Time to Return Control of Capital Markets to Capital Owners

Sep.17.08 | About: Lehman Brothers (LEH)

[The following is excerpted from Bill Cara's Daily Report]

Anybody in the world who is aware that something called the stock market exists is now mouthing the words Lehman Brothers (LEH).

Big Bank. Big Bankruptcy. Which one is next, people are asking.

The first point I’d like to make is that Lehman Brothers is big, but not as big as AIG (NYSE:AIG), until recently the world’s largest insurance company, or Merrill Lynch (MER), until recently the world’s largest broker-dealer, or Fannie Mae (FNM) and Freddie Mac (FRE), until recently the world’s largest lenders of mortgage funds. All are kaput; yet Lehman is the first to actually declare bankruptcy in the legal sense.

So, how big is the Lehman bankruptcy? Would you find it shocking to discover that the Lehman bankruptcy is bigger than the top 100 corporate bankruptcies in history, combined? Yet Lehman was not as big as the four other financial companies that died this week, or as big as some that will die in the next month.

That is a scary thought, but let’s be reasonable here. When the dust settles, you will be able to buy a mortgage, buy insurance, and buy financial products and services from a wide selection of vendors. Life will go on.

Yes, the losers today are the stockholders, bondholders, vendors, and employees of the bankrupted companies. Hopefully you are not among them. The expression “There but for the grace of god go I” comes to mind – but bankruptcy is not an Act of God and its occurrence should not ever be a surprise to vigilant stakeholders.

There is no question in my mind that conflict of interest combined with self-regulation is at fault here. Anybody who has been a follower of this blog knows that I have been warning of this crisis. Now that it is a fact that the system is broke, it is time for legislators to put a new one in place that puts the control of the capital markets back into the hands of the owners of capital, and at the same time to remove all conflicts of interest from those who create and sell financial products and services.

If there are no lessons learned from our mistakes, there will never be social equity. There will always be bullies and gorillas like Paulson and Fuld to beat on us. We deserve better.