Portfolio Manager Robert H. Heath will occasionally be contributing to this blog in the near future. Heath is a consultant, investment banker and corporate strategist who is currently self-unemployed. When he’s not raising three kids and training a puppy, he occasionally remarks on current events, and recently had a little something to say about the underlying causes for our ongoing economic “situation”:
In the aftermath of the 2008 global financial crisis (at least I hope we’re in the aftermath) observers of the financial markets continue to debate its underlying causes. Some point to executive compensation, which supposedly encouraged excessive risk-taking. Others blame excessive leverage (the most basic form of risk-taking) and finger the Federal Reserve for maintaining artificially low interest rates from 2002 to 2005. Other critics believe that a surge in esoteric and poorly-modeled derivatives allowed banks to pretend that a substantial increase in risk and systemic co-dependence was safely hedged.But an article in “Science Translational Medicine” offers a simpler hypothesis consistent with lowered inhibitions, excessive risk-taking and impaired judgment: Wall Street was three (spread)sheets to the wind.Now I’m not suggesting that investment bankers were drinking at work… at least not more than usual. But 100-hour workweeks are not uncommon on Wall Street, and as Bloomberg quotes the study, “Staying awake for 24 hours straight equals having a blood alcohol concentration of 0.10 percent, beyond the 0.08 percent legal limit for driving in the U.S.”You wouldn’t give your car keys to a sleep-deprived, cognitively-impaired twenty-two year old, but bet a billion dollars (levered 10:1) on the AAA-rated tranche of a 30-layer, collateralized debt security that he modeled at four in the morning? No problem.
To find more of Robert’s ruminations, visit his personal blog.