Tuesday, April 27th, 2010
the sideshow

It would be hard to overstate the importance of the debate over financial regulation that is being waged right now. Whatever your views, you likely believe that there’s a lot at stake and that we’d better get it right.

I will spare you the long-form essay of my own thoughts, which tend toward the pragmatic rather than the political, and are an amalgamation of views from “both sides.” Those who read my piece about “playing in the street”the research puzzle | I have some of my own anecdotes in here; I should at some time publish some of the others I’ve heard. know that I’m disgusted by much of what passes as “the business,” and that the buyers of financial services have been derelict in not expecting and demanding better.

In the legislative branch, the procedural maneuvers and sausage making regarding the reform bill are in full swing.  Hearings of one sort or another have been going on for awhile, but today was a special day, when various panels of Goldman Sachs men (including “Fabulous Fab”) were brought before a Senate committee to explain the nuances of mortgage finance and what it takes to put the client first.  It was, however, the sideshow of the title above.

You’d never know it by the media glare and the comments from market players.  I didn’t watch the hearings, but on and off I monitored the reaction of folks on Twitter and in the blogosphere; it was clear that many of them were paying rapt attention.  Most of what I read were variations on the themes of, “Senators are idiots who don’t understand any of this (although they are happy to take campaign contributions and, by the way, had a lot to do with screwing things up in the first place).”

Well, yes.  Did you expect your reactions to be different than that?  It was predictable that each thing said that showed a legislator to know less than you about finance would prompt your outrage, which, thanks to our electronic age, you could share with us all.  Meanwhile . . .

From the break of dawn it was evident that the real issues of the day had nothing whatsoever to do with that sideshow on Capitol Hill.  The main event was playing out around the world, as evidenced by widening credit default swaps for sovereign and financial issuers, sizable currency moves, and dropping equity markets.  There is the smell of contagion in the air.  More pungent now, it has been there for awhile, and the U.S. equity market has refused to acknowledge the odor — reminiscent of its 2007 ignorance when the fissures in the mortgage market started emitting foul smells from the underground.

No matter, since the hearings drew the interest, with some commentators even thinking that the weak stock market had something to do with the exemplars of capitalism being berated by know-nothing glad-handers.

Today was a great example of how easy it is to be distracted by the showy and the sensational.  It happens to all of us as individuals — and to groups of fiduciaries and to investment organizations and to Masters of the Universe running in packs.

It happened to the tranche-buyers of Abacus and Timberwolf and other structured products now in the news, as they fell in love with the alchemy of financial engineering as a way to play the keep-up-at-any-cost game of relative performance.  When they finally faced the cold, hard fact that house prices actually could go down, there weren’t any bids for the paper.

With all that’s in the air right now — the sights, the sounds, the smells — it’s easier than ever to be distracted or confused.  Don’t be led astray by that carnival barker over there.  For now, there’s nothing behind the curtain that matters.  Go watch the high-wire act.