erik lundegaard


Friday June 12, 2009

On Nick Paumgarten's "The Death of Kings"

As I was reading Nick Paumgarten’s New Yorker article “The Death of Kings” last week (late to the party again: it’s from the May 18th issue), I kept wondering why it wasn’t a topic of conversation everywhere. Besides the obvious reasons: It’s long, about finance, in the New Yorker. On the other hand: It’s well-written, deep, scary. Maybe those are the same hand. A Google search on the terms “The Death of Kings” and “Nick Paumgarten” brought up less than a thousand hits. I don’t expect viral, I don’t expect Adam Lambert saying he’s gay or what’s painted on Sarah Palin’s toes, but can’t it at least be a little communicable?

Compounding the problem: It’s only online as a small excerpt on the New Yorker’s site. For subscribers like myself, yes, you can read the whole thing, but in .pdf form, making it difficult to copy and share. I understand the rationale—buy the magazine already—but it does limit its impact in our lazy, online world.

Shame. It’s an article that should be read. It’s about Paumgarten’s search for a wise man in the global financial meltdown. Someone who knew early and who might know early again where we’re heading. It’s a gloomy ride. It begins with unnamed insiders recounting when they knew the jig was up (watching a commercial for a subprime lender, studying debt vs. GNP graphs, learning that their cleaning woman in New York bought a house in Virginia to flip), and then wonders, from the center of the storm, how big the storm is and how much damage it will cause:

This doesn’t look like anything yet. The cities aren’t crumbling; the Plains aren’t turning to dust; your four grandparents are not sharing a bed...

What’s our original sin? How many years are we paying for? Since W.? Since Reagan? Since FDR? Since McKinley? Reading, you almost get a sense that our entire economic system has been funded on an illusion that kept us afloat, as surely as Wile E. Coyote’s illusion that he’s on land keeps him running on air. When realization sinks in, hold up a sign: Bye-bye.

One of his wise men is Colin Negrych, a private market philosopher/trader, who was in that 1985 Salomon Brothers’ training session portrayed in Michael Lewis’ “Liar’s Poker,” and who, among his aphorisms, quotes singer Robbie Fulks: “It’s a full-blown chore overlookin’ what’s plain to see.” What have we been overlooking? Debt. “Debt is the story,” he says. Later he adds: “What constituency is there for pessimism? People believe optimism is necessary, an American right. The presumption of optimism is the problem. That’s what creates the debt we have now.”

He’s full of pithy advice. “This whole culture has been set up to see stocks and homes as annual riskless investments. They most assuredly are not.” So that “whole culture” is, what, 10 years old? More? But not pre-1970s. Homes used to be places to live, jobs places to work. Both were stable.

“What has also run aground,” Paumgarten writes, “is a revolution in financing dating back to the nineteen-seventies.” He’s talking about all the stuff I don’t get, or am only beginning to vaguely get: the end of Glass-Steagall, which separated commercial from investment banks; the creation of interest-rate swaps; new ways to securitize debt:

They pooled assets that yielded a regular flow of payments (mortgages, car loans, credit-card receivables, etc.) and then divided the pool into tranches, ranked according to the order of repayment. Pieces of each tranche are sold to investors as securities—a claim on a portion of the payments. The senior tranches get paid back first but yield less. The equity branches, last in line, get paid more to take on the higher risk of not being paid at all. The idea is to spread and therefore mitigate the risk of lending, and in turn lower the cost of borrowing.

OK, I still don’t get it. Once money goes abstract I’m lost. But I remember the horror I felt watching that “60 Minutes” episode last fall in which Steve Kroft described how there were basically bets on all those failing subprime mortgages and no money to cover the bets. I imagined bankers rolling dice in a backroom. I still do. I kept thinking: Is this legal? Should it be?

Paumgarten writes the piece with short, terse sentences,  as if he’s holding his breath, as if he’s waiting for something else to collapse. How fragile is the entire system now? How much are we overleveraged? Wasn’t it 20-1? Is it still?

We get stories from the front lines about unnamed bankers and traders. The jobs lost. The lessons learned. The walls closing in. There’s a search for a villain, too, a face to embody the whole horrible mess. Even as Paumgarten fails in this task—dismissing Madoff as too small, Lehman and Bear as mere portions, and Greenspan as not pernicious enough—I wonder over its efficacy. Paumgarten feels a villain is necessary but I don’t. The very point of the system was its abstractness. What’s happened to my loan? Who’s playing craps with it where? It deserves an abstract villain.

Now It’s our very culture that’s abstract, diffuse, difficult to pinpoint. We’re all over the place. Which is why “The Death of Kings” isn’t a topic of conversation everywhere. But it should be. Libraries probably have the piece if you want to check it out. If they're still open.

Posted at 08:54 AM on Friday June 12, 2009 in category Business