This line of thought began with this MetaFilter post linking to this FRONTLINE piece on what happened with the banking/ibanking sector last Fall. [BTW, the best animation explanation of the problems is here.]
The FRONTLINE documentary does a great job at pointing out some of the players in the mix and the personal relationships that helped bring the problem to a head.
Perhaps the most poignant bit was on the relationship between Henry (“Hank”) Paulson (formerly of Goldman Sachs) and Richard Fuld (of the bankrupt Lehman Brothers). Fuld firmly believed up to the last that Paulson would help him out. Instead, Paulson decided to make an example of him…and teach him a lesson. Before we get to the lesson that Paulson learned (yea…he screwed up) we have a quick and funny story about Fuld…
Mr Fuld, who has been testifying on the financial crisis before the US House Oversight Committee, was attacked on a Sunday shortly after it was announced that the banking giant was bankrupt.
Following rumours that the incident had occurred, Vicki Ward, a US journalist, said “two very senior sources – one incredibly senior source” had confirmed it to her. “He went to the gym after … Lehman was announced as going under,” she told CNBC. “He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold.
“And frankly after having watched [Mr Fuld’s testimony to the committee], I’d have done the same too.”
In a robust performance in front of the committee, Mr Fuld said that he would wonder “until they put me in the ground” why the US government had not rescued the 158-year-old firm. He said that regulators were fully aware of its plight well before its collapse.
This bit here, about how Fuld still doesn’t understand why he was let to fall, is a big part of the FRONTLINE piece. When it became known that, really, none of the investment banks were safe, AND THE GOVERNMENT WASN’T GOING TO HELP, the panic set in and we got something I called the “Seven Minutes of Death“. That was the point when the entire concept of a “rational market” disappeared along with about $7,000,000,000,000….in seven minutes.
Paulson wanted to make a point with Fuld, and that point was that the government isn’t going to help you. Sadly, this sticking to some sort of “market morality” is exactly the thing that pushed the whole system to collapse. The problem was exacerbated by election year politics, as noted in my post “Why the Failout Failed.”
When Lehman was allowed to collapse, it triggered off all the “bombs” (CDS) in the animation linked above, as these were the underlying insurance for the entire scheme. The fact that people were selling armageddon insurance (essentially) should have been a sign that something wicked was this way coming.
A couple more quick personal anecdotes. Phil Gramm offered a rambling defense of his bill that allowed this stuff to happen. I countered that, I think fairly effectively, in this video, which has a more political side to it than the animation. The simple fact of the matter is that this breakdown was created by GREED at every level. Without something to regulate that GREED, it ate the system.
The best part of that Phil Gramm piece is this blurb on the bottom.
Mr. Gramm, a former U.S. Senator from Texas, is vice chairman of UBS Investment Bank. UBS. This op-ed is adapted from a recent paper he delivered at the American Enterprise Institute
Hmmm, where have I been reading about UBS lately…oh yea…the U.S. and their pissing match with the Swiss. General note on International Politics, when you start to piss off the Swiss, it might be time to re-think your awesome plan.
ZURICH, Feb 21 (Reuters) – The right-wing Swiss People’s Party (SVP) called on Saturday for retaliation against the United States over a U.S. tax probe into the country’s biggest bank UBS that threatens prized banking secrecy.
Switzerland should also reconsider its policy of representing the United States in countries where it has no diplomatic presence, the parliamentary SVP said in a statement.
The SVP said gold stored by the Swiss National Bank in the United States should be repatriated and Switzerland should ban the sale of U.S. funds in the country to protect Swiss investors after the failure of U.S. regulators.
The comments came after UBS agreed on Wednesday to pay a fine of $780 million and to disclose about 250 names of U.S. clients it said had committed tax fraud to settle U.S. criminal charges that it had helped rich Americans dodge taxes.
U.S. tax authorities said on Thursday they were still pursuing a civil case against UBS seeking access to thousands more names of U.S. citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts.
This has been the long run towards the end of the “secret Swiss bank account” legend. A number of the rich (Howdy, Mr. Gramm) use these methods to avoid paying taxes. It is this kind of stuff, exactly, that led to the fiction of the Laffer Curve (the idea being that by lowering tax rates, it’s no longer worth it to hide money and thus government revenues increase with lower tax rates).
One of the things the Patriot Act has allowed for is previously unknown levels of intrusion into American’s financial status. It was exactly this type of intrusion that led to the ouster of Eliot Spitzer. Sure, Spitzer was never charged with a crime, but was excised from public life because of the way he spent his personal money. The Feds are watching that closely, and if you are an up-and-comer from The Other Party…watch yo-self, because they are watching too.
So now we have a federal government that is a) strapped for cash and b) has all the tools necessary to find those nest eggs and secret storage places. Oh, and it has a huge mandate from The People to do something about it all, and do something Obama certainly is.
At this point it’s really hard to tell what is going to happen. A lot of people really don’t understand how much has changed and how badly we have been hallowed out. One guy does, and his outlook is a bit less than rosy.
NEW YORK (Reuters) – Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
And he’s right. Because of a few people’s “faith” in a broken market, and not acting quickly enough to shore up the lynchpins of the economy, we crashed a lot harder than we needed to. The crashing in and of itself adds additional costs to a recovery (think…the looting and burning that goes with mobs mad at The Man…and taking it out on anything and everything within reach…of which The Man owns little). In this case, the mobs were the Republicans and The Man is Obama (yes, we are in Bizarro world now).
Playing obstructionist *now* is closing the barn door after the barn has been burned to the ground.
What we want to build in place of the barn is the question now. It should be noted, however, that we are living in the 21st century now, and rebuilding an 18th Century barn might not be the best idea.
Just some food for thought, from the bottom, where I eat scraps that filter down.