Have We Learned Anything Since the Last Economic Crisis?

It’s ten years since the last economic crisis, and the girl scouts are suing the boy scouts.

The former is re-branding as just “scouts” and reorganizing. A century of no girls allowed is over, and some who say they speak for the now-included call it copyright invasion.

Nothing could be more 2018.

You may not identify with either, or even care they're separate. It's still space and specie spent on something other than the scouts.

That's called opportunity cost. And it's everywhere. Even two very similar programs that are just trying to get kids outside can't cooperate under ordinary circumstances.

Are the grown-ups able to fix it?

I spent most financial crisis Fridays sleeping on the floor of a friend’s dorm room in what used to be NYU’s Hayden Hall.

I was then 19, and by day perhaps the youngest registered representative at Oppenheimer & Company. Our clients owned auction-rate securities, and ten years ago today I'd learned Lehman Brothers was the only bank bidding on them.

Suffice it to say there was steam to blow off, and the honorary freshman year I had in Hayden kept me sane.

Annual Reviews organized a retrospective about what's been learned since the crisis around the corner a few weeks ago. I was late and excited to hear from Scholes, Merton, Engel, and who knows how many future laureates. And also to see some old friends from CFA Institute and its Research Foundation. 

I still walked the long way past my old font of sanity. It's got a new name now: Lipton Hall, after Marty Lipton. He's a founder of perhaps the most profitable law partnership on the planet, and a person who offers a profound window into the post-Lehman era.

His landmark 1979 essay Takeover Bids in the Target’s Boardroom began America’s adjudication of an existential economic question: “Whether the long-term interests of the nation’s corporate system and economy should be jeopardized in order to benefit speculators interested not in the vitality and continued existence of the business enterprise in which they have bought shares, but only in a quick profit on the sale of those shares?”

At the time, the prevailing idea was that all shareholders wanted the same thing: higher share prices. And by extension, that such desire was good for the world. 

This ideology inspired activist shareholders like Carl Icahn and T. Boone Pickens in the legendary battles for corporate control which bought so many souls in the late eighties. These "raiders" would offer to buy entire companies to seize value from their assets, and Lipton earned his legacy giving minority shareholders who couldn't afford to buy the whole firm the means of resistance: a stockholders rights plan.

They're also called “poison pill”  plans.

These board resolutions commit to courses of action that significantly decrease the value of the company to the likes of Pickens, Icahn, and so on. People sometimes act just like they’re corporations in the same way. A friend once made his home conspicuously unsanitary so no neighbors moved in. But it's different: if corporations and people were treated the same way under the law, human rights would barely vary by state.

Minority positions need protection in financial capitalism. And it makes sense: they can be a more aligned base of capital than a given intermediary. So sixty percent of Fortune 500 companies ensured their shareholders had such rights by this time thirty years ago, with thanks to Mr. Lipton. 

That sounds like stewardship. But it sometimes pays to ask “can I see corporations abusing this?” aloud, and this is one such time.

Boards often use poison pills to protect a few minority shareholders in particular: themselves. They typically lose their job after a change of control, and do not like that. So they swallow a pill at some cost to stakeholders and earn the right to hole up inside a company almost indefinitely.

Like every weapon, this one has good uses. But without question, it enables a management team to entrench and ignore other voices, still manifesting their will on the world after unusual opposition.

Take Lipton's tenure on NYU's board as a case in point of how this can play out.

He became chair in 1998, and served until a faculty group demanded he resign in 2013. And he did, shortly after a series of no confidence votes in his president’s strategy by faculty in the University’s Gallatin, Steinhardt, and Tisch Schools. He was still able to buy Hayden as a tombstone on Washington Square three years later despite specific opposition from a seeming majority of minority interests.

The Kimmel Center across the park is our venue for the retrospective, thanks to the generosity of Helen and Martin Kimmel. The latter was a founder of the Kimco Realty Corporation, which today is the largest operator of “open-air shopping centers” in the United States.

Most people call them strip malls, and nobody made more than Kimco.

A widely cited paper notes that Real Estate Investment Trusts formed after its 1991 IPO on the New York Stock Exchange “were somehow different than their predecessors.”

They were certainly more numerous.

Eighty-five similar firms went public in the three year period to come, and together they transformed real estate investments from community endeavors into liquid, institutional-grade investment vehicles over a decade’s time.  

Such alchemical triumphs fund philanthropy for sure. They also just sort of happen. No consent necessary: now your city center is a strip mall.

“It used to be called shadow banking, now it’s non-bank credit intermediation.”

This reclassification from Tobias Adrian of the IMF brought the house down shortly after I made it upstairs. It became a running joke among presenters until Ben Bernanke took a point of privilege to say he still calls it shadow banking.

I'd given him a fist bump a few minutes earlier before I even realized what I was doing. He was surgical. It must happen all the time.

He's on stage now aside a few old war buddies: Jean-Claude Juncker, Mervyn King, and Stanley Fisher. They respectively led the European Central Bank, the Bank of England, and the Bank of Israel during the crisis.

Now, say whatever you want about Quantitative Easing: it was the only actual response to the crisis, and those four men got it done at what seems like great personal cost. I will never forget how their former colleague Tim Geithner responded when Andrew Lo asked how the crisis was for him physically: He contorted, stared at his shoes for five seconds, and then said "it was a dark, hard time.”

Serious question though: what got solved?

You might remember it as the “subprime crisis,” but that’s not quite accurate. Manuel Adelina, Antoinette Schoar, and Felipe Severino found that borrowers with good credit - a FICO score of 660 or higher - were behind 61% of defaulted mortgages in 2006.

But low-income borrowers still somehow caught the blame in stories which wound up worry around the world. And Bernanke would remind us a panic is a very particular kind of crisis: He's argued many times that cooler heads would have meant smaller wounds in the global economy.

At least the people in power today are preternaturally calm.

Vladimir Putin's comments at Davos in 2009 radiate the chilling kind of calm:

“There is a notion of the perfect storm, when the natural elements come to one point and they multiply their destructive capacity. This crisis looks exactly like this perfect storm. Of course, responsible and knowledgeable economists and politicians should always be ready for such a development. But indeed, it comes every time unexpectedly. Well, as winter comes to Russia, unexpectedly comes every year.”

World Economic Forum founder Klaus Schwab had introduced him in this plenary by calling for “a new conversation about values.” 

He then quoted a report which he did not fully attribute: “not a single contemporary issue starting with terrorism or ending with climate change can be resolved without Russian participation. Russia has been, and is a challenge for the global community. To deal with Russia adequately, the rest of the world must invest in Russia in every sense of the word.”

It’s popular to understand “capitalism” in terms of its charismatic megafauna: the self-made, startups and so forth whose stories are sold to fight for or against it.

The truth is that money is political now, and portable. Which means it’s never just one thing. It used to be that two countries with McDonalds had never been to war together until Vladimir Putin annexed Crimea. And still we haven't learned to see in ambiguities. 

The difference between a van and a car gets blurred to skip tariffs, so aphorisms like “free markets are good” are a lousy substitute for analysis in a world which so ably renders such distinctions arbitrary, where you can say "free", mean "fucked", and get away with it. Lots of important things get left undone while it goes on. Opportunity costs across sections, and just compounds.

There were never any grown ups, and even worse: we all have to grow up. We so haven't. So be prepared for crisis.

It doesn't matter what we've learned since the last one because no-one's even listening. There will be no Santa Claus to save us, and no joy in having seen it coming. Just a few communities ready for winter and lots of cold people. 

There are no grown ups coming. And even worse: we all have to grow up.