A year into the financial crisis, few dreamed that the situation would spiral down so far, so fast. Only a week ago, the Bush administration took control of Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies. Then, before anyone could sigh a breath of relief after that crisis, Lehman was on the brink.I remember when people were railing at the finance industry for being a license to print money. Thing is, it should have been. That this kind of collapse is happening is astonishing.
As details of Lehman’s plight began to trickle out on Sunday, the worries deepened that big financial companies might topple like dominoes. Bank of America began discussions to buy Merrill Lynch, the nation’s largest brokerage.
“I spent last weekend watching Fannie and Freddie die. This weekend it was Lehman,” said one longtime Wall Street executive.
By late Sunday, a consortium of banks, working with government officials, announced a $70 billion pool of funds to lend to troubled financial companies.
The rat-a-tat-tat of bad news has frayed nerves up and down Wall Street. “People are just weary,” said another executive. And even more ill tidings loom. Thousands of employees at Lehman are likely to be laid off, casting them into one of the worst Wall Street job markets in years. Other banks are cutting back, too.
Even employees who manage to hold on are likely to make a lot less money this year. Bonuses are not only going to decrease; for many, they will evaporate completely.
While people were stunned by the near collapse of Bear Stearns in March, they were flabbergasted that Lehman, a respected firm with a 158-year history, could be brought to its knees. Many were equally shocked by the downfall of Richard S. Fuld Jr., Lehman’s chairman and chief executive.
“Everyone thought Bear Stearns was a bunch of cowboys; it made sense what happened,” said another executive. “But this is the great Dick Fuld. This is not supposed to happen to Lehman Brothers.”
Many Wall Street executives struggled to draw parallels to the current crisis. The collapse of the junk bond powerhouse Drexel Burnham Lambert in 1991 seems small by comparison, as does the 1998 failure of the big hedge fund Long Term Capital Management.
On Sunday, as the heads of major Wall Street banks huddled for a third day of emergency meetings at the Federal Reserve Bank of New York, many rank-and-file employees were at work in their offices.
“It’s all hands on deck,” said one senior banker.
At hedge funds, analysts worried that investors would rush to withdraw their money.
As a precaution, Wall Street banks have taken the extraordinary step of hiring advisers to assess the impact of the possible bankruptcies of other big financial institutions.
The mood could darken even further this week as several big Wall Street banks report what are expected to be grim quarterly results.
The problems the industry faces are myriad. Mortgage assets that both commercial and investment banks hold on their balance sheets continue to decline in value as potential buyers wait for prices to fall even further and sellers balk at prices being offered. At the same time, revenues from bread and butter Wall Street businesses like debt and equity underwriting and proprietary trading are sliding in a softening economy at home and abroad.
“I have not seen a quarter like this since 2001,” said Meredith Whitney, analyst at Oppenheimer. “And the expense bases at the banks are still built for 2006-style revenues. So the clash of these two things is going to produce the kind of quarter we have not seen in some time.”
And remember, kids: the guy who was arguably responsible for all this, Phil Gramm, is one of McCain's biggest economic advisors. This is what a McCain-Palin administration would look like.
(Also remember: this is what conservatives do to economies. Don't ever let yourself think that because many conservatives only care about personal enrichment, they actually know how to manage an economy. As they've proven over, and over, and over again, they actually haven't the faintest clue. "Fiscally conservative" is a bad thing.)