Never Grow Too Old To Learn
So, last night I stayed off the computer to watch TV. I ended up watching a documentary about the crash of Lehman Bros investment bank. It truly was a crash heard round the world and essentially touched off the economic crisis we are still dealing with just over 2 years later. It also could have been avoided, if Sec. Paulson had promised prospective buyer Barclay Bank of England that the government would secure the loans.
I learned from this documentary that there are entire aspects of the banking industry that simply do not make sense to me. All of these big investment banks which eventually nearly went bankrupt were engaging in unheard of risks. For the life of me, I can’t understand how any bank, let alone the giants of Wall St. could have all been extending mortgages to people with No Income, No Jobs or Assets. At the time, I knew of people being qualified for mortgages which were much larger than they could afford, but never did I think you could get a mortgage without a job. Somehow, bankers were thinking they were making money buying bundles of these NINJA mortgages, and then people started to default when they couldn’t make the much higher payments.
When the house of cards crumbled because Lehman was forced to file bankruptcy, it stopped the flow of credit. Corporations with the need to borrow money to meet their payrolls couldn’t get that money. It put people out of work. Companies had to close, which created more debt for other companies which couldn’t be paid and caused them to close. We here in the US and in other countries around the globe are still living with the unemployment problem created by the failure of Wall St. to exercise financial prudence and not take such risks as they did.
One question I have since watching this documentary is, why then Treasury Secretary Paulson and the Federal Reserve allowed Lehman to file bankruptcy when there was a qualified buyer? At the time Sec. Paulson said he couldn’t, in good conscience, bail them out with taxpayer money. I don’t know enough about the banking industry to formulate an opinion about that. To me, it appears the simple solution would have been to secure the loans so Barclay would buy Lehman, but would that have been the right path to take? There is a real possibility that it wouldn’t have changed what happened, because the banks would have continued with their risky behavior.
Lehman CEO Richard Fuld simply failed to exercise common sense. He placed all his eggs in the housing development market which was nothing but smoke and mirrors. He should have known better, but something got in the way of his basic commonsense. Against cautionary advice from his underlings who did try to warn him that his speculation wasn’t going to work, he forged ahead borrowing major amounts of money to buy bad mortgages. Then the bottom fell out of the housing market, as he should have known it would. The man spent 42 years in the banking industry at Lehman Brothers. It’s not like he was new to it, having worked his way up the ladder over that time. I don’t know him, but I wonder if ego and greed played a major role in his behavior?
One thing I took away from this program is that since I was among the most vocal against the government bailouts of the banking industry, I now know I was wrong. The situation we’ve been living with since September 2008 is bad enough as it is. I can’t begin to wrap my brain around what it might have been without that bailout that I hated so much. I guess life really is a matter of living and learning.