When Wall Street died…
“Within a week, Wall Street as it was known — loosely regulated, daringly risky and lavishly rewarded — was dead.”
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Today’s must read MSM article is a front page WSJ piece, titled, The Weekend That Wall Street Died. Since we have been tossing around blame for various parties in the entire credit/hosuing/securitization debacle, its refreshing to see a major paper actually place blame where it (in large part) belongs: Wall Street bosses:
“For the U.S. securities industry to unravel as spectacularly as it did in September, many parties had to pull on many threads. Mortgage bankers gave loans to Americans for homes they couldn’t afford. Investment houses packaged these loans into complex instruments whose risk they didn’t always understand. Ratings agencies often gave their seal of approval, investors borrowed heavily to buy, regulators missed the warning signs. But at the center of it all — and paid hundreds of millions of dollars during the boom to manage their firms’ risk — were the four bosses of Wall Street.
Details of these CEOs’ decisions and negotiations, many of them previously unreported, show how they sought to avert the death of America’s giant investment banks. Their efforts culminated in a round-the-clock weekend of secret negotiations and personal struggles to keep their firms afloat. Accounts of these events are based on company and other documents, emails and interviews with Wall Street executives, traders, regulators, investors and others.”
The other factor worth noting is that the mainstream press — first Bloomberg, now WSJ — has come around to blaming Fuld for not doing what ha d to be done to rescue Lehman Brothers.
Its a bit longish but well worth reading.
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Source:
The Weekend That Wall Street Died
SUSANNE CRAIG, JEFFREY MCCRACKEN, AARON LUCCHETTI and KATE KELLY
WSJ, DECEMBER 29, 2008
http://online.wsj.com/article/SB123051066413538349.html
Previously:
Gasparino/Fuld vs Einhorn, Kohn & Ritholtz (June 2008)
http://www.ritholtz.com/blog/2008/06/gasparino-vs-einhorn-kohn-ritholtz/
December 29th, 2008 at 9:12 am
great article…
why is the market even open today…yawn
speaking of death of Wall Street…here is the Hedge Funds “Redemption Song”
Happy New Year all – TRB
December 29th, 2008 at 9:29 am
Even worse…the short-term looks bad for equities…and so does the long-term. When interest rates start at such a low level, they have to rise over the next 10-20 years…that kills equity returns. The great bull occurred as the 10 year rate fell from 13% in 1981 to 5% in 1998. Here is a good piece on that tapping Buffett:
http://www.safehaven.com/showarticle.cfm?id=7721&pv=1
December 29th, 2008 at 9:35 am
One day, once the smoke clears and the dust settles, it will become clear that, contrary to the present zeitgeist on the government’s actions, letting Lehman fail was the only smart move our government has taken during this credit crisis.
Had we not been so afraid of even the prospect of economic pain, allowing LTCM to fail back in 1998 might have prevented this catastrophe, as the NYT’s piece points out.
Killing Lehman is the only market-efficient thing we’ve done. The rest of the banks are zombies. At least Lehman is not a walking-dead bank, being fed by the productive efforts of others, until the others (taxpayers) have nothing left to feed them.
Delaying pain does not eliminate pain. In fact, attempts to delay pain ultimately just makes it worse.
December 29th, 2008 at 9:50 am
Blaming what has happened since on Lehman seems to be a convenient way for some to excuse their horrible strategic calls. In fact I have been cleaning up my office and stumbled across Barrons from 9/1/08 on Wall Street’s Top Strategists…here is a taste:
James Paulsen (Wells Capital)…YE 2008 S&P Target 1,450, 10 year @ 4.4%
Davis Kostin (Goldman)…YE 2008 S&P @ 1,400, 10 yr @ 4%
Tobias Levkovich (Citi)…YE 2008 S&P @ 1,475, 10 yr @ 4%
In addition:
Goldman’s commodity team, for example, sees crude oil returning to $149 a barrel by year’s end and, thanks to constrained supply and tight refining capacity, expects positive earnings revisions this year and next.
Great calls guys…true market talents.
December 29th, 2008 at 9:59 am
@SB: LOL. No kidding. I vividly remember my local paper (Minneapolis Star Tribune) had the so-called “experts” (Paulsen at Wells was one of them) predict market returns for ‘08 in late ‘07 and I literally laughed out loud reading them because I knew they would all be so, so dead wrong. Needless to say, most of Wall Street has zero credibility. At least they do with me anyway.
