The Gurus Speak

For the past five years—before the housing and credit bubbles burst and everyone was making money—the so-called “Masters of the Universe” (aka Wall Street CEOs, Congressional leaders and federal regulators) fed us an almost daily helping of good news. Risk was nigh; profits were practically sure and if you did not join the party, well then you were a kill-joy. Now that the script has been re-written, the group as a whole seems to be among the most frightened of the current state of affairs.

Perhaps they should be, because while the growing economy allowed many participants to earn a decent buck, these guys were amassing fortunes. We need not recount the stories of airplanes, boats and “Lifestyles of the Rich and Famous” to know that these guys probably made a heck of a lot more money than any of their clients or shareholders. And so it was a grain of salt that I took their comments at this week’s Merrill Lynch Financial Services Conference.

The host of the conference, John Thain, Chairman and CEO of Merrill Lynch started it off with a not-so-reassuring assessment of the current economy. He noted that “This is not like '87, it's not like '98, it's not like 2001. The contraction that's going on is bigger than that. I think we will in fact look back all the way to the 1929 period to see the kind of slowdown we are experiencing now. And the great degree of uncertainty in the marketplace is how deep, how long and what are the governments around the world going to do to try to provide a stimulus to the environment." Hmmm…he skipped right over the 1981-2 recession and brought us to 1929—nice. Still, the 1929 environment creates “opportunities” for Merrill Lynch and Mr. Thain is “cautiously optimistic that things are starting to get better in financial services.” Does anyone else see inconsistencies in these statements?

Next up at the conference was Bank of New York’s Chairman & CEO Robert Kelly, who made this breakthrough statement: “We need a securitization market to get started again where you have simpler instruments, where you have stronger underwriting standards than the past.” That’s funny because I would bet that Mr. Kelly and his cohorts were not singing this tune a few years ago. In fact, most of these guys told us that the products that were being created were disseminating risk and that the counterparties all understood them, so no need for regulation.

And finally, the current Goldman Sachs wonder boy, CEO Lloyd Blankfein said that Goldman was not changing its long-term strategy and that he is happy with the current lines of business that Goldman has. Really? That’s not what the rest of us are seeing, but hey, you guys at Goldman are really different, aren’t you? At least that’s what you have told us, before this year convinced us that you were mere mortals.

In the end, the Gurus spoke and a day after their horrendously downbeat comments, the US stock market soared by over 6%. It was a wonderful reminder that the weight of the Gurus’ words must be diffused through a more realistic prism…it’s about time.