Deal Heavyweights on the Future of M&A - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis."Will give one look in:
"Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle"While the Panel discussion was on mergers and acquisitions (which have slowed dramatically and will likely remain slow--except in cases of consolidations and saving firms from bankruptcy), some key points in it carry forward to all parts of this meltdown. For instance Friedman's comments that "incentive structures that were in place encouraged bad lending and faulty business practices."
I think everyone knew (and some even understood) that incentives were in place to encourage risk taking. The problem was that many, myself included, gave the banks too much credit. We all failed to understood that the banks (both Investment banks and Commercial Banks) did not fully understand what they were getting into, and the banks did not have controls (offsetting positions) in place, and seemingly (see Greenspan's comments of yesterday) had never stress tested their models with data that considered data out of the recent good economic times. This blatant error has to fall on the shoulders of the Boards of Directors, the management, regulators, and dare I say auditors/analysts/rating agencies.
Without being adequately prepared, when the worst came (call it a black swan, call it a perfect storm, call it the worse case scenario), all of a sudden we had meltdown. (Now if you really want to consider the worse, what happens now if a natural disaster hits. Earthquake hits California, etc.)
This is why SIMM (our student managed real money portfolio) argued so long, and unfortunately unsuccessfully, to be allowed to hedge with derivatives and take short positions last semester.