Understanding the woes on Wall Street
Host Tess Vigeland gets a final perspective on the week on Wall Street, this time from Marketplace's senior business correspondent and market guru Bob Moon.
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TEXT OF INTERVIEW
Tess Vigeland: Don't know about you, but I drank my first cup of coffee Monday morning to the Lehman news. By my second cup, B of A had taken over Merrill. By my tenth cup or so on Friday, Wall Street looked nothing like it did a week ago and my head was spinning and I vowed not to look at my retirement accounts for five years and I told my parents I really hoped they were mostly in T-bills and then I said, "I gotta talk to Marketplace's Bob Moon!"
He's our senior business correspondent/market-guru and here he is to wrap up this crazy week. Bob, thanks for stopping by.
Bob Moon: Hey Tess. What a week, huh?
Vigeland: Unbelievable, but let me ask you this: we're more than a year out from the first kind of inklings of a subprime mess, but that was really contained to a very small percentage of the overall mortgages in this country and here we are on what some are calling the brink of financial collapse.
Moon: Well, subprime -- you mentioned the magic word there, and I think it's a case: don't put your eggs all in one basket. A lot of the investment banks, a lot of other big investment firms put their money in subprimes. Even though most of us are still paying the mortgage, in a lot of cases that's what causing the problem.
Vigeland: And throughout the banking sector. I mean, this is not just investments, this is not just retail banking, this is everywhere. I want to give you a bit of a composite here -- I call her Sally Investor -- and see what kind of advice you might have for her. Let's say she banks with Washington Mutual. She's got some stock holdings with Lehman -- or did. Her company 401(k) is with Merrill Lynch. She has a few annuities with AIG. Oh, and by the way, her mortgage was backed by Freddie Mac.
Moon: I want to talk to her about her astrology.
Vigeland: You would think that this is diverse.
Moon: Yeah, in almost all of those cases, there is sort of this network of safety nets that should offer a lot of protection. Now in some cases there is a problem. For example, if you had Lehman Brothers stock, then poof, it's gone. If you even had bonds in Lehman Brothers, they're talking about maybe 60-80 cents on the dollar return on those, so that could be a problem. Then you have the protection of an agency like the Securities Investor Protection Corporation, SIPC, which has moved in to help out in what they call the orderly transfer of those accounts from Lehman Brothers to Barclays Capital, which is talking about buying their assets.
Vigeland: So this is kind of the investing equivalent of the FDIC?
Moon: Yeah. Those accounts are protected -- $500,000 on a single account, up to $100,000 in cash -- and FDIC, if you've got deposits in a bank, those are protected up to $100,000, $200,000 for a joint account.
Vigeland: Alright. I want to ask you something that has been bugging me all week, which is: as I said, this has been coming down the pipe for a while and we've had massive red lights going off on this whole crisis and since then, all of these financial companies have had all kinds of tools that they could have used to help fix the situation, including getting money from the Fed and apparently Lehman Brothers didn't even bother. Why?
Moon: Well, there's talk that some of that was just plain hubris. I can take you back, though, to January of this year. John Thain, the CEO of Merrill Lynch, was talking about trying to get a handle on what all of these mortgage securities were really worth:
John Thain: We are optimistic that as the market starts to open up and actually trades really occur, that we can actually sell these things at or near where they're marked. So the intention was to mark them where we could sell them. I hope we do in fact see some trading happen.
Moon: Guess what happened?
Vigeland: Well, trading didn't happen, but I have to say, listening to that financial gobbledegook, it sounds to me like the banks didn't know the value of their holdings. How can they expect us to trust them with our money?
Moon: That's a good question. The answer lies on Wall Street and they're scrambling to come up with it to rebuild investor confidence right now.
Vigeland: Alright. Marketplace's Bob Moon. Thanks so much.
Moon: Thanks Tess.
Comments
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From Miami, FL, 09/23/2008
I am sorry for those loosing their jobs over the current meltdown. It was caused by Greed on Main and Wall Street. We had Banks lending 90 Cents on the Dollar to anyone buying equity /stocks, assuming it would always appreciate, this led to the crash of '29. In the 80's we had Banks lending money up to 105 cents on the Dollar to anyone buying equity /housing with the same assumptions. In fact, the worse your credit the higher the loan ratio. All these dreams (and scams) were then packaged and sold around the World as collateralized mortgage debts. The dream, now a nightmare has it's roots with everyone who took a mortgage knowing they could not repay it (Buyers and Sellers). There were a lot of "Hail Mary" purchases where the buyer (they can't be called owners) could never afford the property unless there was a quick resell or an act of God. Those who reviewed the loan knew this. Everyone who could draw a breath and saw housing prices rising at absurd rates and chose to ignore it also bear responsibility. While Jeb Bush and Charlie Christ was asleep at the switch in Florida, State Government's insatiable greed for increased property taxes fueled the total lack of enforcement of existing regulation and the granting of thousands of Mortgage Broker licenses to convicted criminals.
There will have to be some form of bailout, not necessarily the $700B Paulson wants. Open regulation and it's enforcement, could be the beginning of a solution. Sadly, I have no faith in the current administration or their cronies to do the right thing and not the selfish thing.
From huntington beach, CA, 09/21/2008
The reason why Lehman didn't do more to avoid problems is due to the reasons why we have a lot of problems in business. The changes to accounting rules and compensation now means that its in the executives best interest to pump and dump. Billions are paid out every quarter based on the prior quarter performances. There used to be stock option plans with 5 year vesting periods which forced executives to manage the business for long term success. Sure they still have stock similar plans. However, its probably better to manage the business to get tens of millions of dollars today, then possible hundred of millions a few years from now. They can take the tens of millions today and invest. Also, many compensation plans insulate executives from their actions since they get paid no matter what happens to the company. For example, Bear paid out billions to their employees just prior to their failure. Many executives have huge retirement plans which go into effect no matter what happens. We've created the incentives for a pump and dump economy.
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