Peter Thiel with some interesting insights on the root cause of the 2008 bank failures…
… Peter explained, he recognized that the leading investment banks were in much deeper trouble than their share prices reflected. How might a hedge fund profit from that insight? Betting against the entire sector would have been clumsy. What a fund would need to do, he decided, was bet against one bank at a time. But how could anyone predict the sequence in which the big investment banks would founder?
Peter mulled the problem. Then it came to him. “I realized that, the more Republican the institution,” he explained, “the sooner it would go down.”
Events unfolded just as Peter had predicted….
Why? Why did the most Republican banks suffer mortal wounds while the least Republican survived? “I have three explanations,” Peter told me. “I’m not sure which one is right, but I am sure at least one of them is.”
- A hostile federal bureaucracy. Despite a Republican in the White House, the bureaucrats who staffed the regulatory agencies, the Treasury and the Fed remain unfriendly to the GOP. Consciously or not, they proved unforgiving toward Bear, Lehman and Merrill but sympathetic toward Morgan and Goldman.
- An inability to accept reality. At the most Republican institutions, the principals believed in free markets–only too devoutly. Even Milton Friedman would never have argued that markets work perfectly all the time, only that they work a lot better than government intervention. But at Bear, Lehman and Merrill, folks became convinced that the markets possessed almost magical properties. When trouble started, they literally couldn’t believe it.
- Uncoolness. All the investment banks recruited at the same elite universities, and political correctness at such schools is profound. (If you want proof, just look at the last election cycle. The faculty at Harvard contributed to Democrats over Republicans by a ratio of 93 to seven.) At Yale and Berkeley and Wharton–at all the elite schools–the Democratic Party is cool; the Republican Party, decidedly not. The least Republican investment banks were therefore able to snap up the best talent, leaving the most Republican firms to pick through the leftovers. “In big financial institutions,” Peter said, “it could be that a Republican profile now correlates with technocratic incompetence.”
I think Thiel’s last point on the homogeneity of Wall Street is quite interesting. When you consider the backgrounds of most of bankers (at least those in the real positions of power) they truly are of the same pedigree. I contrast this with my experience in the technology sector, which I believe to have a much richer and more diverse composition in background. Too often we tend to gravitate/associate toward like-minded people; often to our own detriment. The award winning book by Dorris Kearns Goodwin, Team of Rivals is a fascinating account of how Abraham Lincoln’s balked the system by hiring many of his former adversaries to avoid these very issues. President-elect Obama is said to be considering a similar approach and it will be interesting to see if this actually materializes. All in all, an interesting theory by Thiel.