The last gasps of the smartest guys in the room

When Treasury Secretary Paulson announced work on a bailout plan, he made some comment about wanting to help responsible homeowners, implying that irresponsible homeowners were the ones to blame for this mess and needed no help. I felt like throwing something at the television when I heard him mouth such garbage.

Irresponsible homeowners -- the ones who'd been pushed to become a part of the "ownership society" to help our floundering post-9/11 economy, the ones who suffered a catastrophic illness that health insurance didn't cover, or lost their jobs due to market conditions over which they had no power.

It's infuriating to hear such hints of blame from Paulson to this effect, knowing that the real problems -- the really BIG problems -- had far more to do with the irresponsible and completely amoral pirahna that populated firms like Enron.

Specifically Enron, but including their corporate brothers-in-arms.

Once upon a time, I worked for a Fortune 100 company, in a department with overlaps between legal and financial departments, and with regular exposure to executives and hedge fund traders. I remember about 10 years ago the first time the division for which I worked explored using "swaps", derivatives that would help businesses share risk as well as share profit. (You can read a nice explanation of derivatives by Hugh here in Oxdown.) The executives of the organization sweated for days and weeks over how this worked, what the real exposure would be, whether they knew enough about these kinds of instruments to use them.

And by executives, I mean the kind of guys that made $200K to $1M or more annually, who were graduates of business schools from around the world. They fretted over this stuff more than they did a number of mergers and acquisitions, even with the SEC or DOJ involved in oversight.

Ultimately, they implemented these "swaps" anyhow.

Not long after the first swap derivative, I had a chat with the firm's top hedge fund traders. Again, brilliant guys with degrees from top notch schools, the kind of guys over which other Fortune 100 companies will fight. We got onto the topic of Enron, which was still in its fattest, headiest days as top dog of the market. I asked them what they thought of Enron, and if there was anything that Enron was doing that our firm should be doing.

They shook their heads and told me candidly that they had no idea how they were doing it, couldn't explain how they were succeeding. If they couldn't understand it, they couldn't duplicate it, even though management wanted to get a cut of the same kind of action since they had exposure to energy markets.

Some of the smartest guys at a Fortune 100 company couldn't understand this stuff and went ahead and did it anyhow; the executives duplicated with derivatives what Enron was doing to spread risk, stopping short only with moving these activities offshore and off-book because regulations and company charters kept them from doing so. Even though the guys who had to execute these transactions might be shaking their heads, the executives with big chunks of company stock and options and comfortable salaries went ahead and continued to do more of the same.

I can picture this happening at AIG at a much larger scale, and I'll even bet that a few transactions from the same firm at which I once worked also involved AIG.

Smart guys, all caught up in trying to outsmart those so-called "smartest guys" at Enron, and continuing their efforts for years, long after Enron had gone down in flames.

Irresponsible homeowners? Pshaw. These guys made the puny little mortgagees look like teeny little pikers when it came to irresponsibility.

And yet we are going to have to bail them out. I sure hope they remember to call us and ask us to go for a ride on their yachts sometime, or invite us to go skiing in Gstaad.

(By the way: where did all the Enron employees go, anyhow? not the poor folks who were frontline energy business folks, but the ones who helped execute off-the-books financial maneuvers but weren't prosecuted? Ever wonder where they got their next jobs after Enron imploded?)

[cross-posted at Oxdown Gazette; photo: gothick_matt via Flickr.com]