Big firms' failures aren't the last of it
Lehman Brothers is filing for Chapter 11 bankruptcy, and Merrill Lynch has been snapped up by Bank of America. What's next in the mortgage-crisis fallout? Bob Moon takes us through all the changes.
U.S. Treasury Secretary Henry Paulson briefs reporters at the White House on Monday. Paulson vowed to take steps to maintain stability in U.S. financial markets, as the failure of U.S. banking titans sent global markets into a slump. (Jim Watson/AFP/Getty Images)
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Two men hug outside the Lehman Brothers headquarters building in New York City on Monday.
An employee of Lehman Brothers Holdings Inc. carries a box out of the company's headquarters on Monday.
TEXT OF STORY AND INTERVIEW
KAI RYSSDAL: Like anybody who does a lot of public speaking, Henry Paulson knows it's best to start things off with a joke. So the Treasury secretary gave it his best shot today when he stepped to the podium at the White House.
HENRY PAULSON: Good afternoon, everyone. And I hope you all had an enjoyable weekend. [Laughs] Yeah, yeah, well ...
Yeah, would have been fine except for that nervous laugh there at the end, don't you think? But really, who can blame the guy for a little bit of stress. Arguably, it was his decision last week not to bail out Lehman Brothers that set off the scramble yesterday -- a last minute search for a handout or a buyout.
Among Lehman's employees outside the company's headquarters in mid-town Manhattan this morning sentiment was mixed.
EMPLOYEE 1: Well it felt like they were using Lehman as an example. That's just my opinion.
EMPLOYEE 2: I don't think the government made a mistake at all. I think they have to draw a line and they drew a line. We had six months to fix this problems and we didn't do it. I think it's the fault of our senior management.
EMPLOYEE 3: While I'm biased, I think it's kind of crappy that when it came time to saving Lehman the government really kind of backed down and I think we'll see the ripple effects as a result of it.
And now there there are two: Goldman Sachs and Morgan Stanley are last of the big Wall Street investment banks standing. Bear Stearns, you remember, was dispatched back in March. Lehman said in the middle of the night last night it is set to file Chapter 11 bankruptcy. Merrill Lynch, as you know, has been snapped up by Bank of America. Marketplace's Bob Moon is here to walk us through things.
Hi, Bob.
BOB MOON: [Sigh] Hi, Kai.
RYSSDAL: But, really, I mean, you sigh but it could have been, could've been worse.
MOON: Yeah, it was not Black Monday. It could have been a lot worse. May sound strange to say when the Dow was ONLY down close to 500 points and ONLY sank around 4.5 percent. But it really could have been worse.
RYSSDAL: Why wasn't it, though?
MOON: Well, the markets hate uncertainty, you remember. And there's a lot less unknown out there today. Experts have been saying for many, many months now that we needed clarity in the markets. And we finally got some today. Investors finally ran out of patience with Lehman. The firm took too long to get its balance sheet in order. It still had $50 billion in risky mortgage-related investments on the books. Then it reported the worst loss in its history last week. And, with the bankruptcy filing today and the surprise sale yesterday of Merrill Lynch, we got some clarity over the weekend about where things stand now. So that helped put kind of a floor under the market.
RYSSDAL: Clarity's great and all, but here's something that's still a little murky. Why is it that Bear Stearns back in March was considered too big to fail -- the chairman of the Fed said basically that -- but Lehman Brothers is not.
MOON: Well, you remember how surprising the Bear Stearns move was. There's a school of thought here now that there was plenty of warning and there was plenty of time for investors to get their ducks in a row, their act together about Lehman's problems.
You have long-time market-watchers out there who argue that this is going to shake things up at first, but then we're going to see an eventual adjustment process as these losses distribute themselves across the market. And you can also read between the lines here that the Treasury and the Fed decided the markets have adjusted since Bear Stearns. In fact, some supporters of that view say that there's no better evidence of that than the surprise sale of Merrill Lynch to Bank of America. Merrill effectively cleaned up its books and, essentially, it took care of the situation itself.
