Home > Finance, Sports > Finance on Steroids

Finance on Steroids

When the “Repo 105” story first broke, my initial reaction was neither anger nor surprise. Clearly Lehman Brothers engaged in some fishy behavior in order to create a massive hole on its balance sheet. Problems of that scale do not happen by accident. I spent little time concerning myself with the plight of Lehman and quickly began thinking about the bigger picture: I wanted to know how widespread its use was; how complicit regulators were in this action; and whether Lehman and their accountants were acting within the regulatory landscape generated by courts and administrators.  What was equally clear to me was that Citibank (C) and Bank of America (BAC) at minimum engaged in a similar violation of the principles of fair accounting by shifting a significant amount of their liabilities to off balance sheet vehicles. After all, why else would they have needed such massive bailouts themselves?

Citi’s hole was significantly larger than Lehman’s; however, they were labeled as TBTF and bailed out. Had they also failed I am sure we would be reading about Citi’s impropriety along with Lehman’s. Instead, thanks to Uncle Sam, the very actors who caused the problems continue to run the bank they drove into the ground (lucky you Vikram Pandit!).  Within days, my initial fears were confirmed: JP Morgan (JPM), one of the HEALTHY banks, claims to have used Repo 105 from 2001 through 2005.   So too was Bank of America (BAC) abusing the infamous “Repo 105” to the tune of $49 billion way back in 2006, hat tip to Felix Salmon for the news.  With Bank of America joining the club, we now know that many of the key players in this game of finance abused the financial equivalent of performance enhancers.

This story is starting to sound eerily similar to a host of steroids “admissions” in baseball. As the story goes, Player A gets caught using steroids. Shortly thereafter, Player A cries about any “transgressions or misdeeds” he may have done in the past. He claims to have acted selfishly and irresponsibly, but never directly refers to the specifics of his wrongs. Generally after the fake admission, yet more evidence surfaces as to the guilt of Player A, at which time standard operating procedure calls for a more specific, but equally vague response. This is the “I was injured and only used it in a very limited manner” phase of the steroid game (notice how it’s still not called steroids, it’s just “it” in the admission language).

Sometimes that player will create a Straw Man and say that he used enhancers, but not steroids and that these “enhancers” were within the boundaries of the law, the rules, and the spirit of the game. This leads the press on a tangential analysis into these enhancers. After still more time, additional evidence surfaces to directly connect Player A with steroid use well beyond the scope of rehabilitation from an injury and in clear violation of the law and the spirit of the game. In the end, just as everyone knew all along, Player A was most certainly on steroids and it was most certainly in an effort to boost his performance.

The most troubling aspect of this whole steroid game is that many players who inherently wanted to do the “right thing” were forced to take steroids in order to compete in an imbalanced playing field. Without steroids, it became impossible for even a supremely skilled human to compete with a ‘roided up super-freak. At the end of the decade, what we learned was that not only were the “bad guys”–guys that we suspected to do anything to get an edge–acting improperly, so too were the golden boys. The taint spread far beyond the “poisonous tree” to the point where a presumption of guilt pervades the entirety of the player body.

The narratives about troubles in baseball and finance are strikingly similar (I was thinking that maybe this is because baseball players and banks alike all use the same PR people?). More apparent now is that in both instances we had a commissioner (regulators generally speaking in finance and Bud Selig in baseball) who turned a blind eye to the problems because his players were hitting home runs by the dozen with one earnings beat after another, thus making the success of the institutions synonymous with the success of the system. Next, we have the fans (the shareholders) who cheered the earnings every step of the way and consequently surrendered more and more power to the players themselves, while idolizing and worshiping the actors (think Greenspan=maestro) without ever considering the longer-term consequences.

Baseball and finance share an obsession with numbers and history. Much like steroids did with baseball, ultimately what hurts in the end is the “integrity of the game,” the health of the actors (baseball players dropped dead on the field from “enhancements” and banks died from holes in their balance sheets), and the impact beyond the scope of the playing field in bringing negative externalities to society at large (remember in baseball the talk over the health of our youth). At this point we must ask: why is it that Congress has no problem using the anti-trust laws as a means to attack and control the steroid debate in baseball yet fears further involvement with finance? Congress approached baseball in an antagonistic manner demanding immediate action. Instead with finance, Congress holds the industry’s hands, while singing koombaya, looking for campaign contributions and all-the-while saying “let’s make a deal.” Hopefully with the health care debate in the rear-view mirror, we can have a more focused and committed Congress to reshaping our financial sector in such a way that it is self-sufficient and no longer reliant on government bailouts in order to maintain solvency.

Unfortunately, where the baseball=finance analogy ends is in the stakes. They are much higher with regard to finance than baseball and the consequences more far-reaching.  It is time for Congress to put together a Mitchell Report for the financial industry. If we can do it for baseball–our national pastime–so too can we do it for the industry which caused an economic collapse of major consequence on a global level. We need to know not necessarily who the actors were, but how widespread this misbehavior was. Furthermore, we must know how complicit (or negligent) the regulatory bodies were in fostering an environment in which every financial institution was on the equivalent of steroids and needed to be in order to compete in the game of generating short-term earnings per share beats.

Without a much deeper understanding as to the nature of the crisis, it is impossible to create a coherent and stable structure for the future. How can we engage in debate about financial reform while we are still naive to the mechanics with which institutions eluded (and continue to elude) regulations? Putting pretty laws on paper does nothing when all they are is pretty words on paper. If we can take action against steroids in baseball, we can do it in finance as well.

  1. No comments yet.
  1. March 30, 2010 at 3:46 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: