Here's a hair-raising comment from an article by John Cassidy of The New Yorker. Speaking with former Morgan Stanley
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
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
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?
Fool contributor Morgan Housel owns shares of Bank of America preferred. The Fool owns shares of Bank of America and Oracle. Try any of our Foolish newsletter service free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy