Thursday, December 18, 2008

Blinded by Truthiness: NY Times Article: On Wall Street, Bonuses, Not Profits, Were Real

Looking at the various entries I've posted to this blog, I've noticed a common thread. Much of our financial system is built on something that is fake. Hedge funds. Short selling. Bonuses for CEO's running companies that are not all that sound.

Many people followed the herd mentality. Groupthink. A recent example is all of the people who lost money investing with Bernie Madoff, or trusted financial advisers who funnelled some of their funds into Madoff's Ponzi scheme.

Trust has been lost.

Our system has rewarded perceived movers and shakers in the financial industry. Just think about the huge amount of money that people made from selling mortgages and mortgage-back securities! What about the CEO's who earned large bonuses, even though their companies weren't doing so well, were not run well, or were tanking behind the scenes?

A recent article in the New York Times, On Wall Street, Bonuses, Not Profits, Were Real (12/17/08 - Louise Story). According to the article, in 2006, Dow Kim, at Merrill Lynch, had a salary of $350,000, but received a bonus of $35 million, for overseeing his company's mortgage business traders.

"...Merrill's record earnings in 2006 - $7.5 billion - turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.... Unlike the earnings, however, the bonuses have not been reversed."

Fueled by greed? Yes. But also blinded by "truthiness".

Truthiness" is a term that sprung from the head of comedian Stephen Colbert's head.

According to Colbert, Truthiness is 'What I say is right, and [nothing] anyone else says could possibly be true.' It's not only that I feel it to be true, but that I feel it to be true. There's not only an emotional quality, but there's a selfish quality."

New York Times Series: The Reckoning (Articles exploring the causes of the financial crisis)

New York Times Reader's Comments

Graphic from the New York Times:

How will trust be restored in our financial markets? There is a long road ahead.

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