Time to Pay the PiperThis morning comes the news that the economy is officially in the tank, as Lehman Brothers officially collapsed over the weekend after the federal government refused to bail the old standby of Wall Street out of its mess. Meanwhile, Bank of America is consolidating its role as the economic Antichrist by purchasing Merrill Lynch in an all-stock deal. Merrill Lynch was, like Lehman Brothers, about to file for bankruptcy if someone didn't come to the rescue. Both Lehman and Merrill had wanted Washington to save them by guaranteeing buyers a financial cushion, and the government finally said no:
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away.
Lehman was apparently in such a mess that PriceWaterhouseCoopers found Monday morning that there may not be enough funds to pay employees:
"When we were appointed this morning, quite bluntly there was no cash because of the group treasury function," Mr. Lomas said, adding that his team would tell employees as soon as possible "whether or not there are funds enough to pay." Mr. Lomas said "a couple of dozen" of Lehman employees in London have been told definitely that they no longer have jobs. The rest should know by Wednesday, he said. The Lehman insolvency will be "larger and more complex" than similar proceedings for Enron and MG Rover, Mr. Lomas said.
The feds were right not to bail out Lehman and Merrill:
Treasury and Federal Reserve officials gathered the reigning titans of Wall Street and told them that the solution to the problems some had with insufficient capital had to come from within the private sector. No such solution was forthcoming. And now there are two fewer independent investment banks. Lehman Brothers, a 158-year-old firm that started by trading cotton, is bankrupt, and the thundering herd of Merrill Lynch brokers will now answer to bosses at Bank of America.
These two giants will be missed. Even so, this was the right time for the government to draw the line.
The reality of the whole matter, of course, is that neither the federal government nor the Federal Reserve ought to be bailing any of these companies out. An argument may be able to be made for a bailout of FannieMae and FreddieMac since the federal government created those firms to begin with, but it is a precarious argument at best.
Now one of the country's biggest insurance and investment firms may be near the end of its ride. Many Americans have insurance, investments, pension plans, or 401 (k) plans insured with the investments of American International Group, or AIG. New York State gave AIG a possible $20 billion cushion yesterday, but it may not be enough to save the company:
The insurer received a $20 billion liquidity cushion when New York state said it could access funds tied up in regulated subsidiaries. AIG is also looking to secure a lending facility of as much as $75 billion arranged by J.P. Morgan Chase and Goldman Sachs.
Investors have been growing increasingly concerned about the futures of AIG and Washington Mutual after both suffered brokerage downgrades after the markets closed Monday. AIG, which has been racing to restructure its business and raise fresh capital to avoid a downgrade of its credit ratings, lost 35% before the bell after plunging 61% Monday. Washington Mutual lost 16%.
Goldman Sachs shares slid about 10% after the firm posted a 70% drop in fiscal third-quarter net income. As the two remaining large investment banks, greater emphasis has been placed on Goldman's results and those of rival Morgan Stanley, who reports on Wednesday. With the number of big players on Wall Street dwindling, traders have said it remains to be seen where and for how much longer the ill effects of soured credit bets will continue to surface.
Lehman's bankruptcy and AIG's precarious position have prompted fears of forced selling that will lower the value of mortgage-related assets. A drop in the value of those mortgage assets could force other financial firms to write down the value of their holdings, in turn forcing them to raise cash that's not readily available.
It may be too much to ask our presidential candidates to quit demagoguing the economy, when both are ready to discuss the woes of Wall Street without admitting that those problems began because of bad credit and banking practices that began under the previous administration:
In his reaction to the Wall Street meltdown, John McCain is playing the part of Teddy Roosevelt, man of the people: Don't use taxpayer money to bail out greedy financial titans, he says, and don't be afraid to regulate Wall Street.
Barack Obama is playing the part of -- well, Barack Obama, man of change: This mess proves what I've been telling you, he's saying, that the team in charge of the economy has to get off the playing field. Oh, and I saw this coming, and they didn't.
That's the picture that emerges from the campaigns' initial reactions, and conversations with some key advisers, in the wake of Wall Street's weekend walk on the dark side.
The problems that plague major Wall Street firms actually began under the Clinton Administration. If we are going to play politics with our present economic crisis, we might as well blame the man in power when the mess began. The rotten fiscal practices that led to the current meltdown began and became common practice when Bill Clinton was residing at 1600 Pennsylvania Avenue. Barack Obama will blame "Bush McCain" (What the H-ll is that? It sounds like a landscaping tool of some kind), while John McCain blames "greedy" people on Wall Street while playing a game of How to Sound Like a Liberal.
The truth is that neither Bush, McCain, or Clinton are to blame for the present crisis if we parse it down to the root. The problem which started it all was poor lending and financial practices on the part of our nation's banks and creditor institutions. Further, the American people are at least somewhat to blame (yes, I said it) for taking out credit that many of them could not afford to finance and loans at terms that no reasonable person could afford to repay. Irresponsibility on the part of banks and the public at large can have a massive and terrible economic price.
The people of this country have been living well above our collective means for entirely too long, and now the piper is calling to be paid.