Sunday, February 14, 2010

A Call to Reason by Blackstone CEO Schwarzman



In “Lawmakers' rush to punish banks threatens recovery”, published in the Washington Post last Friday, Blackstone’s CEO Stephen Schwarzman argues that we should all remain calm in confronting the current crisis. Panic could do us in. The fact that the head of one of the largest private equity investment groups - and probably the most powerful one - defends bankers should be viewed with scepticism as what he is really doing is defending himself and his interests.

Stephen Schwarzman writes, “We need sobriety, rationality and civility in the discussions on the regulation of financial institutions so that the banks can return in a robust manner to their central role in funding the economy”. I do not disagree; we should do everything to preserve our banking institutions as they play a crucial role in our economic development. But to ask everyone not be furious for what bankers (and arguably others) did to bring us to the brink of depression is asking a lot. We know that banks themselves are not to blame; it is the bankers that are.

The private equity investor adds in his defense “If, as a result of this anger, credit becomes unavailable, particularly for small and mid-size businesses, in the amounts needed to fuel economic growth and job creation, then at best the economy will slow and, at worst, we will find ourselves in a dire situation.” Again I agree! We should try not to do anything to make our own situation worse; it would be irrational. Yet, it might be too late.

But this should not be an excuse not to get to the bottom of what happened and to regulate banks and the whole financial system properly. In other words, find the culprits, put them away and regulate the financial system in such a way as to serve the interests of society. For now, it appears likely to many that the system could be high jacked again for the benefit of the few.

Mr. Schwarzman argues further “To produce a crisis of the size we are experiencing requires a great number of actors, each of which must face a degree of responsibility for the situation in which we find ourselves”. Once more, I cannot disagree. However, we cannot continue hiding behind this. The problem is that nobody was truly held accountable for what happened. The guilty are failing to acknowledge any real responsibility and most are too busy blaming each other or arguing that we are all responsible. It is what Mr. Schwatzman is trying to do! But although there are a lot of actors to blame, we are not all responsible. Many people suffered the consequences of this crisis and are in no way responsible.

According to Mr. Schwarzman, “To single out banks for blame is dangerous to the economy”. OK, so let’s distribute the blame to all others who are responsible! However, I think that what is truly dangerous for society (and thereby the economy) is to fail to identify the culprits and punish those who are responsible for what happened. Banks are single out because they are more visible and because the political process is not always very subtle. Yet, failing to investigate, prosecute and sentence anyone if justified will not lead to justice. And without justice, there won’t be any positive settlement that will allow all of us to move on.

Yes, there is a danger that some prosecutors will show overzealous behaviour that could backfire. The best historical example that I can think of is that of the high “reparation costs” asked from the Germans after WWI. They turned out to put such a high burden on the next generation of Germans (who had little to do with the war) that it favoured the emergence of the Nazism and eventually led to WWII. But what this shows, more than anything, is that botched justice and lack of leadership can lead to disaster.

There was no justice, nor any appearance of justice in the current crisis. No wonder people are angry. Bankers are rolling in cash, bonuses are being paid as if nothing had happened and John Thain is back in business as the head of CTI, a mid-sized financial institution. And, all the while, home owners and workers are still reeling from the crisis and are asking themselves what just happened to them!

Mr. Schwarzman makes excellent points in his article but his point of view should not in any ways distract, nor deter us from pursuing justice. Anyways - only time will tell - his logic will not be acknowledged until justice is served.

You can read the entire article at http://www.washingtonpost.com/wp-dyn/content/article/2010/02/11/AR2010021102206.html?wpisrc=nl_pmopinions

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