Throughout the 1980s and early 90s, the legendary chairman of Bear Stearns, Ace Greenberg, wrote a series of amusing memos he later collected into a book called Memos From the Chairman. Among his missives was the now famous ban on paper clips, which, had it been more assiduously followed, I firmly believe would have saved [...]
There are two kinds of employees in the world of investment banking: “revenue producers” and everyone else. For 10 years at Bear, Stearns & Co. I was a member of the second group; one of the innumerable, invisible people who played a role, however small, in making the company run.
These are my reflections on working at Bear – and on the ongoing credit crisis that brought it down.
-Lakis Polycarpou
Last night President Bush broke into regularly scheduled prime-time programming to tell us that “our economy is in serious danger,” and that Congress must pass his $700 billion dollar bailout of Wall Street. After which, everything will be fine, of course.
The powers that be in New York and Washington are facing a serious problem. Without this bailout, many credible sources are saying that our economy will simply cease to function – some companies won’t be able to make payroll, banks will shut down and so forth.
Most members of Congress probably get it, but “average Americans” out there are really not in the mood to put up the money to bail out the crooks who got us into this mess, and they’re letting Washington hear it. A lot are suggesting we just let it all wash out, and maybe we won’t be so reckless next time. Or as Herbert Hoover’s Treasury secretary Andrew Mellon put it, “purge the rottenness out of the system.” We all know where that led, of course.
On the other hand, the current account deficit being what it is, isn’t there a strong possibility that the bailout will lead to something worse?
I originally wrote this post for my other blog, City of the Future (nea-polis.net) last July. Given the subject matter and the unfolding of recent events, I thought it would be interesting to repost here.
-Lakis Polycarpou
When the producers of the new movie August arranged to promote the film by having director Austin Chick and lead actor Josh Hartnett ring the closing bell on the New York Stock Exchange last Friday, it’s doubtful they had any idea what they were in for—but the irony couldn’t have been more dramatic, as Steve Zeitchik at the Hollywood Reporter recently pointed out.
August, a film about the demise of a fictional dot com company called Landshark in August of 2001, approaches its subject as a historical set piece—a portrait of a bygone time when foolish 20-somethings ruled (or pretended to rule) the world with papier-mâché companies that produced nothing of any real worth. The unspoken implication of that approach is that everything changed, especially after September 11, 2001. (In the film, the symbolic weight of that August was pounded in through periodic background shots of the still-standing twin towers, an effect the filmmakers probably thought was subtle.)
But by the time Hartnett and Chick rang that final bell, it looked like the stock market and the economy at large was in a free-fall far worse and more widespread than the one that hit Internet companies in 2000-2001. After all, the collapse of IndyMac and the possible insolvency of Fannie Mae and Freddie Mac signify something far more severe than any number of “Landshark” failures. In 2001 Internet companies collapsed en masse but for the most part alone; one did not necessarily directly affect another.
The home mortgage crisis was another matter entirely—many, many more people have mortgages than ever owned stock in Pets.com. More significantly, the financial instruments derived from bad mortgages were treated by financial players not as the garbage they were but as the safest investments in the world, which means that everything from pension funds to municipalities across the world had exposure. Regarding the idea of real worth, there was never any value more hallucinated than the absurd prices of houses at the peak of the bubble.
What is not widely appreciated is the way in which the events of 2001 and the present are intimately connected. In truth, the crash depicted in August was not really the end of an era, but just a chapter in a much bigger story—a story whose plot revolves around a decades long economic transformation from a society in which wealth consisted of concrete goods and services that people accumulated through savings and production, to one in which money and debt were created out of thin air. The problem is that hallucinations fade and people must still eat and wear clothes.
At the climax of the movie, we finally see Landshark’s chastened CEO going to a meeting with a buyout firm that represents “old money”—headed by a banker played by the inimitable David Bowie. The implication of the scene is that the “grownups” were now back in charge.
But the fact is that investment banks were the generators of the dot com mess. They underwrote the IPOs, after all, providing not only financial but moral support to the arrogant young geeks who thought their code was worth more than the GNP of many small nations. When it was over, companies like Bear Stearns washed their hands and reinstated their formal dress-codes, as if they were above it all.
Now we see they weren’t, of course; and the imbalances and fantasies that were at the root of the Internet bubble didn’t disappear; they metastasized. The results are unfolding before us. August of 2008 may turn out to be far more dramatic than August of 2001 ever was.
Goldman Sachs and Morgan Stanley are turning into regular banks. In other words, there are no more independent investment banks.
So we’re back to the financial structure we had pre 1929. This is progress?
In the days and weeks after the Bear Stearns implosion, there were a lot of whispers around the office that Lehman Brothers would be next. In fact, it was a bit surprising to a lot of people that Lehman lasted as long as it did.
Well, that’s all over now. Lehman did finally fall–but that was only the beginning. Here’s a rundown of all the financial insanity that has taken place in the last couple of weeks:
This last one is a key example of how the crisis has gone global. Another is the recent coordinated action of world central banks, as well as the governments of Russia and China directly intervening in their own crashing equity markets.
How bad is this news? Alan Greenspan is calling it a “once-in-a century” event. “There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go,” Greenspan said. Too bad he couldn’t have warned us of this those years when he was inflating the money supply and telling everyone to buy adjustable rate mortgages.
