Sometimes, when you write history, you can end up feeling old. I had that feeling a couple of weekends ago, when Henry Kaufman ventured to Baltimore to talk to the Business History Conference, an organization of historians.
I’ve known Kaufman for many years, and when my neighbor in the audience said, “I don’t know who this person is,” it was hard to explain how important he was on Wall Street in the second half of the twentieth century — how he, then head of research at Salomon Brothers, and Albert Wojnilower, the chief economist at First Boston, presciently warned in 1981 that Ronald Reagan’s economic policies would drive interest rates and the dollar sky-high, or how Kaufman’s pronouncement in August 1982 that interest rates had entered a long-term downward trend awoke the stock market from years of slumber. Since then, Kaufman has come in for a good bit of criticism: he was insufficiently bullish on the stock market in the 1990s, it is said, and as a board member bears responsibility for the collapse of Lehman Brothers, a venerable investment bank, in September 2008. He remains bitter about his experience with Lehman, and he blames the Treasury and the Securities and Exchange Commission for telling the directors Lehman should declare bankruptcy. “I think it was partly a political decision to allow Lehman to fail,” he says, recalling the pressure on the Fed and the Bush Administration to force someone on Wall Street to lose big.
Kaufman is 90 now, and he continues to cast a skeptical eye on the markets. He has always been a bond guy, and bond guys, by nature, worry about risks more than opportunities. His greatest worry is the financial system itself. He thinks that regulators missed the boat in the 1990s when they phased out the rules that separated commercial banking from investment banking; they expected deregulation would lead to greater competition among banks, he recalls, but instead it brought large-scale consolidation. The Dodd-Frank law and the other reforms that followed the 2008-2009 crisis, he thinks, have reinforced that trend. “It preserved the enormous financial concentration that had taken place and even accelerated concentration. That was a mistake,” Kaufman says. The result, in his view, is a system that is even riskier, with rules that are too complicated for bank supervisors to enforce.
His recommendation is to force financial institutions to specialize. The advantage in having companies that deal only in insurance, or consumer banking, or money management, he says, is that managers and regulators could better understand their finances. “I dare anyone to tell me they can go into a large financial institution [today] and tell me the details,” Kaufman insists. “You can’t,” he says, because the companies are too complicated to comprehend. The idea that “living wills” will enable them to disentangle their affairs in the event of crisis, as Dodd-Frank commands, is fatuous, Kaufman adds. Even with a living will, the markets will devalue a troubled institution’s assets, spreading pain widely.
Kaufman knows the world has moved on, and he is not optimistic about bringing the old times back. But he distinctly remembers how, back when Wall Street firms were partnerships for which partners bore personal responsibility, they behaved differently than they do today. When he was hired at Salomon in 1962, he recalls, he was told, “Go home and tell your wife you’re going to be liable for $2 billion.” Answering to shareholders isn’t the same thing at all.