Morgan Stanley and the Rock Band Impresario: The Story of a Busted Model
September 24, 2008
About five years ago, David B. quit a profitable business. He scheduled appearances of Christian rock bands. He decided to become a stock broker. He joined Morgan Stanley.
In recent years, he was highly critical of my views of the stock market and the fate of the economy. I was just too gloomy. He regarded the Austrian theory of the business cycle as incorrect. We were in a new era.
Today, Morgan Stanley is no longer an investment bank. It is a holding company. Goldman Sachs and Morgan Stanley switched models on Friday, September 19. They were facing bankruptcy. Lehman had gone bust on Monday. Merrill Lynch had disappeared as a separate entity on Sunday.
As banks, Goldman Sachs and Morgan Stanley will have access to bailout money. They switched horses to get in on the national rip-off. "Capitalism at work!" State capitalism, yes. Free market capitalism, no.
That week saw government bailouts of the financial sector: firtst, $85 billion for AIG; then $700 billion for the banks.
David B. never saw it coming. He knew I was wrong. It was a new era.
It's a new era, all right -- a new era without Bear Stearns, Merrill Lynch, Lehman, Morgan Stanley, and Goldman Sachs. The industry as we have known it for 150 years went out of business last week.
Morgan Stanley has just sold 20% of its equity to a Japanese bank.
David was an expert in scheduling rock band events. Overnight, he was an expert in the stock market. "Genius is a rising market." When Federal Reserve monetary expansion ended, the new era ended.
I don't know if David will still have a job there or not. I do know this: his contempt for the Austrian theory of the business cycle blew up in his face. It has blown up in a lot of faces.
Ludwig von Mises in 1912 outlined his theory: central banks inflate, stock markets boom, central banks reduce inflation, stock markets crash. I have written a mini-book on his theory.
They were an arrogant bunch, investment bankers. For over a century, they ruled the roost. Now they are a busted bunch.
How the mighty have fallen.
They did it to themselves. In 2004, the Securities & Exchange Commission exempted the big five investment banks from banking leverage limits of 12-to-one. They took the bait. They all went to 30-to-one. "Rich! We'll all be rich!"
They are all dead. Good riddance to bad rubbish.
The man who saw it coming was Prof. Nouriel Roubini. On Sunday evening, September 14, he predicted the demise of Goldman Sachs and Morgan Stanley as investment banks.