Saturday, March 26, 2011

Ya Can't Lose if You're Not at the Table

The subject for the moment is "market share."  Specifically how, over and over again, grownups who you think would have known better, belly up to the table and double down on the green felt just because, well, just because everybody else is doing it ("If your big brother jumped off a 20-story building, would you do so too?"--"I don't kno-o-ow...").  Or whatever.

Exhibit A: Floyd Norris' gripping piece in Thursday's Times about Washington Mutual and how they knew perfectly well what a lunatic scenario they were playing out when they shoveled money into subprime just as all the supports were giving way.

Exhibit B: Barbarians at the Gate (which I'm just now getting round to) and its account of how Henry Kravis, the supposed grand supremo of leveraged buyouts, proved himself the crown prince of winner's curse.  We're talking about the takeover of RJR Nasbisco here, a slam- bang public brawl that Kravis got into out of personal pique and got out of buried under a mountain of debt from which he spent years attempting to dig himself out.

Exhibit C: Fannie and Freddie, facially the most sophisticated players in the real estate market, who committed ritual suicide in the very presence of the taxpayers who now have to clean up the carnage.

In each case, you have to ask yourselves: why did they do that?   Sure, they were in it for the money, but as Brady Hawkes never tired of telling us, you've got to know when to walk away, know when to run.  It's  hard to  believe that any sensible poker player would have stayed in any of these games as long as these players did.

So, what (if anything) is different in finance?   I suppose there are probably different answers for different situations.  Of WaMu, Norris suggests something about maintaining market share.  This is beguiling, but weak: 100 percent of nothing is still nothing, and WaMu's market share is worthless once they throw in their hand.  Re Fannie/Freddie, William K. Black discerns a cunning plan:  self-servig executives deliberately took on toxic debt so as to ramp up gross revenues so as to ramp up their bonuses--banking on the premise that they would be gone before the roof fell in.  This is particularly tempting although it may attribute more rationality to the executives than they deserve.  Re: Kravis, I suppose you could say he need to maintain his presence so as to be regarded as  player, though this sounds an awful lot like a post-mortem justification.

In all three cases I suppose you could say that the players sucked out enough money in fees along the way so as to ameliorate the sting of ultimate loss, but this, too, sounds like after-the-fact ad hockery.   So we are left with the macho/testosterone readiing: in all cases, it was just too much fun.    As  Lieutenant Colonel Robert Duval said, "I love the smell of napalm in the morning."  Maybe in all three cases (and others such) the players just loved the smell of financial excess.

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