If you can, read Gretchen Morgensen’s piece in the Times yesterday. Mind boggling incompetence and/or criminality (you choose) by one of the so-called “good” banks that are left when dealing with mortgage payments by customers. Who in their right minds would trust these firms anymore? Unreal…….
http://www.nytimes.com/2008/12/28/business/28gret.html?_r=1
December 29th, 2008 at 10:09 am
It’s long been my opinion that a complete failure of corporate governance at every step of the process is the primary culprit.
Boards and management put the fate of their companies, and their stockholders investment, in the hands of a bunch of rocket scientist quants who developed the fundamentally flawed structured products and the equally fundamentally flawed Value At Risk models. Regulators allowed 40:1 leverage because they believed the models just HAD to work if the execs and the boards were risking the possibility of financial ruin for their firms.
The boards and management enabled the quants to create the poison, and then everyone drank the Kool-Aid.
December 29th, 2008 at 11:35 am
I haven’t trusted any bank or major finance institution for 25 years, doing all my banking with credit unions. 5 years of pain dealing with JP Morgan Chase to settle my mom’s very simple estate reminded me how horrible and uncaring they really are. I won’t need any further reminders.
December 29th, 2008 at 11:45 am
Well, a couple of things caught my attention this morning.
First the speculation about the return vs. demise of tech in 2009. Rational sounding debate on both sides…the numbers, though, show something of interest…
http://techon.nikkeibp.co.jp/english/NEWS_EN/20081219/163115/?SS=imgview_e&FD=1222307169&ad_q
N American Semiconductor Equipment Industry: November Book-to-Bill Ratio
Even though the B to B is now 1, sales have been steadily declining…and that spells harder times next year than this…
Also, even the cheerleaders are anticipating less than fun times ahead…this is not new news to those who frequent here, but interesting that the Leisman faction is apparently on the decline…
http://www.cnbc.com/id/28416981
Pros Say: Employment Collapse is Coming
I agree with Crumudgeon’s thoughts above..we started with massive debt and are creating Zombie Banks and Zombie Employees, although the employees are about to get a lump of coal in their stockings…
December 29th, 2008 at 11:56 am
Assessment of responsibility is a good first step. Filing criminal charges would be a good second step.
Actually holding people to their responsibilities and removing them from their positions when they fail is something that is necessary for a system to function. Until we have taken those steps we won’t have a working system again. To the extent that he has purposely interfered with that process, Hank Paulson has done great damage to the future of this country and Ben Bernanke has enabled him.
December 29th, 2008 at 11:58 am
The first half of 2009 is going to be bloody awful. The second half will be bad, but in a different way.
Q1, 2009 will be negative for GDP, equities and employment, flat for Treasuries and commodities.
Q2-4, 2009 will be flat to positive for GDP, equities, negative for $ and Treasuries, and positive for commodities.
We will ring in the New Year in 2010 with anemic growth, continued weak employment and rising inflation.
December 29th, 2008 at 12:26 pm
leftback,
You say both: flat to positive GDP and equities, and also inflation.
Depending on the degree of inflation, that could actually mean declining real GDP and equities.
December 29th, 2008 at 12:42 pm
@Wally:
Exactly right – this is the price you pay for currency devaluation and years of misallocation of capital.
See UK, the 1970s. Structural problems in the US economy will take years to correct.
December 29th, 2008 at 12:56 pm
I would venture to guess that the vast majority of those who wanted to bail out Lehman were also opposed to giving any money at all to the autos.
Socialism for failed Wall Street ventures, free enterprise for union workers in Detroit.
December 29th, 2008 at 12:59 pm
leftback @ 12:42
“Structural problems in the US economy will take years to correct”
Yes, just in time for the baby boomers to retire in large numbers.
December 29th, 2008 at 1:47 pm
As a former resident, married to a native New Yorican, I’m very interested in NYC property values.
The WS debacle should be a major pressure but I don’t see any major effects yet.
Anyone think NYC RE market will ever get back to early 90’s levels??
December 29th, 2008 at 10:36 pm
@Groty Agree totally. But boards have always been like an honorarium networking, credibility who do you know and how much money do you have type thing.
Here’s an irony for you. The first thing a corporation does is buy D&O insurance, from the likes of AIG.
And what it means is, regardless of what happens, if someone decides the board was derelict, AIG pays. So board members are kind of like gambling for free. Enjoying the status and perks.
If there is a single moral hazard to go after, perhaps this is the one. At least scare them a little.