Summer in the City

Here we are again, another summer in New York, and as yet this year has not delivered the searing heat New Yorkers are accustomed to. Sure, we've had some hot days and muggy nights, but overall the weather report has been decidedly mixed, prompting some to wonder whether the climate change predicted to occur long after this generation is gone has come early.

 

But while the unseasonable weather may lead to some short-term nail-biting, my cynical nature tells me that a sweltering August will soon calm peoples' nerves and reassure them that the mild and wet start to summer was just a blip on the radar, and they can go back to leaving the air conditioners on all day while they drive their gas-guzzling Hummers to work.

My cynical side is also worried that the industry will dismiss the crisis in the same way once markets pick up, and view it as a blip or a random outlier, instead of a systemic problem, and return to the old ways. It would be like finishing a course of antibiotics for Chlamydia then going back to having unprotected sex with strangers. Of course, the crisis could have been softened somewhat if people had paid more attention to outlying data a few years ago when some saw the signs of impending disaster that others missed, and more chose to ignore.

So, where does responsibility lie when the chips are down? Is it with trading firms and investment managers to second-guess the data and analytics they are paying for, or on the content and technology providers to ensure their services are accurate and reliable? While firms can't offload their fiduciary duties, should they expect that the products they buy do what it says on the tin, instead of vendors trying to absolve themselves of the claims they make about their products when selling them? But of course, firms shouldn't be able to blame a product that failed to predict the crisis if they were ignoring the warning signs anyway.

The outcome of the recent lawsuit by the California Public Employees Retirement System (Calpers) against ratings agencies for their role in mis-classifying toxic assets could result in changes to the way different parties within the industry treat their role. If the case is dismissed, it will emphasize that the burden is on investment firms to perform their own due diligence and that they-and no one else-are responsible for their clients' money. But if the court decides otherwise, we could see a flurry of litigation against-as well as tighter regulation of-providers of content, from over-the-counter (OTC) prices to anything that might constitute advice or an indication of what strategy to employ.

My cynical side also wonders whether we are so distracted by trying to assign blame for our current problems that we may miss the next round of problems. Underlying the toxic assets that precipitated the credit crunch were loans that should have never been made to people who could never afford them. But greed on all sides kept building the untenable house of cards ever higher. And while that house of cards collapsed spectacularly with the demise of Bear Stearns and Lehman Brothers, we may already be building a new one in its place. Though at the time of writing, the Dow Jones Industrial Average is rising, so is unemployment. Yankee Stadium is still full of fans, despite rising ticket prices at its new building, and some of the most expensive restaurants in New York are still packed with diners. If consumers are still living beyond their means, financed by debt and savings, there could be another crunch when that stimulus runs out. Should that scenario unfold, will traders and their tools be wary enough to predict it?

Max Bowie

Max Bowie is editor of Inside Market Data and can be reached at  

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