I watched “Breaking the Bank” on PBS’s Frontline last night, all about last fall’s economic meltdown, concentrating on Bank of America and its acquisition of Merrill Lynch, with the death of Lehman Brothers playing a key supporting role (I mean it all began with that).
In a nutshell this is basically what I retained, plus some of my own interpretation (and one way to see the program for yourself if you missed it is to Google Frontline):
What with computers and the new way of doing business everything nationwide and world-wide is so interconnected and there is such a symbiotic relationship between the major players and within the whole economy that if one entity goes down, they are all sure to fall.
(Reaching back here into my memory, seems like I read some time back that there was a financial panic in I think the first decade of the 20th Century and fearing that the whole financial system was in jeopardy, was it J.P. Morgan? I don’t know, anyway the big money boys chipped in and worked everything out without the hand of government. Probably even the thought that the government could bail out the private sector was not even there at that time, and regardless, the private sector knew better than to let it go to that. Okay, I checked on that and my instant research indicates J.P. Morgan and monied cronies saved the economy with their money in 1893 and 1907.
Back to Frontline: So Treasury Secretary Hank Paulson last September caught wind that Lehman Brothers was in trouble and that its impending demise could take the whole economy under. He called the big bankers together and urged someone to buy Lehman Brothers. Well these guys did not get where they were by doing something as foolish as that (even if they did trade in highly risky paper), so there were no takers.
Plan B: Paulson and others in the government apparently decided that they could mitigate the effects of the demise of Lehman Brothers if they could get someone to buy Merrill-Lynch, also in trouble and apparently a lot more so than most anyone knew. Conveniently, Ken Lewis over at Bank of America, nowadays headquartered in Charlotte, N.C., always had a dream of doing just that. The modern B of A is really the former NationsBank, southern boys who wanted to show up Wall Street (B of A began in San Francisco, but sold out to NationsBank and destroyed its own honorable legacy with it).
The former CEO of the former NationsBank explains that his bank’s mission was to supply capital for southern “bidness”. As to why they got so big, he explained that in “bidness” you can’t just sit still, you have to grow.
John Thain of Merrill Lynch knew he was in trouble and wanted to at least save his bonus and the bonuses of his high rollers and so the deal was done with B of A over a weekend.
Lewis indicates that he was chagrined to realize that while Merrill Lynch was going under, in subsequent negotiations all Thain and his gang seemed worried about was their bonuses. Even though they had run Merrill Lynch into the ground they all shared some $5.8 billion in bonuses and compensation through those negotiations (and eventually made possible by taxpayer money).
Lewis would also soon find out that Merrill Lynch was in worse shape than he knew.
Now the whole large banking industry (not so much in some of the smaller regional banks) was in trouble over risky sub-prime real estate loans. Once those adjustable mortgages set to a level at which huge numbers of risk-unworthy borrowers defaulted the whole house of cards collapsed.
Why were so many bankers and other investors so imprudent? you ask. Actually in other blogs I have said that I think that it goes something like this: if the other guy is doing something that might seem unwise, but not illegal (unethical perhaps), and is making tons of money doing it, if you are a CEO or whatever, you find yourself either doing what he is doing too or without a job because your board of directors and/or stockholders are going to demand that you produce as much quarterly profits as the other guy (and of course you want to make as much money as you can for yourself), and there is no other way to do it than to do what he does.
I think it was noted that Merrill Lynch was once a conservative brokerage house but it found itself pressured to compete in the high stakes gamble of sub prime mortgages.
Back to Frontline again: so anyway – skipping over many of the details here – at some point (and this was still during the Bush administration you will recall) all the major bankers were called in for a meeting conducted by Paulson and were pressured (intimidated?) into signing an agreement (they still did not have to do it and in fact Lewis now says he wished he hadn’t) to take government money with the idea that it would help unthaw frozen credit markets and accept what amounts to an at least partial nationalization of the banks.
Personally, I feel the government should not have done this. I also feel that if anyone of those guys who signed on now complains, you have to ask him why he signed. No law said he had to. And if businessmen can run things better than the government, then they should do so. But if you sign on to take taxpayer money, you are going to have to accept the strings that come along with it.
Some would say letting Lehman collapse was the big mistake and that it had such a negative impact (the B of A/ Merrill Lynch thing did not soften the blow after all) on the stock market and the economy that it proves the government had to step in.
I don’t even pretend to know the real answer to all that. I can only surmise that it would have been better to let the private capitalists work it all out. They know that a collapse of the system means their own demise. Necessity is the mother of invention. For nothing more than self-preservation you would think they (the capitalists) would want to save the system. If the government had not interfered with the natural course of the markets perhaps they could have corrected themselves.
That’s kind of water under the bridge now. But it seems to me that we need to move away from government being the lifeline of business. Only business can produce the prosperity that in turn produces the revenue for government. Both the business sector and the public at large depend upon government for the framework and support of our whole society and the service and protection it provides. Business owes government, government should not owe business.