Lloyd Blankfein, the chairman and CEO of Goldman Sachs, performed a reasonable facsimile of self-flagellation in a speech delivered Tuesday in Washington to the Council of Institutional Investors. I imagine the general reaction to his analysis of where Wall Street went wrong would be: How come a smart guy like you didn't figure this out before you broke the global economy? But one section resonated with me:
Fourth, risk models failed to capture the risk inherent in off-balance sheet activities, such as Structured Investment Vehicles. It seems clear now that managers of companies with large off-balance sheet exposure didn't appreciate the full magnitude of the economic risks they were exposed to; equally worrying, their counterparties were unaware of the full extent of these vehicles and, therefore, could not accurately assess the risk of doing business. Post Enron, that is quite amazing.
Italics mine. I once wrote, way back in the day, that "Who knows -- [Enron CEO Ken] Lay might even go down in history as the man who broke Wall Street!"
But I was wrong. Washington politicians and Wall Street high finance titans dismissed Enron as a bad apple. Never mind the irony that for a decade the company had been lauded as the acme of innovative American capitalism. The dust hadn't settled from its catastrophic implosion before we were being told that Enron was an exceptional case. Even better, it's sudden downfall was proof of the strength of the free market. As soon as its bogus business model was exposed, it vanished! Natural selection at its finest!
But now we know that Enron's collapse was merely a dry run for the great Wall Street meltdown of 2007-2008. And not just because Enron was an early or active player in credit derivatives. Enron's arrogance, its failure to judge risk adequately, its elevation of paper profits over the actual production of goods and services -- it's all there. Lloyd Blankfein is absolutely correct. It is "amazing" that after Enron's spectacular fall from grace, business continue, without interruption, as usual.
Which brings to mind something else I wrote, in the early days of Enron's crash and burn:
The mutual embrace between the entire political system and Enron goes so deep that to ask whether the government could have (or should have) prevented Enron's collapse is pointless. Enron's woes aren't really a scandal at all -- instead, they're a magnifying glass allowing us to see clearly exactly how government and business operate today. You spend enough money on campaign contributions and lobbyists to buy influence and get the laws changed on your behalf, and then you sit back and count your stock options. Enron did it on a bigger scale than anybody else in recent memory, and ultimately, on a more incompetent scale than everybody else, but that doesn't make it exceptional.