From today’s New York Times, “How the Thundering Herd Faltered and Fell,” by Gretchen Morgenson.
It sounds like a classic principal/agent issue of corporate governance:
A native of Turkey who began his career trading stocks in Istanbul, Mr. Semerci, 41, oversaw Merrill’s mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking.
At the same time, Mr. Fakahany, 50, an Egyptian-born former Exxon executive who oversaw risk management at Merrill, kept the machinery humming along by loosening internal controls, according to the former executives.
Mr. Semerci’s and Mr. Fakahany’s actions ultimately left their firm vulnerable to the increasingly risky business of manufacturing and selling mortgage securities, say former executives, who requested anonymity to avoid alienating colleagues at Merrill.
It stretches credibility that politicians, the alleged “agents” of “the people” who are known to have exacerbated principal/agent issues greatly ever since they have pretended to take on that role, can fix such problems better than the discipline of profits and losses. Firms that don’t solve those issues go bankrupt and the shareholders lose the value of their shares. That does tend to focus the attention on getting the rules and the processes right — a lot better than hectoring from politicians or imposition of controls by people who haven’t a clue about the nature of the financial transactions involved.
One thing about the crash that I’m disappointed about is that nobody seems to address the potential role recent huge deficits played. In 2006, the year Ms. Morgenson’s story starts, the Feds issued $250 billion of Treasury bills, which is 3.5 times the size of Merrill itself. I am confused why this part of the story is consistently left out.