Dan's Papers - January 30, 2009 - Finance Guru Launches SI Library Dialogues

On a very cold January 16, at 7 p.m., with a full crowd huddled in the basement, the Shelter Island Public Library launched Friday Night Dialogues@the Library. Martin Mayer, noted columnist, author of 35 books, Brookings Institute Scholar and of course, Shelter Islander, was the speaker. All 65 seats were filled, with many people standing or sitting on the floor, making for a cozy atmosphere. Denise DiPaolo began the evening by introducing Robert Lipsyte - author, TV personality, newspaper columnist and local - as the moderator of the program, titled, "The Current Economic Crisis: Will Anything Work?"

Lipsyte introduced Mayer after stating, "Cell phones may be left on if you are expecting a call from Bernie Madoff about your investments." Following the laughter, Mayer, the 81-year-old who graduated from Harvard at the age of 19, lit up the room with his wit, and warmed up the audience with his charm. He began his talk by explaining the toxicity of credit default swaps and derivatives, with a clear voice on these complex matters. He described the commerce of Shelter Island in the last few years as "The women of the island selling real estate to each other," which received a nice laugh. He, like many, believes the repeal of Glass-Steagall, (the law that kept banks and brokerage houses from merging), had much to do with creating our current crisis. He quoted a colleague who said, "Diversification devalues knowledge." Mayer explained that banks knew how to make loans and brokerage houses knew how to market paper. Somehow, after the mergers, all that went awry. Mayer explained today's problem of the large numbers of "toxic waste troubled asset" contracts for the banks, "are sort of like roach motels. Once you get in them you can't get out of them."

The crowd was very attentive as Mayer jumped from issue to issue, noting the major players of today's crisis, some who shared their views with him recently. He critiqued the present SEC, FED and Treasury officials as well as the newly appointed, as if he were describing playoff football rosters, pointing out strengths and weaknesses with precise language and candor that held the audience spellbound. He exposed the fact that perhaps many in high places really don't know what they are doing, while others are brilliant. He believes that it was a mistake to let Lehman Brothers fail, reciting the problems that followed, and believes that the government bailout of insurance giant A.I.G. was a foreign policy decision because A.I.G. was the largest insurance company in Asia. Its failure would have effected our policies in that vital, growing, and heavily populated part of the world.

Mayer does not believe in large super banks because, "the bigger they are, the harder they fall." He shed some light on the largest financial entity in the world, the Depository Trust, which has assets of about $74 trillion.

While describing the horrors of today's banking world he said there are "Zombie Banks." What is a Zombie Bank?

He answered, "A bank that is dead and doesn't even know it yet."

So what of the TARP $800 billion bailout? Martin Mayer is not a fan of it. He stated his belief that government bailout capital will not stop the bleeding or offer stability. He said that this crisis will come to an end only when private and foreign capital once again emerges to fund the banks and buy the commercial paper. As for the credit freeze at the banks and their non-cooperation, he quoted a friend who said, "The banks don't trust each other's balance sheets because they know how they cooked their own books to hide things."

However, while professing that he believes things will get worse before they get better, Mayer believes ultimately they will get better. He hopes the new Treasury Secretary will get a quick handle on things and describes former Treasury Secretary Paulson as a disaster. As for the Bernie Madoff situation, he said it never dawned on him that the best way to create a Ponzi scheme was to make the investor never want to take his capital out because of the apparent performance of the fund. "People would go elsewhere to get needed personal money because the Madoff fund was supposedly performing so much better that the other investments."

This first Friday Night Dialogue was a rousing success. The series was funded by the late Shelter Islander, Betsy Jacobson, who in addition to being a kind neighbor and Library user, managed around $6 billion in assets at J.P. Morgan. If her goal was to both increase the sense of community at the Library and provide an engaging forum, then she succeeded. The first night was everything small town community should be, and is, on Shelter Island.