15 Sep Lehman Five Years Later
Five years ago today Wall Street lost one of its staple investment banks to bankruptcy, and Main Street woke up to the reality of the financial crisis. The American economy had been in a financial crisis for at least a year, but it was the Lehman bankruptcy filing this fateful weekend that caused push to come to shove. As has been amply recorded, Lehman’s bankruptcy led to Merrill Lynch’s panic sale to Bank of America, which led to the Fed bailout of AIG, which led to a massive hedge fund redemption panic with Goldman Sachs and Morgan Stanley, which all took place simultaneously with Citibank and Wachovia teetering on the brink of death. The money market fund universe froze up, the overnight lending market froze up, the TED spread blew out, and Treasury Secretary Paulson determined that we stood at the verge of complete economic meltdown. While Fannie and Freddie had been put into conservatorship of the U.S. Treasury the weekend prior, it was Lehman’s bankruptcy that expedited the entire fall 2008 crisis and ultimately led to the passage of TARP and made the financial crisis a household conversation topic.
I do not believe the United States government should have bailed out Lehman Brothers, as ultimately I believe all of the pain that came after the filing was going to have to happen regardless. There is prima facie reason to understand why one may say, “Couldn’t of some short term assistance to Lehman kept the government from having to do a lot more in the bailout sense later?”, but the reality is that this is wishful thinking. A capital deficiency is a capital deficiency, and the size of the hole in Lehman’s balance sheet was not going to be papered over. I also happen to believe, and could demonstrate so if I were sitting in your living room discussing this (I won’t get into it on my blog), that the powers that be knew the chickens had come home to roost, and Lehman was a better first domino to fall than a couple of the really, really big dominoes that would have come later. In other words, Lehman was big, but it was a gnat compared to the alternative.
I have had plenty to say about what I believe truly caused the crisis, including what can be found at this link here. I do not wish to fully elaborate now on my strongly held beliefs about the causes of the financial crisis. What I do wish to explore is where the behaviors and policies that caused the last crisis continue to linger today. There is an understandable anger from both the right and the left regarding the actions that took place after the crisis of 2008. To me, the single most unfortunate thing about TARP is that it teed up so much righteous indignation about the post-bailout decisions, leaving a wholly inadequate righteous indignation about the pre-crisis decisions. It is an exercise of futility to walk many well-meaning folks (from the left and the right) through the chain of events that took place during and after the crisis. One of the great dangers when the stakes are high in interpreting current events is for a narrative to get baked in. Reasonably intelligent people get away with saying, “Main Street had to bailout Wall Street”, because there was no way to stop the train of that narrative from rolling. It is patently absurd, but it is probably irreversible.
The right has had an agenda since the crisis, and that was to blame misguided government policy for what happened. The right is half-right here. The left has also had an agenda, and that is too blame financial deregulation for the crisis. While inadequate regulation, bad regulation, excessive regulation, silly regulation, and stupid regulation all played into it, the left’s play on the events of the crisis also comes up short.
As I state in the lectures mentioned earlier in my piece, the financial crisis was two things at its core. First, it was a combination of events for which the term “perfect storm” is not sufficient. The stoking of mal-investment and careless risk caused by Greenspan’s Fed laid the kindling for what would become an ugly fire. Well-meaning but idiotic mark-to-market accounting requirements kept poorly capitalized banks from dealing with their balance sheet needs in a sensible manner. Government policies pushing home ownership then enabling it via their Government-Sponsored Enterprises (Fannie and Freddie), played the role of drug dealer through the whole mess. Wall Street’s Randian greed went amok, as it has always done, and always will do, given the climate around them. Misguided decisions and policies from lawmakers, central bankers, loan originators, and everyone else in this food chain all came together and pushed the world economy to the brink. Some of the post-crisis decisions have been good, such as the decision to suspend FASB 157 (mark to market requirements), and the decision to allow the TARP firms to pay back what had been forced upon them (how many of you knew that every single dollar of TARP funds were paid back in very short order from all of the major financial firms that took them, and at huge profits to the taxpayers?). Many of the post-crisis decisions have been disastrous, such as the passage of Dodd-Frank, a classic example of Congress doing something bad just to say they did something. But I said that the financial crisis was two things at its core, and it is the second one I want to reflect on in this five year anniversary of Lehman’s demise.
