The water cooler talk in the 1980’s was about the powerful effort under way to repeal the Glass-Steagall Act which separated banking into types (commercial and investment) – built a wall between them – and established the FDIC. In 1999 the Act was repealed, paving the way for commercial banks to invest in brokerage houses.
In September 1987 I passed my Series 7 exam and went to work for a very conservative midwestern brokerage house where you needed the Branch Manager’s permission to write a covered call. It was a baptism by fire if you remember the events from October 19th of that year. But I digress. I do remember a great deal of talk and worry about bankers getting in to the brokerage business. Particularly if you were IN the brokerage business. Not everyone was yelling “capitalism, yeah!” when it came to cutting banks loose from their moorings. Bankers were simple dark suited wing tip types – CD’s and T Bills. Boring. Predictable. Moreover, they simply weren’t capable of managing complex investment instruments. Have you ever seen the Series 7 exam? It’s not a cake walk. In comparison, banking was – well, predictable, vanilla and safe. Which is great when you want predictable, vanilla and safe. Not so great when you are managing mortgage-backed securities or collateralized debt obligations.
This past week David Brooks reminded me of the doom & gloom scenarios we postulated would happen if banks got into the brokerage business in his Op Ed piece “Greed and Stupidity,” by juxtaposing the results of greed and stupidity and laying them at the feet of the financial debacle. Per Brooks: “the second and, to me, more persuasive theory revolves around ignorance and uncertainty. The primary problem is not the greed of a giant oligarchy. It’s that overconfident bankers didn’t know what they were doing. They thought they had these sophisticated tools to reduce risk. But when big events — like the rise of China — fundamentally altered the world economy, their tools were worse than useless.” Dead on. Water cooler. 1987. Maybe it was my age or the times in which I lived, but if you made a bad bet in the market you could lose everything – but it was on you. Now that’s capitalism. Banks didn’t work that way and they didn’t think that way. They didn’t mitigate their risk because they didn’t understand it.
But one of the most interesting points Brooks makes, in a rather offhanded kind of way, bears great significance in today’s realm of new media: “To me, the most interesting factor is the way instant communications lead to unconscious conformity. You’d think that with thousands of ideas flowing at light speed around the world, you’d get a diversity of viewpoints and expectations that would balance one another out. Instead, global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time.”
Diversity of viewpoints? Differences of opinion? Critical commentary? These hybrid instrument experts existed in a vast echo chamber of conventional wisdom. Unfortunately that conventional wisdom was desperately flawed. There were contrarian voices outside the echo chamber but the brokers of Washington and banking subculture were poised only to react and unwilling to listen.
In today’s world of new media even the plugged in repeat rumor and fall for the occasional well-timed April fools joke only now at breathtaking speeds. And the sheer willingness to craft a desirable on-line and instantaneous product leads many communicators to shrink the content beyond what is meaningful or correct. More disturbing will be the increase in unconscious conformity when checks and balances are further reduced through seismic shifts in the fourth estate. The bright side of new media is that the citizen journalist will have a larger and more meaningful voice in this new era. Let’s just try to stand outside the echo chamber.