Tony Blair and the Subprime Mortgage Crisis–It’s the Basics

On November 8, the Washington Speaker’s Bureau booked a nice commission when former Prime Minister Tony Blair was paid $500,000 for a 20-minute talk to Chinese industry and government officials in Hong Kong.

Not a bad sum, even in US dollars. Blair’s Chinese market rate is now 2X the former reigning champion, one William Jefferson Clinton (and 5X Rudy Giuliani’s rate, according to the Financial Times (print edition, Nov. 9, 2007).

But all was not sweetness and light. Several attendees groused that Blair’s talk was full of platitudes and banalities.

As the China Youth Daily paper said, "To be honest, Mr Blair’s speech sounds so familiar. It’s just like the report of any Chinese county level official and contains no novelty. If the local political and business circles paid such a high price for a speech they could have made themselves, was it worth it?

A ripoff?. A con job? A typical politician hussle—take the big bucks, give nothing in return, smile all the way to the bank—and don’t give up a thing?

So it sounds in the papers.

There is, of course, another way to put it. Maybe Blair spoke the truth, and the audience just didn’t want to believe it. Maybe the road to global leadership isn’t a “secret” after all—maybe it’s one of those platitudes like “5% inspiration and 95% perspiration,” “common sense is uncommon,” and “just keep hitting singles.”

Maybe it’s back to basics.

Maybe it’s human nature to prefer something splashy. We want cleverness—we’re disappointed when the answer turns out to be a banality we’ve heard since the cradle. We want to believe others’ success is a trick. Back to basics? Don’t wanna hear it.

Wall Street loves quantitative cleverness. Take the SIV, or Structured Investment Vehicle. SIVs are asset-based products with tiers of risk deconstructed and repackaged, which let offerors capitalize on short vs. long-term spreads.

Problem; buyers used short-term debt to fund long-term products. Back to basics: match your maturities.

Moody’s now says, “many managers have told us they now do not expect to see the SIV model survive in its current form." (FT, November 9, “SIVs Face Fight to Survive, Says Moody’s”).

Morgan Stanley saw the subprime mortgage crisis coming a year ago, and designed a clever hedge. It bought credit default swaps (a side bet against subprime mortgages). And, to get the swaps insurance for free, they bought the least risky tranches of subprime—still high return. Voila—a free lunch.

Unfortunately, the least risky tranches of subprime also crashed and burned, overwhelming the insurance. “They were so right, they were wrong” says the FT. (Morgan Stanley Peers Through the Looking Glass, Darkly”, FT, Friday Nov. 9, p. 26).

Back to Wall Street basics: pigs get fat, hogs get slaughtered.

I have recently re-discovered John Gottman’s research on marriage. He talks about “bids”—basically little reach-outs to one another. Healthy marriages average about 70 bids in a given time period—unhealthy marriages, something like 20% as many.

We resist this line of basic thought. We want to believe in flowers, candles and soft lights. The Secret. The Ice Cream Diet. The latest technology. The “this time it’s different” stock market. If someone else succeeds—they must have had an inside angle.

Then the correction happens, and we see clearly yet again. It’s the little things. It’s hitting singles, not homers. It’s blocking and tackling. It’s no pain, no gain. It’s just eat less calories. It’s practice, practice, practice. It’s buy low, sell high. If it sounds too good to be true, it probably isn’t true.

It’s the basics.

Just ask Warren Buffett. Larry Bird. Ask Oprah. Or Tony Blair. The advice might be worth it. Even at Tony Blair’s rates.