2008: The Year of Great Humility

From the diaries, by Erick.

As I was thinking about looking back at 2008 and all of the events that have gone on around the world this year, one word came to mind: humility.  Bear with me while I explain this, because it might be easy to miss what I’m saying.  When I say “humility,” I’m not thinking about how those the world watched most this year exhibited great humility.  Instead, I am using this term in the sense that what the world watched was some of the most notoriously powerful, prestigious, glamorous and notable people were humbled, one after another.  So, I believe 2008 should be known as the “Year of Great Humility,” where so many people became too big for their britches to the point where the year will mark a time of fundamental change in the way many components of our world and society function.  Let’s look at how the most changing and humbling events unfolded.

First, there is the obvious example, which relates to the unfolding changes in the global financial markets.  You see, I don’t believe the challenges the US and global economies are facing are just a function of general business cycles or economic downturns.  At one point, I did; I even held out as long as possible in admitting we were actually in a recession.  I, like many Americans, either just didn’t want to believe it or was missing the bright red lights flashing in front of my face.  Well, there comes a point where the lights don’t do enough, and you end up just crashing into the brick wall that the lights were meant to prevent you from hitting in the first place.  This “crash” marks the year’s most significant humbling.

Within this event, there were many examples and instances of specific humbling events.  Let’s look at Wall Street.  For the past few years, we have watched young professionals and recent college grads flock to the world of investment banking as a ticket to making more money than they ever imagined in their young professional lives.  We saw kids, not so far removed from shopping in the kids section at Brooks Brothers, making annual bonuses in the six figure range.  It wasn’t uncommon to walk into what were considered NYC “hotspots” only to find all of the tables filled with young barefaced chaps outfitted in Hickey Freeman and Farragamo loafers, enjoying expensive bottle service until the sun came up. 

Now, fastforward to today.  All of the I-bankers aren’t gone, but if  you’re looking for them in clubs on Saturday nights, it is doubtful you’ll find anything except remnants of clothing where the previous wearers were busting at the seems of their well-tailored, custom-made britches. If folks in this sector were actually able to keep their jobs, you can be certain any glamour they might have experienced previously is now replaced by extreme competition that they’ve turned to in efforts to prove themselves to superiors (who in turn are also working to save their careers), so that they aren’t included in any of the tens of thousands of Wall Street jobs that are being cut this year.  In 2007 and going into 2008, investment banking jobs were the “celebrity of the business world” positions, reserved for the who’s who of the Ivy League system.  Today, these folks have been demoted to Excel Monkeys fighting like apes to keep their jobs and bonuses coming, even if it means doing rails off their cubicle desk at 3:00 am to continue striving for some resemblence of a real deal that can get them positive attention amongst their Managing Directors. 

Another notable group of humblings taking place in 2008 were the executives managing these firms that are now cutting young analysts and associates left and right, or as every other ad on XM Radio refers to them, the “Wall Street Fat Cats.”  Earlier in the year, I was out to defend executives at financial firms, with the argument that they are just trying to meet earnings expectations living from quarter-to-quarter, so what can we possibly expect of them?  Well, I can tell you we should expect much more than we got. 

While the modern financial system as we know it was literally crumbling right before our eyes, many heads of the most popular Wall Street firms were attempting to position themselves for one thing:  to save their own hides.  We saw this even today, as Merril Lynch CEO John Thain is still battling for his approx $10mm bonus for the alleged work he did on the BofA deal.  Now, let me just say that I am all for companies compensating their employees appropriately and I also understand that executives’ compensation is based on performance, which in turn, relate to total company revenues.  So, if the company does well, theoretically, the C-suite should be compensated adequately.  So, the fact that many CEO’s make more in their salaries than the GDP of some small countries really doesn’t bother me; however, the caveat here is that when companies are struggling to stay alive in the sector being butchered on a daily basis, I don’t think $10mm needs to go anywhere except back into the company.  Also, let me say that John Thain doesn’t need the $10mm bonus.  In fact, he really doesn’t need any compensation this year, because 1) he has been a part of the problem on the Street for years; and, 2) the Street has been very good to him, allowing him to make hundreds of millions of dollars in his career.  Needless to say, he isn’t hurting, so maybe the best thing to do in this situation is to just walk away.

Nevertheless, we’re seeing executives in some of the world’s largest and once considered most powerful firms begging for their salaries and bonuses.  For some, it has been much worse, as criminal investigations have run rampant this year, focused on the negligence of Wall Street managers that has contributed to our markets’ suffering.  Simply put, while the economy has been looking for relief, too many CEO’s were more than accepting of poor risk management practices and crisis prevention tactics.  The credit rating agencies are in this boat too, as the incestuous inter-linking of Wall Street’s power players, in all their ineptitude, ultimately allowed us to get where we are today.

This example leads us into our next sighting of extreme humility, which relates to the fund managers, who’s britches have long been too small for their exploding egos and pride.  I really enjoy the popular blog Cityfile, because you can get a lot of interesting background information on some of the world’s richest and most successful hedge fund managers.  As I have found myself reading through this information, I grew more and more disgusted with the image that “hedge funders” have put out into society with their actions.  This is another group that I have defended, not the least of which because I myself manage my own investment fund, although I certainly don’t consider myself a hedge fund manager.  But, the more I have learned about the so-called “leaders” of this market niche, the more I learn about where I want my money to go and more importantly not to go. 

The question I have found myself asking very often when talking or reading about popular fund managers is when is it enough?  How many billions will it take for them to be satisfied?  How many homes in the Hamptons and on the Vineyard do they really need?  Is it totally imperative to have a G-IV for both you and  your wife, so that you can travel to your home in Aspen and the yacht off Nice at the same time?  Seriously? 

