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Commentary: A New Day
by The Editors
When historians study the Wall Street crisis of 2008, they’ll ask, How did this happen? In the immediate aftermath of the banking meltdown, a sense of shock was on ostentatious display. At the Capitol, Indiana Democratic Senator Evan Bayh declared, in a typical refrain, that there was “the most palpable sense of national crisis since we gathered here in this building immediately following the 9/11 attacks.”
Give us a break. It’s infuriating to see people who should know better expressing surprise. This train was coming for well over a year. Wall Street and regulators should have seen it coming. Condé Nast Portfolio readers certainly did.
We’ve been reporting since our premier issue, in May 2007, that the country’s financial institutions were poised for trouble. The themes we’ve highlighted for months are now familiar: Financial instruments are so complex that banks themselves have no idea how to value them; investment banks have borrowed far too much; the most toxic debt of all is in the form of derivatives, those opaque “financial weapons of mass destruction,” as Warren Buffett called them in 2002.
In his Wall Street column in our first issue, Jesse Eisinger spelled out the danger in a piece called “The $300 Trillion Time Bomb.” He focused on derivatives, which were invented as a way to spread risk from a single financial institution to many. “But,” Eisinger warned, “when it comes to the really big stuff—such as global market collapses—derivatives could turn from vaccine to contagion.”
Eisinger has been scary-right throughout this financial mess, predicting a year ago that America’s five investment banks were over their heads in debt and that all of them couldn’t survive. The fact that even the ever-skeptical Eisinger underestimated the problem—in fact, none of the firms have survived as investment banks—gives a sense of the scale of the challenge. This month, in “The $58 Trillion in the Room," Eisinger traces the Patient Zero of this crisis—the banking team at J.P. Morgan that created the credit-derivatives market.
But amid the cries of “panic” and “meltdown,” here’s another word not enough of us are focusing on: opportunity. The election of a new president and the revamping of Wall Street’s regulatory system give us the best chance in 75 years to truly rethink—from the ground up—how business should be regulated, financed, and structured. Everything is on the table, from the oversight of hedge funds and private equity firms to the amount of cushion we’ll now require of our banks and other financial institutions. The default should be toward more transparency.
Yet there is opportunity amid the gloom. As economics columnist John Cassidy points out, we should not confuse Wall Street’s flaws with the important strengths that have not diminished in the U.S.: Our economy is still the biggest in the world, entrepreneurialism remains strong, and an influx of immigrants brings in brainpower (a fact that our cover subject, American Apparel founder Dov Charney, has been loudly pointing out, to the consternation of Lou Dobbs and others). Yes, Wall Street is imploding, and that will be painful for the entire country. Yet there are still pockets of economic health and even growth—in Silicon Valley, in the oil patch, and elsewhere.
Another type of opportunity awaits as well. As we face a more uncertain economic future, those of us who can step up and help need to do so. In our annual Generosity Index, we look at the relative generosity of America’s wealthiest citizens. Some of the findings will surprise—and infuriate.
Give us a break. It’s infuriating to see people who should know better expressing surprise. This train was coming for well over a year. Wall Street and regulators should have seen it coming. Condé Nast Portfolio readers certainly did.
We’ve been reporting since our premier issue, in May 2007, that the country’s financial institutions were poised for trouble. The themes we’ve highlighted for months are now familiar: Financial instruments are so complex that banks themselves have no idea how to value them; investment banks have borrowed far too much; the most toxic debt of all is in the form of derivatives, those opaque “financial weapons of mass destruction,” as Warren Buffett called them in 2002.
In his Wall Street column in our first issue, Jesse Eisinger spelled out the danger in a piece called “The $300 Trillion Time Bomb.” He focused on derivatives, which were invented as a way to spread risk from a single financial institution to many. “But,” Eisinger warned, “when it comes to the really big stuff—such as global market collapses—derivatives could turn from vaccine to contagion.”
Eisinger has been scary-right throughout this financial mess, predicting a year ago that America’s five investment banks were over their heads in debt and that all of them couldn’t survive. The fact that even the ever-skeptical Eisinger underestimated the problem—in fact, none of the firms have survived as investment banks—gives a sense of the scale of the challenge. This month, in “The $58 Trillion in the Room," Eisinger traces the Patient Zero of this crisis—the banking team at J.P. Morgan that created the credit-derivatives market.
But amid the cries of “panic” and “meltdown,” here’s another word not enough of us are focusing on: opportunity. The election of a new president and the revamping of Wall Street’s regulatory system give us the best chance in 75 years to truly rethink—from the ground up—how business should be regulated, financed, and structured. Everything is on the table, from the oversight of hedge funds and private equity firms to the amount of cushion we’ll now require of our banks and other financial institutions. The default should be toward more transparency.
Yet there is opportunity amid the gloom. As economics columnist John Cassidy points out, we should not confuse Wall Street’s flaws with the important strengths that have not diminished in the U.S.: Our economy is still the biggest in the world, entrepreneurialism remains strong, and an influx of immigrants brings in brainpower (a fact that our cover subject, American Apparel founder Dov Charney, has been loudly pointing out, to the consternation of Lou Dobbs and others). Yes, Wall Street is imploding, and that will be painful for the entire country. Yet there are still pockets of economic health and even growth—in Silicon Valley, in the oil patch, and elsewhere.
Another type of opportunity awaits as well. As we face a more uncertain economic future, those of us who can step up and help need to do so. In our annual Generosity Index, we look at the relative generosity of America’s wealthiest citizens. Some of the findings will surprise—and infuriate.
