught up to our economy. It'll take a while for the various positions to unwind and for the financial impact to be fully realized. The biggest fallout from all this is the renewed sense that regulation is actually worthwhile. Both candidates have talked about increased regulation in our economy, although from the commercials and comments it seems like Barack Obama has a much better handle on what is actually going on than McCain. I'm heavily biased of course, but did anyone see McCain having a hard time understanding what credit default swaps and derivatives were? He said "derivatives" the way an old person says "rap" with the kind of vindictive disdain that can only come from not having a clue about what one is talking about. I think everybody should get a chance to watch Obama's two minute ad about his plan for the economy, it's actually very good.
Anyway, like most things I comment about, there are an infinite number of better commentaries that one can take a look at for more information. Under the circumstances, Bernake and Paulson are doing all that they can, I certainly do not envy the position they are in right now. I'm not for bailing out a bunch of companies that took on excessive risk, but under the circumstances, it's probably the only solution that would not cause a domino effect of failures, particular those with whom AIG stood as a counterparty to their swaps. The next step it seems is for the government to take on scores of bad debt from some of these institutions. Stocks rallied because of this announcement, but that might be going a step too far. Unfortunately, I think that a case-by-case basis is really the only way to go about deciding who does and does not get government intervention. I think its the only equitable way of both saving our economy and not absolving all the heavy risk-takers. It may seem like it is arbitrary, but really life ain't fair. If you can, try and stay tuned with the latest developments- it's important that we don't forget these lessons the next time Wall Street lobbyists start advocating for deregulation sometime in the future.
One thing I want to go into a little bit more depth about is something that I've been doing a lot of reading about at work. I work in the realm of public finance and have been trying to keep up with recent developments in the municipal market. One of the biggest developments has been the exiting of JP Morgan from the municipal swap market, citing that it the profits are no longer justifying allocated resources. Also, with banks like Lehman as well as insurers like AIG acting as counterparties in these swaps, it is interesting to see who gets stuck with termination fees (most of the time it seems like the issuers/municipalities/hospitals do) and what happens when said swap is in/out of the money (basically who is making or losing money). What I think is most important though, is the degree that institutions like not for profit hospitals and municipalities, institutions charged with keeping the public interest at heart, use these derivatives. And they use them, not simply to transfer the cost-savings to their constituents but in order to speculate, to make money on changes in interest rates.
What's even more striking though, is the lack of financial savvy that many of the finance directors have in these transactions. The guys on Wall Street, who create, package, and sell these instruments- the guys who do this for a living, are of course far more sophisticated than a county finance director or stand-alone hospital CFO. Basically, they (the county finance directors and the like) want to play like they're investment bankers, like they're Gordon Gekko or something, and they get their hats handed to them. How else would they end up with agreements where they end up paying the termination fee, even if the banking counterparty goes bankrupt. I think that unless you are a CFO of a major hospital system, or a major city, you probably have no business swimming in the deep end. Issue your bonds, pay your fixed or variable rate, and always look out for the best interests of the people you are charged with serving.
What this really boils down to though, is an issue of respect. People respect moneymakers, and there ain't too many moneymakers out there like the investment banking crowd. City/county finance directors make good money, just not Wall Street money, nor do they have Wall Street prestige, but they sure as hell want it. When a banker from Goldman comes up to you, after they've already underwritten your bonds and he/she starts talking about fancy new derivative products, you want to seem knowledgeable, you want to feel like an equal; or maybe he's just thrown you some campaign dollars. Either way, you go along with their ideas, regardless of whether or not it helps your city or your hospital.
My belief is, that if you want to be an investment banker, go be an investment banker. But if you are working at a not for profit hospital, which gets the benefit of being tax-exempt with the condition that you give charity care, then thats what you do. Like Hyman Roth from Godfather II said, "this is the business that we've chosen." Don't start getting jealous because you're not making their kind of money or that no one thinks of you as particularly prestigous. Take pride in the fact that you've chosen a profession where you have the opportunity to help dictate the amount of charity care given to those less fortunate. There ain't no big reward, no big pie in the sky for those of us who choose an honorable profession (not to say being a banker isn't honorable, I don't begrudge what a man does for a living, but... well, you know). You make the money that our economy demands, you fight for your constiuents (if you are an elected or appointed official), you fight for the workers you want to help (if you work for a union like me), or you get out of it, do something different. The way we keep score in society, those kind of jobs are tough to handle, but there shouldn't be room in public interest careers for those who want to enrich themselves. The fight is too hard already.