Tuesday, April 28, 2009

"There is no more Wall Street."

In February, Frontline aired a documentary "Inside the Meltdown," a documentary on the financial crisis.

I was very busy with work and missed it when it aired on TV, but watched it last night online. I recommend it as a great resource for anyone looking for information about the collapse of our economy.

At one point, Senator Dodd recounts the moment the Treasury Secretary informed an elite group of Congressmen about the situation. After being told that Congress needed to hand over vast sums of money or the global economy would collapse, says Dodd, "there was literally a pause in that room where the oxygen left."

We were all left gasping for air when we were told that "the system" was drowning in toxic assets and the great titans of capitalism needed socialism to save them.

Money from the feds was needed - vast sums of money, trillions of dollars had to go to these Wall Street firms to "bail them out" - no strings attached.

That was what Paulson told us in those early days of the crisis. And in those early days, he wanted to use federal funds to snap up the toxic assets.

The goal shifted not long after that terrifying moment that Dodd talks about - for whatever reason, Paulson decided to save the system through "capital injection." The capitalists on Wall Street needed the government to inject capital into their businesses to shore up their books; of course we all remember that some of the capital was used to pay the bonuses.

Some of these firms are declaring profits this quarter.

The toxic assets still hang like an anchor around the necks of these businesses, but still they declare profits and then justify more bonuses.

It's a mystery that I'm not able to solve - how you can drown in toxic assets and declare a profit all in one breath.

The Frontline website has an absolutely fascinating interview with Alan "Ace" Greenberg, a brilliant man, I suppose, a leader at Bear Stearns, the head of its executive committee at the time of the company's collapse, a man whose clear-eyed view of the business can't help but be obscured by the foggy tendrils of self-deception.

Greenberg joined Bear Stearns just out of college and remained there until the end. In this documentary, he gives the insider's version of the industry - past, present and future:

"There is no Wall Street. It's gone. There is no Wall Street. It's a street just like Broadway or Madison Avenue now. There are no firms on it. The model of the investment banking firm is gone forever. It will never come back, in my opinion. There are no investment banks.

There were three basic ways that people could make money in the brokerage business: They could be strictly stockbrokers doing commission business for people; they could give advisory service to advise the corporations who were going to merge; ... and the third thing was they could be a full-line investment banking firm, which means they risk their capital to help their clients accomplish certain things -- give them bridge loans, buy their securities, hold them for a while, resell them.

That third model is gone, because it's been proven without a question of a doubt in the last year that a rumor can put any of these firms at peril. You certainly saw it with us. You saw it with Lehman [Brothers]. Even the firm that I had the most admiration for, Goldman Sachs, found itself the victim of rumors. And Merrill Lynch did. And both of these firms had to convert over the weekend to banks, had to have infusions of capital because they couldn't withstand the self-fulfilling prophecies of the rumors."

I find that last sentence remarkable.

"...These firms had to convert over the weekend to banks, had to have infusions of capital because they couldn't withstand the self-fulfilling prophecies of the rumors."

It was rumors that killed the beast, says Greenberg.

Never mind that Bear Stearns had leveraged itself heavily to get into the mortgage-backed securities market.

Never mind that it was a market built up on a rotten, shoddy foundation of granting $500K mortgages to people who earned $40k a year.

Never mind that, as Greenberg acknowledges, "the whole question of what the inventory was worth caused more problems."

The inventory Greenberg is referring to has been labeled "toxic" by a host of people a lot smarter than me. But for Greenberg, the possession of the toxic assets was not the issue.

Bear Stearns was the victim of "rumors."

Greenberg also believes that "the government didn't bail out Bear Stearns. JPMorgan bought Bear Stearns."

That $30 billion "capital infusion" handed to JP Morgan to help them seal the deal - that's a loan that just might end up being a good deal for the feds:

"My understanding is these securities have gone down more than a billion dollars, not much more. So the Fed is out a little bit now. But don't think the Fed just wrote a check for $30 billion and it's gone. That isn't the case at all. They have securities that may end up being worth more than $30 billion, and whether they'd like to sell them or keep them is up to the Fed."

I wonder about the value of the toxic securities that brought down the US economy. Is there really profit to be made from them? If yes, then why the siege mentality coming out of the Feds last fall? Surely, Paulson meant it when he said told those elite political leaders that the feds needed to bailout these companies - or else.

What lessons does a man like Alan "Ace" Greenberg take away from a crisis like this?

"I guess it's a question of overexuberance and getting caught up in thinking the good times are here forever and they never are. The tech bust of nine years ago certainly wasn't a surprise to me. That was so obvious, much more obvious than this. I had no idea that people throughout the country were buying homes they couldn't even come close to afford. It just didn't occur to me that the banks or the mortgage brokers at the grassroots level were doing these things. Maybe I should have known. I don't know why I would, though. So these things, if they're not built on solid ground, they just disintegrate in a hurry."

In other words, when a company is built on a rotten foundation, even a rumor can blow it away, leaving the equality of nothingness, I guess, if you believe in the gospel according to Greenberg:

"There are no fat cats on Wall Street. There are no skinny cats, no fat dogs -- there's nothing. There's nothing left. There is no more Wall Street."

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