Since the financial crisis first erupted, there have been frequent disconnects between the credit and equity markets. Generally speaking, those who buy and sell bonds and other credit-related instruments have been ahead of the curve, while those who trade stocks have been — to put it mildly — slow on the uptake. Although there are important differences in how certain fundamentals affects each asset class, my own experience suggests that the disparity stems in part from the contrasting mindsets and analytical capabilities of those who comprise the majority of participants in both trading arenas. In fact, I reckon Lawrence McDonald, a former Vice President at Lehman Brothers and author of A Colossal Failure of Common Sense, hits the nail on the head with one comment in an interview at The Daily Beast on the just-released sequel to Wall Street [italics mine]:
The Daily Beast: Well, what other Wall Street details did the movie get right? Larry, you were at Lehman during the meltdown.
McDonald: It was really hard for me—it brought back a lot of memories, you know? It just was hard for me to watch it because I just remember going through that and losing everything.
The culture of the employees, the trading floor…I thought all that was pretty good, though some of the machines looked funky. And those equity guys were portrayed very accurately, like the lugheads that know their stories on a couple of [stocks]. At Lehman the difference between the equity floor and the fixed income floor was like night and day. It's like the Harvard, MIT crowd in fixed income and then it's like UMass on the equity floor. So many equity guys totally got blind-sided. They didn't understand credit derivatives, and they just were so wrapped up in their own little stories.
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