2The bankruptcies of Fannie, Freddie, Lehman, and AIG; the fall in theprices of risky assets worldwide; the shutdown of the flow of fundsthrough financial markets as trust evaporated and everyone presumed thatwhoever they entrusted their money to might go bankrupt—this wasSeptember's harvest. Risk tolerance collapsed. People became much lesswilling to hold risky assets at any price. The interest rate on 30-yearTreasury bonds fell to less than 3 percent. And it was presumed that everylarge bank in America would be bankrupt if they were forced to mark tomarket.The banks' survival depended on their (a) not having to sell assets untilasset prices rebounded, and (b) the availability of enough governmentmoney, at cheap enough prices, to enable them to avoid selling any assetsat fire-sale prices.This troubling tale led to the largest recession in post-war history. Yet if you go to the big banks of Wall Street right now, most of them will say:"What is the problem?" They will deny that any changes in the way theyrun their businesses are called for. "Sure there were a few scary moments,"they say, "but big shocks cause scary moments. And our fundamentalbusiness model is sound."Indeed, as Paul Kedrosky points out, if you look at the stock prices of Goldman, JPMorgan Chase, Barclays, and Morgan Stanley, they are backwhere they were in late August, 2008 before the worst unpleasantnessbegan. (Citi, however, is still down 75 percent and Bank of America is off 67 percent.) So, they say, there is no need for government investments in,or control over, their businesses; no need for restrictions on how muchthey can pay whom or for what; no need to restrict how much leveragethey assume or what they invest in or how much capital they must hold.The smart banks, they say, figured out that the mortgage market washeaded for a crash and managed to profit from the boom without beingdestroyed by the bust. It was only the dumb banks, they say—Bear-Stearns, Lehman, AIG, Fannie, Freddie, and to a lesser degree, Citi andBank of America—that suffered severely. That's how the market works.This is a fairy tale.
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