Here's a hair-raising comment from an article by John Cassidy of The New Yorker. Speaking with former Morgan Stanley (NYSE: MS) CEO John Mack, Cassidy explains:
I asked John Mack if he could see subprime-mortgage bonds making a comeback. 'I think in time they will,' he replied. 'I hope they do. I say that because it gives tremendous liquidity to the markets.'
What?! If this wasn't a family website, all kinds of profanity would be appropriate in responding to this comment.
Liquidity is the ability to buy or sell an asset quickly. Large-cap stocks like Oracle (Nasdaq: ORCL) are very liquid: You can sell them in huge amounts almost instantly. Indeed, CEO Larry Ellison has been selling 1 million shares per day, every day, for months. A farm, on the other hand, is very illiquid. It might take you months to sell, if you can at all.
Liquidity in the mortgage market means all types of loans, creditworthy or otherwise, can be made and quickly passed off to someone else.
As much as I'd like to believe Mack's comment was taken out of context -- he's actually a pretty good, honest, guy -- I doubt it was, and it highlights a central flaw in Wall Street thinking: choosing efficiency at the cost of stability.
Push hard enough, and you make anything really efficient. Drive to work at 100 miles per hour, and you'll be an efficient commuter. Don't pay your taxes, and you'll be an efficient saver. But the obvious downside to these is that efficiency comes at the price of stability. Your odds of crashing your car or being arrested by the Internal Revenue Service go through the roof, so we usually choose a more stable route.
This simple logic all too often evades Wall Street. Make as many bad loans as you can and dump them into a liquid market, and you'll make good quarterly profits, but the odds of blowing up go through the roof. And that's a fair way of describing what happened on Wall Street: Whether Goldman Sachs (NYSE: GS) or Citigroup (NYSE: C) or AIG (NYSE: AIG) or Bank of America (NYSE: BAC), the crux of Wall Street's mess over the past two years can be boiled down to pushing profits as hard as possible today, tomorrow be damned.
In basic engineering, stability always comes first; efficiency is a distant second.
Mack's comment proves Wall Street has yet to learn this simple concept.
What do you think?
