In his timeless 1946 essay "Politics And the English Language," George Orwell condemned political rhetoric as a tool used "to make lies sound truthful" and "to give an appearance of solidity to pure wind." Were he alive today, Orwell might well be moved to pen a companion piece on the use of financial lingo. Remember those toxic assets? The poorly performing mortgages and collateralized debt obligations festering on the books of banks that made truly execrable lending decisions? In the latest federal bank-rescue plan, they've been transformed into "legacy loans" and "legacy securities" —safe for professional investors to purchase, provided, of course, they get lots of cheap government credit. It's as if some thoughtful person had amassed, through decades of careful husbandry, a valuable collection that's now being left as a blessing for posterity.
Using the word "legacy" to describe phenomena that are causing financial carnage is "crazy," according to George Lakoff, a UC Berkeley professor of cognitive science and linguistics, because "legacy typically suggests something positive." More insidiously, the word is frequently deployed to deflect blame. Legacy financial issues are, by definition, holdovers from prior regimes. Word sleuths advise me that "legacy" derives from an ancient Indo-Aryan root meaning "it wasn't my fault, and I should still get a bonus this year even though we lost billions of dollars."
The (not so) Big Three auto companies routinely refer to the now-unaffordable pension and health-care commitments entered into by prior management as "legacy costs." (And why not? They've convinced us to regard used cars as "preowned.") Citi CEO Vikram Pandit last month told employees that "we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007." Huh? Citi, currently connected to a taxpayer-funded multibillion-dollar feeding tube, is "profitable" only if you ignore the losses it continues to incur on lending decisions made in the previous years—legacy loans made by legacy bankers.
In this new paradigm, a legacy, usually a gift, is a burden. A potential loss is spun as a potential gain. War is peace. See what I mean by Orwellian?
The legacy gambit is necessary, in part, because the prior nomenclature used to describe the stuff in question was so corrosive. " 'Toxic' is one of those words that is so negative that it's just hyperbole," says Jesse Sheidlower, editor-at-large of the Oxford English Dictionary. The phrase "toxic assets," used widely in 2008, was either a sign of admirable reality, or an attempt to scare people into action. A middle ground of sorts was reached last fall when then–Treasury Secretary Henry Paulson rolled out the Troubled Asset Relief Program (TARP). Of course, calling some of those mortgage assets troubled was a little like calling Charles Manson a troubled person.
In trying to rebrand dodgy financial instruments, Treasury secretaries like Paulson and Timothy Geithner are continuing a recent tradition. So much of the finance sector's innovation in the past 30 years, it turns out, wasn't developing new stuff, but rather developing new ways of talking about preexisting stuff. In the 1980s, labeling risky debt offerings as junk bonds was an intentionally ironic feint (pros knew that the instruments possessed real value). But as junk bonds went mainstream in the 1990s, they evolved into "high-yield debt"—their liability became an asset. Frank Partnoy, a reformed derivatives trader who teaches law at the University of San Diego, recalls that at Morgan Stanley in the 1990s, "we were constantly coming up with new acronyms" to describe similar financial instruments. The goal: to present products, some of which had been discredited, in a more favorable light. At the height of the housing frenzy, I visited a large subprime lender in Irvine, Calif. These folks would have made a $425,000, no-money-down, negative-amortization loan to a 12-year-old presenting nothing more than Pokémon cards as collateral. Were they engaged in subprime lending? Absolutely not. This outfit, they informed me proudly, made "nonprime" loans.
The late senator Daniel Patrick Moynihan lamented declining societal standards in an essay entitled "Defining Deviancy Down." The language employed in the late credit bubble—let's rebrand it the Dumb Money Era—helped define solvency down. And words, even if they're thrown mostly by sophisticated professionals at other sophisticated professionals, can be just as damaging as sticks and stones. The people on Wall Street believed so fervently in their own rhetoric that they bet their financial houses on it. They chugged the Kool-Aid through funnels. "If you call a mortgage-backed security AAA for long enough, you forget that its value could get cut in half," says Partnoy.
The problem isn't that words intended to change the conversation aren't accurate. Rather, the accepted terms turn out not to mean what people think they mean. Instead of helping to reduce risk, securitization—chopping up debt and distributing it—spread risk. Nonprime mortgages frequently turned out to be subprime. A lot of high-yield debt turned out to be junk. This confusion over the meaning of financial terms, and the skepticism it engenders, may be the real legacy of the Dumb Money Era.