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With the Cheap Money Policy of Greenspan

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The financial crisis of 2008/2009 was by far the greatest financial disaster since the Great Depression, and could have been far greater if not for the actions of the Treasury and Fed. Andrew Ross Sorkin, in his book "Too Big TO Fail" has presented the facts that led up to the explosion of the world's financial institutions in a very clear and concise form, and in my humble opinion should be required reading in every business school in America and beyond. Sorkin, a financial reporter for the New York Times, had over 500 interviews with the "players" and those that had access. I saw him interviewed by Charlie Rose and his style was to interview someone and after interviewing many of their colleagues, he would then return and check his information once again but now with knowledge he did not have in the previous interview. In other words he could say, "That was the day you were called away from the meeting because your child had been hurt playing soccer." The person being interviewed of course, "knew that he knew' and that fact many times opened the door to get the story.

Let me make it clear at this point, that I am not an economist, nor have I had any experience with Wall Street or any other such institution. My purpose here is to attempt to put in plain language, what Mr. Sorkin has so clearly written--in a condensed form. Any facts that I use will be simply ones from his book and any conclusions or comments I will make that are not his directly, I will point out as being my opinion. I did spend over 25 years in the real estate development business, so I was familiar with Fannie and Freddie, and of course knew that the supply of money was controlled by the Fed. However, prior to 2008 I had never heard of the terms CDO's and CDS's which became a huge part of the disaster. One of the very clear facts is, this world of "super bankers" and mega business was in fact, very small and all the players knew each other and they were being paid huge compensations. In 2007 40% of corporate earnings were from financial service firms. Like so many, I found it outrageous the huge amounts being paid out in salaries, stocks, and bonuses but a story from my childhood came to mind as I read the book.

I grew up around a family friend that was born shortly after the beginning of the 20th century, to an old Southern family of 19th century wealth. His mother made it quite clear that her two sons were not born to work, so Curtis had spent his life persuing hunting and fishing. Once on a dove hunt, he had killed 77 birds and when asked by another hunter how many he killed (he was called a game hog ). Instead of being insulted, he asked how many the other hunter had killed and after being told 55 he simply said, "I think you killed as many as you could and so did I". It seems much easier to criticize someone that made 300 million than the small business man that made $100,000 but each probably made as much as he could. Was, and is there greed on Wall St.? You bet for in 2007 Goldman Sachs made 20 billion dollars and Lloyd Blackfein, Goldman's CEO took home 68 million; but there is greed on Main St as well. It does not take a lot of searching to find it on any street, main or otherwise. In no way am I trying to defend the people that ran these companies but to single them out as the only cause to this debacle, would be unfair and perhaps keep us from learning how to avoid the next meltdown, for if there is anything more important to be gained from "Too Big TO Fail" I don't know what it would be.

Dick Fuld, the former CEO of Lehman probably suffered one of the biggest hits to his reputation and also lost over 1 billion when his Lehman stock ended up being worth $65,000. If one wanted to award the biggest villain, I believe it would be the U.S. Congress. After all it was the repeal of the Glass-Steagal Act of 1933 during the Clinton Administration that set the stage for the firestorm that would follow. There were both Democrats and Republicans that were preaching, "free markets, no regulations, let the markets work." Alan Greenspan was certainly one of those voices. At the same time the financial services industry was accounting for 40% of corporate profits, the investment banks were running a debt to cap ratio of 32:1. How could anyone believe that could continue and I wonder if "they" really did? I did a brief stint in the time share business. I was broke at the time and made a lot of money very With the cheap money policy of Greenspan, we saw the housing boom With the cheap money policy of Greenspan, we saw the housing boom fast and I liked it but I knew it would not last and it did not. Most of us know the expression, "if it is too good to be true it probably isn't." When the homebuilding industry is at its best everyone joins in. Builders, lenders, suppliers, subs, real estate people, mortgage lenders, all grabbing as much as they can and no one stops until the bubble pops. It is human nature and it was the same on Wall St.

With the cheap money policy of Greenspan, we saw the housing boom of the 90's, which was also the birth of the sub-prime mortgage era. Companies like Country Wide were making loans to unqualified buyers and these were being packaged in CDO's and insured with CDS's with AIG being one of the major players with 300 billion in exposure. Of course the big 5 investment banks were making billions in fees and everything was grand, until it wasn't. There is no doubt that Country Wide was criminal in behavior but there was also the buyers, that knew they did not qualify, the builder, the real estate agent, and banker that played a role. In March 2007 Ben Bernanke testified before Congress that the subprime market seemed under control, yet by August this TWO TRILLION dollar market had collapsed, with two Bear Stearnes hedge funds failing losing 1.6 billion. It is my personal opinion ( I am not sure Mr. Sorkin would agree) that S.E.C. Chairman Cox failed miserably by not taking quicker action with short sellers and urging Congress to reinstate the uptick rule passed in 1938. I was not familiar with this rule but it made firms shorting a stock once, to have to wait for the stock to go up before shorting again. Short selling was obviously one of the causes of the Lehman's failure, that along with naked selling. This allowed one fund to "borrow" stock then sell short taking the profit and returning the stock. When Cox, a free market zealot finally took action it was too late. Fuld was convinced (I believe he was correct) that rumors in the market about Lehman were a major factor in the short selling that led to its failure.