Sure, this is the free market and people can do with their wealth what they please – trust me, I understand that better than anyone and I don’t think anyone should apologize for their success or wealth – but I still ask why. 

Well, it seems some of it (emphasis on some) is coming full circle.  In recent weeks and indeed in the past year, we have seen some of the most successful hedge funds shut their doors.  Practically all of the major institutionally-backed funds have restricted capital redemptions.  And, the number of funds that are not down more than 10% I can probably count on both hands.  Funds that boasted returns of 40%, 70%, 100% and even 400% in the past five years, are now realizing what it feels like to issue quarterly statements to their LP’s covered in red and numbers in pesty parentheses. 

As previously stated, some of these funds have shut down operations completely.  I think the New York Times story from a few months ago about former fund manager John Devaney sums up this situation best. 

One by one, John Devaney sold his treasures, hoping to forestall what was in the end inevitable. He sold his Renoir and his Gulfstream, his home and his helicopter. Even his cherished yacht — gone.

Devaney, whose fund made bets on the risky mortgages that this financial crisis was built on, ultimately called it quits earlier this year, which in looking back was probably about two years or so after he should have shut everything down.  This also exhibits why the humbling of the world’s most pompous hedge fund managers is so sweet for the little guys like me, because these guys just didn’t know when to call it quits.  Every piece of data in the world was telling them to back out, even before the losses came in.  When the declines started to build, they attempted to dig their way out, totally forgetting that the only way to really dig yourself out of a hole is to just stop digging.

And finally, perhaps the sweetest humbling of all relates to all of the too-big-for-their-britches politicians who right now are sitting in their homes, no doubt sipping on their seventh scotch since 7:00 pm, wondering what in the world happened, and when was it exactly when things took a turn.  The best example of a fallen from grace political figure this year for people in the financial sector (like me) is without a doubt former-New York Governor Elliot Spitzer, who left office in disgrace last summer after being exposed as a number one client of a “high-class” (whatever that means) call girl. 

There are two reasons Spitzer’s scandal is so sweet:  first, watching any politician fall from grace due to their own stupidity is enough to bring a smile to the common American; and, second, Spitzer was/is one of the most hated men on Wall Street for the unjust attacks that he made for years against various companies and his fight for increased regulation of the financial markets.  He was once known as the King of Wall Street out to crack down on Enron-esque corruption, only to be the eventual target of corruption investigations and eventually leaving office in disgrace.  Today, he rightfully exists as the laughing stock of New York, where he will no doubt remain for the rest of his life. 

The other political humbling that is so sweet in 2008 is actually still unfolding, because it came out literally days ago.  Yesterday, I briefly commented on the situation where Illinois Governor Dan Blagojevich ran a “pay-to-play” ring while trying to fill President-elect Barack Obama’s vacant Senate seat.  As I previously said, I don’t think this will hurt Obama in the long-run, but I can’t help but wonder, along with many Obama supporters, if whether or not this could be a sign of more things to come from the candidate who no one cared what his background really was, except that he was different from George W. Bush.  This is also so sweet, because of the prideful audacity that has eminated from the Obama-Biden campaign and transition team over the past few months.  Not only did the idiotic Blagojevich get humbled (and indeed still is as we speak), but this whole event has been critical in bringing Democrats back down to reality.  The fact that Mr. Obama is realizing it’s a lot harder running the world’s superpower than he originally thought also makes it humbling for the Democrats, as well as the fact that he is gradually learning that it will be physically impossible to follow through on many of his campaign promises.  Barack Obama understands that American voters grow impatient very fast, as we saw with President Bush, so trying to find a way to deliver on his promises, rescue the country from a major economic crisis and two wars, along with distancing himself from a legitimate Chicago-style scandal will all be plenty challenging for him. 

And finally, I can’t speak about humblings without offering some criticisms of my own Party, because the GOP is in need of a little humility just as much as the Democrats are.  Further, my criticisms of politicians and their need of humility applies to those on both sides of the aisle who have fallen short of their duties.  Indeed, many Republicans have disappointed me this year, just as much, if not more than many of the Democrats.  I have come across more Republicans in the past year who I am convinced are unfit to serve in office, to the point that I welcome the re-creation of the Republican Party that will be inevitable if we ever want to regain control of Congress and the White House.  Further, I am looking forward to the few new faces that will be around in Washington next year, such as the two newest GOP Members from Louisiana, including John Fleming and Joseph Cao.  Dr. Fleming is replacing a personal friend of our’s and great Congressman, Jim McCrery, who is retiring this year, while Congressman-elect Cao is replacing another humbled and disgraced politician, William Jefferson who lost amidst fighting federal corruption and bribery charges. 

Ultimately, the list of humblings taking place in 2008 could go on and on.  Furthermore, I have no doubt that the trend will continue in 2009 and beyond, but I am confident that the changes taking place this year will mark considerable evolution of the many facets of American society, not to mention the way many of the world’s most powerful individuals manage their lives. 

I hope that 2009 marks a time of re-emergence and growth, rather than the inevitable fall that humility initially causes.  But, the thing about humility is that once an individual or group is humbled, they can pick up their jaws off the floor and begin to rebuild stronger than ever before.  I am hoping this is how America responds next year, including the economy, the financial markets, politicians and individual stakeholders in this country’s well being.  Whatever we do, we should all take the humility experienced this year as an extremely valuable lesson on things to do and not to do going forward, which willhopefully ultimately make this country stronger than ever.

[NOTE: this post was first published at my blog, Mark to Market at www.Reiboldt.com]