A Year After Lehman: We Remain at Risk 15 comments
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As the author of a new Lehman book, I was naturally a participant in the intensive media coverage of the anniversary of Lehman's bankruptcy filing a couple of months ago. As the furor quickly dissipated, I have had time to reflect on the Lehman collapse in the context of what I experienced in September. In short, I see a country failing to adequately discuss, much less address, the conditions that enabled the credit bubble and the global financial crisis Lehman sparked.
Just over a year ago, Treasury Secretary Paulson was smarting from criticism over the government-backed Bear Stearns marriage to J. P. Morgan to which he had reluctantly acceded. This was followed by the Fannie Mae (FNM) and Freddie Mac (FRE) bailouts. Ideologically incensed, he was by this point on a mission to teach Wall Street a moral hazard lesson . As Lehman Brothers crumbled and its suitors left the table, through the secretary's lens, bankruptcy of the firm became an imperative. Paulson's abandonment of the oldest major investment bank (with nods from Bernanke and Geithner) had devastating consequences. This fallout was not foreseen by our country's policymakers, but was viewed as a near certainty to many who work in or understand financial markets.
Soon after Lehman filed for bankruptcy, Paulson predictably awoke to a cataclysm. He scrubbed the words moral hazard from his vocabulary and reinvented his rationale for the Lehman bankruptcy as an inability to act due to legal impediments. Behind this transparent veneer of dodging blame, there was, however, an important shift in Paulson's and the government's collective view. A visceral desire to see to it that reckless Wall Street villains paid for their sins --- rather than taxpayers --- was overtaken by the practical need to act boldly to prevent unimaginable ruin.
Following the Lehman bankruptcy filing, I and my colleagues were relieved that Barclays, after the eleventh hour, acquired Lehman's North American operations. We were road kill, resuscitated because of a deft angle crafted by skilled lawyers. At the same time, our franchise now operated in an apocalyptic financial landscape. The Lehman bankruptcy hovered over the world like a mushroom cloud. Still, it could have been worse. Reeling from the shock and awe of the bankruptcy's collateral damage, our leaders, albeit clumsily, had seized the post-Lehman moment. AIG was bailed out a day after Lehman filed and the government acted to prevent an economic nuclear winter from truly smothering our country and the world.
Marking the one-year anniversary of the Lehman-sparked crisis, President Obama warned financial leaders that the excesses and reckless accumulation of risk in the recent past would no longer be tolerated. These were encouraging words, surely resounding on Main Street, but cynically discounted on Wall Street. To date, the new rulebook consists of little more than this Obama preface. Secretary of the Treasury, Geithner and Senator Dodd have talked of an uber-regulator to replace the rusted structure that currently passes for oversight. We await a true blueprint. New rules on compensation are under congressional discussion and are in the news, but already appear to be shaping up with gaping holes that invite disregard. There is talk of breaking up large financial groups so that none are so large that their individual failure undermines markets and economies. Much is discussed. Little action has followed.
As time passes, the opportunity for reform is slipping through our nation's fingers. The notorious Lehman anniversary has come and gone and is already becoming little more than a footnote to the financial crisis. As noted, I spent some days satisfying the media's insatiable appetite for anything Lehman. I found the attention, in many cases disappointing. I hoped the coverage I received would be substantive. With a few notable exceptions, I found the quotes excised from lengthy interviews were mostly a few tabloid words. Serious discussions of the many factors that created the conditions for the Lehman-triggered financial crisis were excised. Is it any wonder that the politicians feel less urgency for reform than they did a year ago? And so, yes, the anniversary has passed with great hoopla, but with tragically few truly scrutinizing the lessons of the Lehman bankruptcy. Instead, it was a time for many to reminisce about Dick Fuld's rage and the helicopter in which Joe Gregory, Lehman's former president, commuted to work.
We, indeed, remain at risk.