Should the government have stepped in and rescued Lehman? After all they orchestrated a Bear, AIG, Freddie, and Fannie rescue, so why not Lehman? I will leave that up to people much smarter than myself but after the rescue of the above firms, Congress was using inflammatory language like, "socialist", "fascist ", and mourning for the tax payer. To me, this false playing to the voter, instead of grasping the problem and offering reasonable solutions should go down as one of the biggest failures of this whole disaster. McCain put his presidential campaign on hold to return to Washington as some sort of financial savior that he had no credentials for and this was quickly followed by Obama. Hank Paulson may be a lot of things but calling him a socialist is like calling Warren Buffett a communist. If there is any one thing made clear by Sorkin's book, it is the obvious fright of Paulson, Bernanke, and Geithner's belief that the financial world was close to imploding and perhaps seeing an event even greater than the Great Depression. In discussions with key Congressional members concerning the legislation that became TARP, when Harry Reid complained that it "takes me 48 hours around here to get Republicans to agree to flush the toilets", Mitch McConnell said, "I think we need do this, we should try to do this, and we can do this". I give McConnell good marks here and unfortunately that view had not been held by more Republicans and Democrats. I will interject here a personal experience of business failure, and the difference between a very small business failing and the failure of a giant.

In 1979 I experienced the perfect storm, when after a number of successful years as a small builder/developer interest rates topped 20%, and we had a devastating hurricane, and I was in a very expensive divorce. My failure was but a small ripple on a very small pond but to me it was a catastrophe, yet it never occurred to me there should be any governmental help. I still hold that belief but when the failure of a company has effect on the entire world it must be responded to differently. In March of 2009 the Dow was in the 6000's and now in 2010 it is over 10,000. Where would we be if the philosophy of "just let the market take care of itself" had prevailed?

Peter Peterson, co-founder of Blackstone Group and former CEO of Lehman, when asked by a New York Times reporter about Lehman, said "I've been in the business for 35 years and these are the most extraordinary events I have ever seen." When Judge James Peck signed the order for Lehman's Bankruptcy he said; "This is not simply approving the transaction because Mr. Miller is putting pressure on me to do so," the judge explained. "This is not approving the transaction because I know it's the best available transaction. I have to approve this transaction because it's the only available transaction." He went on the say "Lehman Brothers became a victim. In effect, the only true icon to fall in the tsunami that has befallen the credit markets. And it saddens me. I feel that I have a responsibility to all the creditors, to all of the employees, to all of the customers and to all of you."

What has been learned from this financial crisis is yet to be known, as well as how history will judge the players. Perhaps as the New Year gets started a more important question is what that year will hold. The recovery in the stock market, as encouraging as it may seem, does not solve unemployment, the housing crisis, the auto industry, and consumer spending. There are some economists that are warning of what happened in 1937, when the government thought the Great Depression was over and began a tight money policy that staggered growth for the next 5 years. Certainly we should have learned that there must be regulation of the financial markets and that Congress needs to consider newer tax structure for CEO's that are paid hundreds of millions in bonuses at the expense of stockholders. Companies that incorporate outside of the U.S. in order to avoid paying tax needs to be examined closely. Congress needs to throw off the shackles of special interests and look closely at the rules that regulate our financial institutions.

It is my opinion history may judge Sec. Paulson harshly but I think that may be unfair. Paulson was asked in 2006 to become Sec. of the Treasury and at that time was CEO of Goldman-Sachs and called it, "the best job in the world." I think he responded to the call of public service and under the conditions he found himself in, acted in what he felt was the best interest of the country. I think the same of Bernanke and Geithner as well. After the bailout was over but still being debated, Jamie Dimon, CEO of J.P. Morgan Chase sent Paulson this email quoting Teddy Roosevelt. "It is not the critic who counts: not the man that points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by the sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who never knew victory or defeat." The "big five" investment banks are no more; Bear and Lehman died and the others became bank holding companies and thus ended an era. Will we learn from this epic and tragic period? Only history will tell the tale.

 

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Gin Arnold is a 70 year old liberal living in Cotacachi, Ecuador after living in S. Alabama. I have owned several businesses, lived aboard a 32 foot sailing yacht, been a bar tender, boat captain, short order cook, and imported furniture from (more...)
 

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