Monday, September 22, 2008

Where We Are.

I didn’t think I’d be saying “I told you so” quite so soon, but here it is: Morgan Stanley and Goldman Sachs, the two remaining preeminent investment banks of Wall Street have asked the government to let them become “traditional bank holding companies”, more like Chase and Citi according to the Wall Street Journal today.

The “House of Morgan” is all but gone metaphorically speaking, all that really remains are the bricks and mortar of its former incarnation. The Wall Street of Mellville, Rockefeller, Carnegie, Fitzgerald, Faulkner, of Oliver Stone; -all of those “Wall Streets” real and imagined ceased to exist as we’d known them today. Nobody who’s heard the details of this situation and is looking around the corner at the new world that is emerging should be happy about this if they’ve got any sense. I say that as a proud, pro-union, working-class, Liberal.

Our Federal Reserve will now regulate these two institutions along with the other investment banks and brokerage companies that have been bailed out in recent days. The Bush administration may not have succeeded in destroying Social Security, but they have achieved, by luck, by criminal negligence, or both, the symbiosis of the people’s financial fortunes and the nation’s monetary health with those of Wall Street... or what’s left of it.

You break it you buy it.”… but taxpayers didn’t break anything… or did they? I’ll get to that a little further down in this post.

There are three major changes for Morgan Stanley and Goldman Sachs that I can see as the harbingers of things to come for what’s left of the investment community’s institutions that go down this road of bailout-preemption and taxpayer funded handout/loans: they can now accept deposits like ordinary banks; they will now be able to borrow from the Federal Reserve; they can now merge with other banks pending the usual antitrust scrutiny and assessments. This is all possible now because the Fed will regulate these giants and not the SEC.

I wrote recently that I believe this Finance and Investment Apocalypse is actually largely a product of a strange new “trickle up” dynamic. A dynamic whereupon the individual bankruptcies and foreclosures of the many, create the ultimate fall of the few who ride their backs and monetize their ability to pay and the time it takes them to pay for things. Someone with a lot more expertise and knowledge of economic systems and markets than myself needs to look at this failure and identify what part of this interdependence made it all fall apart: Did the overseas move of so many American jobs by corporations destroy American earning power to the degree that it then destroyed the revenue steam of investment banks dependent on those same Americans to pay their mortgages and interest? Or were there a myriad of economic factors at work? Are there more disasters related to the credit card industry and its debt-based revenue streams coming?

I have no idea. Every scenario seems as likely as any other to me at this point.


I, like many Americans, have more questions than answers. I’m profoundly worried by today’s news and what it means. If as Richard O’Connor once wrote in paraphrasing Honoré de Balzac that “behind every great fortune there is a great crime” then what was the great fortune? What specifically is the great crime behind this unfolding collapse of the investment houses? The rising tide is too chaotic, too large and disordered to clearly see. But my most nagging question at this time is this:

Had the Bush administration managed to get all Americans to sink their retirement fortunes in the stock markets as they had intended, would they have been so quick to bail everybody out as they have with these companies?

In the interest of full disclosure, the funds in my own 401k are managed by Goldman Sachs.
-SJ

3 comments:

Hazzy said...

It amazes me how long it took from the collapse of the real estate market, and foreclosures, to the financial collapse of the those that doled out the mortgages like candy. What other inane decisions did lenders make while the country shook it's collective head at the foreclosure rates?

As houses were selling at 125% of the asking price, which was three times tha actual value, how many questioned this "new" real estate reality? How could the basic law "buy low, sell high" lose it's hold on reality? Of course, it didn't. Shortsightedness and an artificially low interest rate just made it easy for the greedy to ignore the rules.

As always, my life lessons come from comics. During the speculator investment of the 90's, very few questioned how valuable Radioactive Blackbelt Hamsters #1 would be if thousands owned 20 copies and each store saved 100. They ignored the basic rule of supply and demand and many companies went under, including Marvel going Chapter 11. Holy stupidity Spider-man!

Thanks to our government, it will not just be those that hit the mortage lottery a few years ago, "Really? I am approved? You sure?" but all of us paying the price.

SJ said...

@hazzy-
A remarkably appropriate analogy. I forgot about the collector bubble of the 90s. At least people didn't leverage their lives away to buy those comic books... Hey, maybe the investment banks can go into the movie business like Marvel did.
-SJ

Michael Hew said...

I can't even pretend to comprehend the severity or complexity of the financial crisis, but I do know that in the end, the taxpayers are going to get screwed.