If the first point was that the crisis was a “perfect storm” of bad decisions from elites, my second point is that it was the apex – the grand finale – the last hurrah – of poor decisions from Main Street. There would have been no financial crisis without the greed and immorality of Main Street, and in the obsessive agendas of the left and the right over the last five years this message has not been explored with any substance or consequence. There is no need to take away guilt from traders, lenders, bankers, executives, bureaucrats, and others who erred. However, to do this for the purpose of absolving Main Street for her role is highly ill-advised. There is no subprime crisis without subprime borrowers who committed fraud and who failed to perform in their obligations. There is certainly no crisis apart from those folks who did have the means but not the integrity to make their payments (mostly the speculative homebuyers who simply walked away the second the collateral was under water relative to the amount of the loan). America went on a borrowing binge for a long time prior to the crisis, and ground zero of this borrowing binge was the market for home ownership. Borrowing above one’s means was not forced upon the American people. Using fraud to qualify for a loan was not forced upon the American people. And most importantly, refusing to pay when one had the means to do so was not forced upon the American people. The agendas found in counter-scapegoats to the crisis (i.e. Wall Street, Washington D.C.) have served the purpose of giving a hall pass to those at the epicenter of this financial debacle: The people on Main Street whose greed and irresponsibility led to the crisis. Did this greed stop at Main Street? Of course not. Where there are addicts there will always be dealers, but to blame the addiction on the dealer is rank tokenism and reflects a misguided understanding of the responsibility of actual economic actors.
What does the fact that many Americans behaved so recklessly have to do with the five year anniversary of Lehman’s bankruptcy? Because five years later, I ask you, what has become of the cult of home ownership in American society? Has it been squashed, or is it larger than ever? Can you name one political candidate, political party, or economic ideology with the courage and wisdom to speak out AGAINST a “real estate recovery”? What exactly is a “real estate recovery”? Intrinsic value needs no prayer for recovery – it just plain happens. When supply and demand are aligned the way they are supposed to, prices move the way their supply/demand characteristics dictate. Today, we do not have people praying for a substantive real estate recovery – we have people praying for their house to go up in value so they can trade it. We do not have a culture, five years after the economy was brought to its knees, looking to repel the culture of debt that created the crisis – we have a movement to give this culture fresh life. The family value of home ownership is a noble and worthwhile goal, but I see no evidence five years later than Main Street has disposed of its culture of short-termism, speculation, indebtedness, and instability for a culture of value, fundamentals, and stable community living. The covetousness that destroyed Lehman is the same covetousness that raged throughout Main Street.
I know five years later what effects the crisis has had on Wall Street. Leverage has been reduced and capital raised with reckless abandon. Many of the firms who played such a huge role in the crisis are gone (which should cut the silly narrative that Wall Street got off scot free, but for some reason doesn’t). I ask you: Can the same be said of Main Street? How we look at the crisis in another five years is not going to depend on what is happening with Wall Street; it will depend on the American culture’s ability to learn the great moral lesson of 2008 – a culture that begins with Main Street.
As a postscript to the above piece, it is my opinion that Fannie and Freddie should have been put into conservatorship (as they were), that the common and preferred equity holders be wiped out (as they were), and the companies be split up and fully privatized, with a goal of completing eliminating the “implicit guarantee” of their debt. The Feds, instead, doubled down on the guarantee of Fannie debt. The global economic mantra of “bailing out bondholders at all costs” is alive and well, evidenced throughout the European crisis which took place just three years after the 2008 debacle. I believe that the market for advising on global capital is going nowhere, and in that sense there will always be a market for “Wall Street firms” doing what they do best – advising on global capital. Efforts to reduce leverage and increase capital have been effective, and I consider them wise. No single hangover effect of the 2008 crisis is more concerning to me, though, than a Federal Reserve who believes that the interest rate is the great policy tool for manipulating economic behavior. I expect we will be in a boom/bust cycle for the rest of my life, and that when we enter bust cycles there will be people on Main Street who want someone to blame for the careless decisions they made. In that sense, the next crisis will be deja vu all over again. However, I do not believe the crisis we had will ever happen again. History doesn’t always repeat itself, but I prefer that when it comes to 2008, the future not even rhyme.