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"Two years after Bear Sterns: We Remain at Risk"
The economic distortions fuelled by poor investment practices, lack of adequate internal oversight of investment bank and near bank operation, inadequate regulatory institutions and practices and inadequate bank and near bank capitalization and risk control contributed significantly to what almost became a deflationary depression. This weakness needs to be addressed.
On Nov 24 06:51 PM pacalis wrote:
> Nicely done - now I don't have to write my article...
>
> "Two years after Bear Sterns: We Remain at Risk"
I've lived my life in a society that gives lip service to markets, capitalism, entrepreneurship and production. The reality is that we've engineered paper gains from a financial house of cards and squelched producers with taxes, regulations and endless Orwellian hurdles.
You mention "skilled lawyers" saving the day. Them and other rule issuers and enforcers have increased their control of the system to such an extent that reality is what they say it is. They have MSM and false statistics to prove it. They provide themselves the easy path they deny to businesses in the remnants of the private economy. Without a hint of facing moral hazard, or moral anything, they now are poised to bring the whole system down on our heads.
Here is the problem that we aren't and won't address. The public Treasury is open season for people with connections. When Lehman saw that the equity positions of Bear were paid at well more than their value, they were encourage to leave risk on the table. The government gave Lehman a false sense of hope that failure would be backstopped by the taxpayer. Why not take the risk?
Lehman failed because of poor business decisions. Raising the dividend wasn't the worst decision, but just the most visible that they really didn't think that they would be left holding the bag for the risks that they took.
On Nov 24 11:03 PM Leftfield wrote:
> Since TARP, policy has been 100% throwing good $trillions after bad.
> No reform or cleanup.
> I've lived my life in a society that gives lip service to markets,
> capitalism, entrepreneurship and production. The reality is that
> we've engineered paper gains from a financial house of cards and
> squelched producers with taxes, regulations and endless Orwellian
> hurdles.
> You mention "skilled lawyers" saving the day. Them and other rule
> issuers and enforcers have increased their control of the system
> to such an extent that reality is what they say it is. They have
> MSM and false statistics to prove it. They provide themselves the
> easy path they deny to businesses in the remnants of the private
> economy. Without a hint of facing moral hazard, or moral anything,
> they now are poised to bring the whole system down on our heads.
Let me repeat: Business has corrupted the political process. It now completely favors their interests with no real oversight to curtail their greed. With this group it is not country first, as John McCain used to like to say, but profits first and damn the country.
So save the long winded explanations and handwringing and start calling a spade a spade. Bad mouthing congress as a do-nothing failed institution is only describing the symptom not the cause. Treat the cause if you truly want to change the symptom. How about publicly listing the political contributions made to every politician whenever they appear to offer an opinion or articulate a position so at least, we know who is paying them to have that opinion or position.
On Nov 24 11:03 PM Leftfield wrote:
> Since TARP, policy has been 100% throwing good $trillions after bad.
> No reform or cleanup.
> I've lived my life in a society that gives lip service to markets,
> capitalism, entrepreneurship and production. The reality is that
> we've engineered paper gains from a financial house of cards and
> squelched producers with taxes, regulations and endless Orwellian
> hurdles.
> You mention "skilled lawyers" saving the day. Them and other rule
> issuers and enforcers have increased their control of the system
> to such an extent that reality is what they say it is. They have
> MSM and false statistics to prove it. They provide themselves the
> easy path they deny to businesses in the remnants of the private
> economy. Without a hint of facing moral hazard, or moral anything,
> they now are poised to bring the whole system down on our heads.
Ex-CEO of Goldman had little, if any, desire to punish reckless Wall Street villains. In the few days following the A.I.G. crisis, Paulson definitely communicated with Lloyd Blankfein on several occasions (more so than with any other wall street CEO) even before he received an ethics waiver to do so.
www.nytimes.com/2009/0...
In addition, many Wall Street banks, Goldman included, received 100% repayment for their exposure to credit-default swaps with A.I.G. Was this necessary to prevent a global financial meltdown ? Could these banks have received 60%, saved the taxpayers billions, and still survived ? It doesnt take a quant to answer that.