Michael of Bankers Anonymous worked as a Wall Street bond salesman, hedge fund investor, small business owner, distressed debt investor, and financial consultant for the past 15 years. He thinks it's time for us to wake up from our collective post-crisis hangover.
Ilene: Hi Michael, thanks for doing this interview with me. I know you're a banker and in recovery, at Bankers Anonymous, but can you tell me more about yourself?
Michael: I graduated from Harvard in 1995 and was a Fulbright Scholar in 1996. After that, I worked as a fixed income consultant in bond trading for a small NY company till 1997, and then at Goldman Sachs in the Emerging Markets and Mortgage Departments from 1997 to 2004. I recently finished unwinding a hedge fund that I had started in 2004. My plan is to focus on writing about the financial markets, and teaching and speaking about finance (more here).
Ilene: Do you have any investing ideas to share?
Michael: I don't run outside money now, and I don't have any advice for anyone other than myself.
Ilene: What do you like for yourself?
Michael: My fund purchased debt that Wall Street wasn't buying. Exclusively non-securitized debt. Secondary debt - legally enforceable cashflows: charged off consumer debt, secondary mortgages, debt that banks sold, "oddball" cash flows. I would not advise anyone to get into this on their own.
Ilene: You've written, on your website:
I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year's budget - it is a weakness of our civil society.
What should we as a society be talking about?
Michael: We suffer from a lack of financial education in our society, in general. Intelligent friends often tell me they don't understand what's happening in finance. They ask questions such as "What does it mean that the banks are 'too big to fail'?" They've been trained or trained themselves to believe that it's too complicated and unknowable - even though they are highly intelligent people. The dialogue in the news and on TV is terrible; the portrayal of the financial system by the media is misleading and inaccurate, and people have many misconceived notions. After going through the near-death experience of the financial system in 2008, it's amazing to me that people don't understand the basics of our system.
So I assigned myself the role of talking about and teaching people about finance. The teaching isn't done well and it's not in the interest of financial professionals to really explain things to lay people. They like to keep it complicated.
Michael: What I like to call in my site the "Financial Infotainment Industrial Complex." They can't charge huge fees without making what they're doing seem very complicated. But it's not the complexity that makes understanding finance so tough; it's the poor teaching.
Ilene: I've searched websites such as Zero Hedge to get different takes on market-moving events, and have noticed that at least some of the writers are levels well above my own in this area. I don't always understand well enough to evaluate the validity of some of it.
Michael: Zero Hedge has a mixture of very insightful and informative articles, plus other articles that are on the paranoid fringe. Though some of the paranoia is probably warranted. I approach a story by first considering how people are motivated.
Ilene: You consider how people are motivated in trying to divide life into real world vs. paranoid fringe world?
Michael: Rather than assuming a conspiracy, it's a good assumption that the financial system can be best understood by "following the money." Money is driving the decision process of the people involved. It's driving their conversations, their political agenda. But it's not one big illegal conspiracy.
Ilene: Are you saying it's more the players' self-interest and desire for money than any explicit agreements to engage in illegal activities and take over the world?
Michael: Yes. There is not a secret cabal of banks working together to scoop up all the money and end life as we know it, but there is a tacit agreement between people with money to act in their own interests, to drive the solutions to problems their way. There's a common interest among people are similarly overlapping desires, rather than an overt conspiracy. There is honor among thieves, same with bankers.
Ilene: I've read that people in the banking industry, particularly traders, have a higher degree of psychopathy or sociopathy compared to the general population. Is that something you saw?
Michael: No, most of the people I knew were not sociopaths, but there were people with some antisocial or obsessive compulsive disorder-like traits that might have helped them get things done. OCD (obsessive compulsive disorder) is probably helpful to developing a monomaniacal drive to completely exploit one's talents. Success has its costs. And sure, there is the occasional Gordon Gekko, but he wouldn't be well-liked for his personality. You do have to be profitable - and being exceptionally good at whatever you are doing often involves some sort of oddball behavior.
Ilene: Do you have any oddball behaviors?
Michael: Of course not. [Laughing]
Ilene: What do you think about the Fed keeping the stock market higher by supporting the banks with money?
Michael: The Fed gives huge market support to the broker dealer community. The issue is at what pace does it get removed - how do the crutches put in place in 2008 and 2009 get taken away?
Ilene: If the Fed decides to pull money out of the financial system, will this cause the price of bonds to tank, yields to rise and stocks to drop?
Michael: Chances are that when the Fed decided to do this, it would be because the economy was heating up. So you couldn't say in advance that a particular Fed action would inevitably lead to a certain market direction. You couldn't take this action in isolation. The Fed is extremely sensitive to the market, so if it starts taking away all the monetary props, maybe it's just as logical to predict the opposite move for markets. The Fed is not going to take away props before the economy is booming.
Ilene: Will the economy ever be booming again?
Michael: I'm not an economist, but I wouldn't bet against America. We do have extraordinary natural resources, extraordinary human resources, respect for private property, and we are resourceful. Although I don't know what will happen in the short term, the US is still a good place to invest risk capital.
Ilene: If you could reform the financial system, what is one thing you would do?
Michael: Ah, if I was awarded dictatorial powers? The major problem of 2008, and the major lesson for me is that if we have banks that are too big to fail (TBTF), that are considered essential to the functioning of the financial system, then they have an implicit guarantee from taxpayers. Because of this guarantee, they should be treated and regulated like utilities. If we are on the hook to keep these TBTF banks alive, they should be regulated accordingly and all their key executives get to be paid like an executive at a utility that is supported by the taxpayer.
A hedge fund is different. Hedge fund owners should be allowed to make all the money they're able, pay themselves all the money they want. But when they blow up, the public doesn't come to the rescue. The public doesn't bail them out of their failures. They go broke, the owners lose, and there's no backstop from taxpayers.
In the case of TBTF banks, we should not have allowed massive private profits to be enjoyed where there is a public safety net in place for when things go wrong.
The New Year's edition of Market Shadows newsletter is now available: MarketShadows "Comfortably Bulllish," January 4 2013
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