RYSSDAL: You're not really telling me that all the bad stuff's behind us, are you?
MOON: Not at all. The fallout's going to be really profound here. Will the bank profits take a hit? Absolutely. Is this going to take a lot more time to play out? No question about that. This is the result of bad decisions, Kai, that were made back as far as the '80s, and it's still going to take a long time to unwind all that. The trick is doing it gradually without shocking the system, but not so slow that you really create this water-torture effect.
RYSSDAL: The Fed meets tomorrow. They're going to talk about interest rates and, obviously, everybody's going to be looking at that very closely. I wanted to ask you, though, about the companies that are still left. The ones that are getting bigger -- the Bank of Americas, the Goldman Sachses. Aren't we now setting ourselves up for another round of "too big to fail?"
MOON: There is concern about that. You know, Bank of America gobbles up Merrill Lynch and it becomes even bigger. And don't forget that Lehman Brothers had a very big closet and there are still some very big shoes in there to drop.
Let me give you a case in point there: Today's bankruptcy filing lists the biggest single creditor as a Tokyo-based bank, Aozora Bank. It's on the hook for a $463 million bank loan. Well, it turns out that Aozora may be based in Tokyo, but it's actually controlled by Cerberus Capital Management, the big U.S. private-investment firm. Now, Cerberus issued a statement today that its exposure is really "significantly less" that Lehman's balance sheet might indicate because it's protected by what it calls "risk-management instruments." Well, guess what they are? They are essentially these exotic insurance policies that others are going to have to cover now -- if they can afford it.
RYSSDAL: Funny you should mention that because that is where we are going next -- insurance. Marketplace's senior business correspondent Bob Moon. Thank you, Bob.
MOON: Thanks, Kai.
Comments
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09/18/2008
check out this interview with Terry Gross and Professor Michael Greenburger of U Maryland's Law School--teaches class in finance--credit derivatives...
very informative
http://www.npr.org/templates/story/story.php?storyId=94686428
they should just play it over and over on MSNBC and other shows about the market
It is about a million times more informative than the talking heads that are saying the bottom is here....
From NYC, NY, 09/17/2008
Why were "no document" loans being made by the banks? Why was it so important to take people out of low income rental housing and put them in properties with mortgages that they could not afford? Why did no one question whether a poor person could pay back a mortgage loan? Why was it so important to replace the Glass-Steagall Act in 1999 which had protected consumers since 1933? The mortgage crisis was created by the policies and practices of the federal government, the financial industry, the mortgage industry, the lobbyists, and the politicans who failed to reform the industries, exercise oversight, and investigate the abuses that they were aware of and which they knew were taking place. People made millions of dollars at the expense of the working class. Franklin Raines, Jim Johnson, and Jamie Gorelik made millions of dollars from Fannie and Freddie. They are contemptible.
From St. Louis, MO, 09/16/2008
Fascinating that in all the reporting about the origins of the current liquidity crisis I haven't heard a single analyst, reporter, or commentator mention the word "greed" as a contributor to the set of problems in which we're now mired. Greed on the part of the mortgage brokers peddling untenable loans to people who couldn't afford them just so they could cash in on the loan placement commission, greed on the part of the Wall Street investment bankers who concocted all sorts of derivatives to haul down 6, 7, and 8 figure annual bonuses while creating no value in the marketplace, and greed on the part of the officers of the financial institutions who were all too eager to lend money despite the clear indications that all rational lending qualification criteria were far from met. Couple that with lax regulation and oversight along with minimal personal accountability (of any real consequence - just look at the lucrative exit packages for the scions of the financial industry who took their respective companies into the dirt), and it's easy to see how we got here. The only question that remains is whether we have really learned anything from this. My bet is that the same people who had no qualms about taking down the economy for personal gain are right now busily creating the next "derivative" to dip into our collective pockets yet again...
From wichita, KS, 09/15/2008
Too much is too much, not enough simply won't do.
From Terlingua, TX, 09/15/2008
Loved the insert of the Who's "Won't Get Fooled Again", that was priceless. "Sturm und Drang", sigh, i'm glad today is over. for now.
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