Friday, December 4, 2009

A few thoughts on the Economic meltdown of 2008

Reading an article on Neel Kashkari in Washington Post today I felt compelled to write on this subject. Kashkari, of Indian origin, shot to prominence when he was tasked with overseeing $700 billion in TARP (Troubled Asset Recovery Program).

By now a linear storyline has emerged in the minds of the populace that a bunch of CEO's in wall street ran the vaunted American economy tanker aground thanks to unbridled 'greed'. The line from Oliver Stone's film "Wall Street" spoken by the character Gordon Gekko, "greed is good, greed works" became oft cited. Nobody cared that the actual line was "Greed, for lack of better word, works". Big difference. St Paul did not say "money is evil", he said "love for money is evil".

Is it even remotely possible for a clique of guys in pinstripe suits to bring a $14 trillion economy, the economy of the only super power, to its knees? When Congress dithered on passing a staggering $700 billion stimulus/bailout plan Ben Bernanke, Fed Charirman, Hank Paulson, Secy of Treasury, lobbied senators behind closed doors. Hearing what they said Sen. Chuck Schumer (D-NY) said "my jaw just dropped". The bottom line message delivered was "no time to play partisan politics, if the bailout does not pass Congress come Monday morning there will be NO American economy". Apocalypse would have looked like a picnic in comparison. When the economists at the Fed looked at the data staring out of their PC screens what they saw was akin to a patient whose blood stopped flowing. The credit markets were simply frozen. Nobody, absolutely nobody, was lending to another person or bank. Credit, the blood and oxygen of an economy, that too of the worlds largest and most powerful economy was simply in a stage of a coma. Banks did not know if the collaterals offered, complex structured securities, where worth anything to be lent against. Nobody believed the credit ratings anymore, credit rating agencies themselves were in a tail spin.

To attribute all of this to simple greed is too simplistic and self serving, especially when mouthed by politicians in the heat of a campaign.

Lets take a small slice of contrarian view. There is furore amongst the Afro-American community that foreclosures have hit them the hardest. Very true. What is conveniently glossed over, if not hidden, is that banks did not dupe them, or at least most of the time. Banks have been compelled by legislation to invest in under served communities, CRA (Communities Re-investment act). Most who applied lacked documentation for income, many would not qualify for loans under normal circumstances. When banks asked for proof's of income and proof of ability to pay etc they ran into rough weather, lawsuits alleging 'discrimination' sprouted, including one by a certain community organizer named "Barack Obama". I am not for a moment suggesting that this was the only reason for the crisis. I just want to shine a light on lesser known but vital components that helped create the mess.

From consumer to politician today everyone rails against banks for 'enticing' gullible consumers with fancy projections of how properties would appreciate and how such appreciation can be tapped into in the form of more loans to finance dreams of cars or just plain re-finance the home. Give me a break. American economy, the capitalist component is based on the premise of 'personal responsibility'. When a guy, family of 5 with 2 daughters in college and gross household income $90,000 buys a home with swimming pool at $500,000 what can one say. Irrespective of any fancy enticement or math wizardry of the house appreciating in double digits the guy is facing the immutable logic of what he can afford. That too when he took a interest only loan betting that when the house appreciates he will re-finance and THEN start paying measly principal, I call it plain "nuts". Yes, the American style of consumerism encourages risk taking. But risk and recklessness are not synonyms. When a well educated young working couple buy a home stretching a bit by 20K or 30K they have a decent chance of coming clean, that's calculated risk but what the guy did was sheer recklessness. CNN once featured a forlorn single mom in Florida lamenting about how she has to foreclose. The camera goes around the home and I saw a pretty swanky well kept home, the kitchen had a Wusthof knife set (retails at $750 at discount). This woman was a realtor too. She had bought a home way beyond her earnings and bought it on a 'interest only" pay option loan.

Amongst the carnage blame can go around sufficiently to how Congressmen and senators sought to use the quasi-federal agencies of Fannie and Freddie to further their own political mileage with constituents. The easy money policies of Fed, under Alan Greenspan fuelled the housing crisis that finally brought America to its knees.

The derivatives market, short sellers, math wizards behind bundling of securities etc all had a role. To blame each and everyone with just greed and malicious intent bordering on calling them as just thieves is sheer stupidity. I've worked for one of the ratings agencies and I've my highest regard for that company as a corporate entity. Companies exist to maximise profits, to deny that is to deny them a reason to exist. Companies innovate to differentiate themselves. The innovations in capital markets were not done to swindle a gullible consumer. That they went awry and need to be reworked is part of being a resilient capital market. America will find its feet again.

CEO's have no joy in seeing their firms get obliterated in a tsunami of crisis. One could comment wryly that the hundreds of millions lost by Lehman CEO Richard Fuld really does not change his life style unlike the thousands who lost their jobs when Lehman went down. Agreed. But to characterise Fuld as some swindler is gross injustice. Thousands of Lehman employees have made a fortune working for Lehman. Also beyond a point its not only about money, imagine the humiliation that Fuld had to endure with jeering crowds carrying placards when he appeared for Congressional hearings. One can only imagine how his ego might have hurt. In the final moments of his company going under he pleaded with all and sundry to save his employees by buying Lehman.

Then there are the conspiracy theorists of how Goldman Sachs alumni control US government. Hank Paulson, ex-CEO of Goldman, had to forgo hundreds of millions in selling his Goldman stocks prior to joining Bush administration. Show me a politician who does that. John Thain who took over Merrill after Stan O'Neil was ousted was excoriated for spending $100,000 decorating his office while company was going down the tube. Note that the crisis which finally engulfed Merrill had nothing to do with John Thain. In fact Thain helped avert a catastrophic event by orchestrating the merger with Bank of America. Contrast that with how Barack Obama behaved. He too inherited a crisis, he too inherited deficits yet he had no problem in taking Air Force one and the presidential entourage to make good on his promise to Michelle for a date night in NYC if they won. Wow....Nero anybody.

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