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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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March 3, 2008 12:01 AM ET
Getty Images
If only that comparison with the savings and loan debacle were apt, the financial community might anticipate closure and a brighter future. In reality, the world of finance is facing a disaster unimaginable when the S&Ls met their collective fates at the hands of sometimes overeager federal watchdogs. While it's seldom ac-knowledged in recent years, the United States has not completely lacked socialism. The “chicken in every pot” sentiment of the 1930s reflected the peak of that once powerful political influence. The modern equivalent is “everyone a homeowner.” Such institutions as the Federal Home Loan Banks remind us of that fact. In the same spirit, the savings and loan industry was given its unique assignment to augment the conservative home financing pace of America's traditional savings banks. As a result, the economically dominant, union-organized building trades flourished, at least until the S&L debacle distorted the perfect circle of ready construction loans, inflating wages and mortgage-based, federally supported realizations of the American dream. The end of that era was, fortunately, very American, with little damage reported elsewhere. Unfortunately, socialist programs are not a capitalist obligation, or even a profitable privilege of the system. Absent governmental subsidies in the form of tax breaks, even the cleverest lenders have avoided financing housing for obviously unqualified buyers. But eventually, clever is as clever does, and damn the old-fashioned, rational rules of the game. When it became obvious that a grand surfeit of funds existed, and that a new generation of computerized financial whiz kids could securitize just about anything, the imaginative search for collateral began. Mortgage originators and the key securities underwriters, already weaned on triple-A Ginnie Maes, became enamored of replicating and enhancing the “junk bond” model by “tranching” presumably top-quality debt issues. Sweeping up home buyers of every stripe, the race for mortgaged-backed volume irrespective of risk began. As the slicing and dicing progressed, “subprime” mortgages, many of them “sub-sub,” were packaged. In turn, CDOs were collateralized by whatever financial instruments could be assigned apparent value. Credit unworthiness was, presumably, diversified to relatively riskless levels by mathematical modeling. Not a few of the fraudulent joined the party as theoretically sound CDOs, such as Merrill Lynch's notorious Norma (a “hairball” of risk), floated onto global markets. Where on Wall Street and in the broader financial realm were the graybeards who might have questioned the entire process? Who could not anticipate already full debt burdens bursting as variable-rate loans approached the inevitable upward ratcheting? The answer, of course, is that money mattered and bonuses burgeoned. Even recently unfrocked Wall Street leaders are not out in the financial cold. Notably, Goldman Sachs, the much publicized big winner, covered its own impending losses by betting against products it had sold to buyers worldwide. Congratulations? To whom? Morgan Stanley's John Mack mutters “embarrassing” as the Fed and major central banks abroad pour liquidity into a faltering global financial system. Politically controlled foreign lenders leap in to bolster our failing financial bastions. This time the damage is far more than an American travesty. There can be no image-enhancing damage control, no short recovery. K.L. Holmes is a retired Wall Street executive.
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