US Outlook: Set banks free to stop another crisis? A successful man can be stupid too

There is an old episode of The Simpsons in which Homer is falsely accused of sexual harassment after reaching for a gummy bear that is stuck to a lady’s backside. At the end of the episode, Marge asks Homer what he has learnt from his experience. Homer replies: “Marge, I haven’t learnt a thing.”

The same is apparently true of Stephen Schwarzman, a private equity titan and chief executive of Blackstone. Asked to pen a Wall Street Journal column this week, he responded with a “let them eat cake” diatribe so tone deaf it would have shamed JP Morgan’s Jamie Dimon … OK, maybe not. But still. Close.

For the uninitiated, Mr Schwarzman is a very successful private equity investor, responsible for turning Blackstone into one of the most respected (and feared) names on Wall Street. The personal fortune he has amassed for himself is staggering at around $12bn (£7.5bn), more than double what KKR’s Henry Kravis and Apollo’s Leon Black have made. His investors have made a pretty penny too.

However, success doesn’t mean he isn’t a sandwich short of a picnic: not long ago he also claimed that asking the wealthy to pay a slightly higher rate of tax was like a Nazi invasion. Maybe two sandwiches short.

“How the next financial crisis will happen”, Mr Schwarzman’s Wall Street Journal piece, was a lament for times past – a time when banks could happily do what they liked with customers’ money, safe in the knowledge that regulators didn’t care or could easily be beaten into submission. That included being able to bet the house on esoteric derivative instruments with self-destruct functions. It was a time before the fall of Bear Stearns and Lehman Brothers, before the banking industry killed the goose that laid the golden egg, and before “too big to fail.”

In short, if only you plebs would trust banks to make sure nothing bad happened, nothing bad would happen. The memory-impaired Mr Schwarzman is particularly unhappy about the Volcker Rule, which prevents banks from engaging in proprietary trading. This means trading with a bank’s own funds (in other words, its customers’ deposits), and betting on one financial instrument or against another. And yes, it is gambling, but it is not their money to lose, so why worry about semantics.

By calling for a “holistic regulatory review”, whatever that actually means, Mr Schwarzman is basically saying “let the banking industry do what it wants – it can be trusted now”. It is worse than tone deaf, it is an argument that borders on insanity, even if it also includes legitimate concerns about potential liquidity shortages in the bond market. Banks are recidivists; hardly a week goes by without more scandal.

Yet, amazingly, the odds are that Mr Schwarzman will get what he wants. A Republican House and Senate and possibly a Republican White House in 2016 will almost certainly gut the Dodd-Frank Act and the Volcker Rule. Which in fact is far more likely to be how the next financial crisis really happens.

For most managers of alternative assets, public money is the sweetest slice of the pie – no contact with pesky underlying clients who might ask awkward questions, and a vast pool of funds to fight for. Calpers, the biggest of them all, has $300bn to play with.

The California Public Employees’ Retirement System, its full name, has long been one of the most generous backers of alternative investment strategies. Other public funds followed suit and hedge fund, real estate and private equity managers have grown fat and rich on fees charged on the retirement savings of teachers and firefighters.

Many alternative asset funds have provided Calpers (and other public funds) with pitiful value for money. Rolls-Royce fees, Trabant returns. It would be laughable if it weren’t for the fact that it’s working people getting fleeced, even though most are blissfully unaware. So Calpers finally bit the bullet last week, announcing that it would halve the number of alternative asset managers in its portfolio – just months after it announced that it would ditch $4bn worth of hedge funds.

Last year Calpers paid out $1.6bn in fund management fees, so cancelling a big chunk of those relationships means a lot of Wall Street snake-oil salesmen will be looking for new investors. Calpers aims to have just 100 relationships with alternative asset managers by the middle of next year.

These managers should not despair, though. They have had it good from public funds for a long time, so proving beyond doubt that investment management is an industry where it is possible to generate huge profit without actually being very good at it. Meanwhile public pension funds have underperformed and many are facing a shortfall crisis.

The alternative asset-management industry isn’t going to disappear; there are lots of good private equity and hedge fund managers out there. However, that’s not why alternative asset managers will survive. They will survive and thrive because they sell lottery tickets to ordinary money managers like Calpers, and money managers are no different to any other punter buying real lottery tickets. The lure of the big score is too hard to resist, and no matter how many times managers get burnt and ordinary people get fleeced, there will always be a market for alchemy.

Au revoir then, Dick Costolo. Getting fired isn’t fun, but it must be even less fun when news of your exit gives the company share price a (brief) shot in the arm, as happened to Twitter’s (now former) chief executive on Thursday. Ouch. OK, Mr Costolo didn’t officially get fired, but chief executives of $24bn technology corporations, no matter how beleaguered, tend not to quietly hand in their notice because they have other things they want to do.

A bummer for Mr Costolo but really the only option for Twitter’s board. It’s tough to muster up a huge amount of sympathy for Mr Costolo, who tried his best with a stagnating business but had a very bad habit of making promises he wasn’t able to keep. Perhaps in his next job he will get into the habit of under-promising and over-delivering – a much better combination when it comes to keeping your job.

Mr Costolo will be replaced on an interim basis by Jack Dorsey. He was an original founder of Twitter who until recently was running a financial services group called Square – which also failed to make much money. Twitter investors can be forgiven for hoping that interim really does mean interim.