Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

Sometimes it takes one catastrophic collapse to illustrate the larger dangers. 

 

There goes my collateral

 

Had Lehman been saved, then nobody would have failed up to now.  Joe and Jane Public – and their elected representatives – might not have swallowed hard and enacted TARP.  (Humans have a great capacity to doubt expert warnings.)

 

Don’t bring us bad news, Cassandra

 

Global central banks might not have insured deposits and interbank lending.  In other words, we might be in much worse overall systemic shape.

 

You should see the other banks

 

The devastation of Lehman failing — the implication of their failure is hard to predict. I think you’re seeing it play out in the stock market and the credit markets; I think you’re going to see some hedge funds go out of business. Some of it has already been made public and some will come soon, but there are a lot of implications of Lehman reflected in the capital markets.

 

For better or worse, we’re going to find out.  Think of Lehman’s collapse as the radioactive isotope running through the global financial body.

 

Glowing is good … isn’t it?

 

Q: What about the move to backstop the commercial-paper market and guarantee money market funds?

 

A: I think it’s unfortunate, but it’s one of the situations where the government has to step in. You’ve got to have confidence in the basic functioning of the banking system. The risk borne by the government is quite small, and the benefits are incredibly high. Unlike industrial companies, where bankruptcy works well, it does not work well at all in the financial system and Lehman is a poster child in that regard.

 

That’s good analysis, very well said.

 

If you’re one of the big car companies and you go bankrupt, you can keep making cars; it’s an ongoing business. With financial institutions, so much of what you do is predicated on confidence — business literally evaporates overnight.

 

Money is all about faith – it takes a leap of credence to accept that a piece of paper has tangible value.

 

I believe!

 

Q: What do you say to the taxpayers who didn’t participate in the borrowing frenzy of the last few years, who saved diligently and are now paying the price with their tax dollars?  [Snip]

 

A: I also lived very conservatively and did not borrow, and I think we’re all going to get hosed.

 

The next generation will have its revenge

 

But the reality is it’s in our interest that the economy doesn’t melt down. I’m a right-wing free market [supporter], and the last person to ask for government intervention, but if we allow a breakdown in the financial system you’re going to have a depression. It’s like the military — incredibly expensive, but the cost of not doing it is far worse.

 

There’s a reason we have governments – some things can be done only collectively, and only unilaterally, because people will never vote them in via plebiscite.  (That isn’t an open license to trample the common wisdom; rather, it recognizes that in times of crisis, some acts must be done quickly and decisively, or not at all.)  Preventing the Second Great Depression remains Job 1.

 

[Snip restored.]  And who may have to pay it again when the baby boomers retire and the government raises taxes to bail out people who haven’t saved?

 

The penitent banker never addressed this, but the answer is simple – when the baby boomers retire, their pensions are going to be devalued through inflation.  It is ever thus.

 

Q: What about the characterization that the greedy Wall Street bankers made their millions in the boom and left others holding the bag?

 

A: Everyone on Wall Street wants to make as much money as he can — we’re not missionaries.

 

Greed is my term for your taking a risk or getting a benefit I didn’t.

 

You think I’m greedy?

 

But no one thought, “Let’s do this loan because we know it won’t blow up for a while, and we can get fees today or get this year’s bonus.” Because everyone knows his stock position at a firm is worth far more than this year’s bonus.

 

That’s been lost in the shuffle.  All the committed, diligent, hard-working employees at Fannie and Freddie, whose bonuses rested mainly in stock and options, have seen those savings wiped out, because of decisions made multiple levels above them, and which they may have protested to no avail.  

 

Look at the stock prices and the value of Bear, Lehman, Merrill, Morgan Stanley, Goldman, Deutsche Bank — that’s hundreds of billions of dollars evaporating, and a good chunk of that was owned by employees.

 

At the Wall Street firms, executives far down the food chain have likewise seen options that were in the money fall out of the money.

 

For most employees that was the majority, and in some cases all, of their net worth, because of deferred compensation. People read these big numbers that bankers make in good years, but much of it you don’t have yet, it’s locked up for three to five years; you thought you made $2 million but you actually made $1 million. It’s huge value destruction for people who work on Wall Street.

 

There are thousands of unemployed bankers with no prospects to get a job. And on Wall Street, if you’re out a year or two, it’s as if you never worked there. There’s a real bias toward young people. If you’re in your mid- to late 40s and you’re shot, and you don’t get a job in 12 to 18 months, you may never work on the Street again.

 

But lunch is for wimps, isn’t it?

 

Gerontophobia is real – on Wall Street even more than Main Street.

 

Don’t try to work on Wall Street

 

But I don’t feel bad for anybody on Wall Street, because we knew what we signed up for when we got the job. No one complains in the good years, and you have to live your [financial] life accordingly. The guys who bought big houses or a second house or who lived a lifestyle they couldn’t afford — some of those guys have a very tough next couple of years, because they’ll be caught on the wrong side of the spiral.

 

As C. Northcote Parkinson said, expenditure rises to meet income.  Or tends to, anyhow. 

 

But what happens when income drops, old boy?

 

Q: What do you see ahead? Should long-term investors be buying equities?

 

A: I think the equity markets will recover before the credit markets will. I think you’re going to see much more cautious lending. The U.S. continues to have the best, most innovative workforce, and the core fundamentals are good.

 

Important core global fundamentals.  We lead the world in financial innovation – which, most of the time, is a good thing – and we have an entrepreneurial mindset that is hard to match (although India in particular is rising rapidly and could easily overtake us).

 

There could be more legs down, but over a long period of time as long as we maintain our free markets and have reasonable capital gains taxes and a framework where risk-taking is rewarded, you’ll still get the best risk-adjusted rewards in the U.S.

 

Which is one of several reasons the dollar’s been rising lately against everyone else’s currency.

 

And its dollar

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