I wasn’t going to write about this, because I really don’t have much to add. But people keep mailing it to me, so in order to shut you all up, I’ll chip in.
As everyone knows by now, we’re in the midst of a really horrible
financial disaster. I’ve argued in the past on this blog that the root cause of the entire disaster is pure, simple stupidity on the part of people in the financial business. People gave out mortgages that any
sane rational person would have considered ridiculous. And then they built huge, elaborate financial structures on top of those mortgages, pretending that by somehow piling layer upon layer, loan upon loan, that
they were somehow creating something that could be considered real wealth.
They gave themselves bonuses that boggled the mind. Even after the whole ridiculous system came tumbling down, they continue to give themselves ridiculous bonuses. Insane bonuses. They’ve been writing themselves checks for millions of dollars to continue to operate their
businesses – even after taking billions of dollars in loans from the government to prevent them from going out of business. I consider
this to be downright criminal. But even if it’s not criminal, it’s
incredibly stupid. The very people who ran those firms right to the edge of bankruptcy, who nearly took down our entire financial system
are being rewarded. Not only are they being allowed to continue
to rut the businesses that they pretty much destroyed, but they’ve
been paying themselves an astonishing amount of money to do it. And now they’re complaining bitterly about the fact that the government
wants to limit them to a paltry half-million dollars of salary per year.
They argue that they must be allowed to earn more than that. Because after all, the people who run those businesses are special. They’re “the best and the brightest”. They’re
extra-smart. No one else could possibly run those businesses. We can’t rely on anyone who’d accept a puny half-mil – they won’t be smart enough. They don’t have the special knowledge of the business that these people do.
There’s one minor problem with that argument: it doesn’t work. A couple of weeks ago, some idiot at JP Morgan circulated a chart that was supposed to summarize just how bad the financial disaster has been. The chart circulated for a couple of weeks – bounced from mailbox to mailbox, sent from one financial genius to another.
Only the chart was blatantly, obviously, trivially wrong, and anyone who had the slightest damned clue of the assets those businesses managed – i.e., the kind of thing that the idiot who drew the chart was supposed to know – should have been able to tell at a glance how wrong it was. But they didn’t. In fact, the damned thing didn’t stop circulating until (of all people) Bob Cringely
flamed it. Go look at the chart – it’s up at the top of this post.
So what’s wrong with it?
Look at the Citigroup circle. In 2007, the total market cap of
Citigroup was around $255 billion. Today, it’s down to about $19
billion. That’s a pretty damned dramatic loss, right? Citigroup is
worth less that one tenth of what it was worth just two years ago.
But if you look at that chart, the circles show it as as being
worth less that one one hundredth.
See, the idiot who drew the chart apparently doesn’t understand
the idea that the area of a circle is quadratic. He drew
the circles so that the diameter of the circles is proportional
to the value – not the area. So if you take a really narrow slice down
the center of the circle – so that you wind up with a bar chart – that’s the real relationship. But no one who looks at this chart is going to interpret it that way. Because in a chart like this, it’s obvious that you’re supposed to compare the areas. If they wanted to use a bar chart, they would have used a bar chart, right?
Compare that figure to this bar chart – which correctly represents the values by bars. Pretty dramatic difference, huh? Citigroup still looks piss poor – but they don’t look anything like what they did in the original figure.
But no one noticed. For weeks, this circulated, and no one noticed. The people who generated the graph at JPMorgan never retracted it. They never realized that it was misleading. They published it, and allowed it to be circulated – even though the point that it was making was wrong, and it made them look even more incompetent that they we already thought they were.
The geniuses running those firms, the people who are so smart and so supremely skilled that they can’t possibly be replaced by someone who’s willing to work for a pathetic $500,000/year – those people don’t know enough about what’s happened to the values of their own businesses to
know how incredibly wrong the images on that chart are.
If I sound angry, that’s because I am. I work in NYC, and live in a suburb with a lot of people who work for those firms. I know people who
worked for them, as lawyers, secretaries, programmers – people who are now either out of their jobs, or on the verge of losing them. People who don’t earn a tenth of $500,000 are losing their jobs, because the financial firms “can’t afford” to continue paying them. But the execs
who’ve ruined those businesses, and are trying to collect handouts from the government to keep them going – they think they deserve orders of magnitude more than that – and are complaining, bitterly, about how unfair it is. They’re so damned incompetent that even as they talk about how they’re the only people who can possibly save their businesses, they’re not even capable of understanding something this simple.