"wall street bankers are stupid" -- 5/21/18

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Today's selection -- from The Big Short by Michael Lewis. As financial cracks began to appear in 2007, bankers were still claiming that all was well, a woman who was a stock analyst at Oppenheimer was the first to claim loudly that the proverbial emperor had no clothes:

"Meredith Whitney was an obscure analyst of financial firms for an obscure financial firm, Oppenheimer and Co., who, on October 31, 2007, ceased to be obscure. On that day she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It's never entirely clear on any given day what causes what inside the stock market, but it was pretty clear that, on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of, and who could have been dismissed as a nobody, had shaved 8 percent off the shares of Citi­group and $390 billion off the value of the U.S. stock market. Four days later, Citigroup CEO Chuck Prince resigned. Two weeks later, Citigroup slashed its dividend.

Meredith Whitney

"From that moment, Meredith Whitney became E. F. Hutton: When she spoke, people listened. Her message was clear: If you want to know what these Wall Street firms are really worth, take a cold, hard look at these crappy assets they're holding with borrowed money, and imagine what they'd fetch in a fire sale. The vast assemblages of highly paid people inside them were worth, in her view, nothing. All through 2008, she followed the bankers' and brokers' claims that they had put their problems behind them with this write-down or that capital raise with her own claim: You're wrong. You're still not facing up to how badly you have mismanaged your business. You're still not acknowl­edging billions of dollars in losses on subprime mortgage bonds. The value of your securities is as illusory as the value of your people. Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it's true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms, or even the extent of their losses in the subprime mortgage market. The CEOs themselves didn't know. 'Either that or they are all liars,' she said, 'but I assume they really just don't know.'

"Now, obviously, Meredith Whitney didn't sink Wall Street. She'd just expressed most clearly and most loudly a view that turned out to be far more seditious to the social order than, say, the many cam­paigns by various New York attorneys general against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they would have vanished long ago. This woman wasn't saying that Wall Street bankers were corrupt. She was saying that they were stupid. These people whose job it was to allocate capi­tal apparently didn't even know how to manage their own."