Can’t I trust anybody to keep things in check while I’m gone? I go out of down for just one weekend and what happens? Not only does Chicago flood but the financial system is in what look very much like a crisis to me:
NEW YORK — The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. filed for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.
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. Barclays said Monday it pulled out of the potential deal after deciding it wasn’t in the best interest of shareholders.
Early Monday morning, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.
On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion.
Is this a return to moral hazard as some have suggested? Billions in commissions have been made over the last few years so I think it will take a somewhat closer reading of the actual results to make that determination. If the guy who’ve been raking it in through what is rather clearly mismanagement have taken their money and run, leaving a bunch of mutual funds (read: the Baby Boomers’ retirement funds) and the federal government holding the now very empty looking bag, it’s hard for me to count this as moral hazard.
Sen. Obama has issued a statement on the goings-on:
The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.
I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years – one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It’s a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.
as has Sen. McCain:
The crisis in our financial markets has taken an enormous toll on our economy and the American people — first the decline of our housing markets followed by the collapse of Bear Stearns, Fannie Mae, Freddie Mac and now Lehman Brothers. I am glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bailout Lehman Brothers, a position I have spoken about throughout this campaign. We are carefully monitoring the financial markets, including the duress at Lehman Brothers that is the latest reminder of ineffective regulation and management. Efforts must also be focused on ensuring that the deposits of hardworking Americans are protected.
Both presidential candidates are promising reform.
But both are frustratingly short on details. How would President Obama have been handling things over the last eight years? President McCain? What sort of reform would they be looking at going forward? Can the problems really be pinned on the Bush Administration other than that it happened on their watch? I’d really appreciate someone connecting the dots a little more for me.
Sen. Obama’s economic plans are long on credit card reform (he might want to discuss that with his running mate) and short on regulatory reform of the investment banks and the maze of “shadow banks” Paul Krugman took note of in his column this morning. Sen. McCain speaks piously about markets but if there’s one thing that the experience of the last century has taught us it’s that the unfettered market produces boom and bust.
Will the pain of the financial system bring pain to the broader economy? Or will it be concentrated in the big financial centers? I guess we’ll have to wait and see.
I suspect that there won’t be as much political hay to be made out of this financial crisis, however serious it is, as Democratic activists might like. Not all financiers are Republicans and Democratic senators haven’t exactly been beating the drum for more regulation since they took control of the Senate a couple of years back.
I don’t either. You can see from Mr. Obama’s statement that he’s trying to bring the focus around to other aspects of Republican governance where the Democrats have a clearer contrast to draw. I’m a Democrat, but in this case McCain’s statement is the more responsible one (if admittedly quite vague).
Here’s an interesting NYT piece from five years ago that I ran across today on another blog. Apparently, the Bush administration had proposed reforms for Fannie and Freddie but were blocked by the Democrats in Congress.