But Lehman’s demise was only one manifestation of the financial and liquidity crisis that engulfed the entire world—banks failed, stock markets tanked, and almost everyone lost money. No type of investment was spared price depreciation: from stocks to bonds, from commodities to real estate.
On the same day that Lehman collapsed, another Wall Street titan, Merrill Lynch & Co., sold itself to Bank of America Corp. A day later, the U.S. Treasury gave $85 billion in taxpayer funds to insurer American International Group, Inc. to avoid a catastrophic domino effect that could have wiped out the entire U.S. financial sector.
But the rest, as they say, is history.
“I’m playing the hand that was dealt me. A lot of what I am dealing with (is) the consequences of things that were done often many years ago,” former Treasury Secretary Henry Paulson said at a press conference on Sept. 15, 2008.
What Have We Learned?
There were many factors that led to the crisis—many of which will soon end up as case studies at B-Schools. The number one lesson we have learned from the past year or so is the danger of greed.
During the boom years, asset prices rose across the board, igniting bank executives to take greater risks for even bigger rewards. The culture of excess was pervasive—lenders gave loans to unqualified borrowers, banks took on excessive leverage to boost returns, firms used “off-balance sheet” entities to bypass regulators, and traders peddled exotic derivative instruments to drive bigger markets, more risk-taking, and larger profits.
Oh sure, there was risk management at all financial institutions. But the assumptions used to manage risk only factored in isolated incidents, not systemic meltdowns. And many hedging (protection) strategies employed by banks involved using those same financial derivatives that became useless in a liquidity crunch.
What to Expect in the Future?
• Inflationary pressures. Many economists feel that as soon as the U.S. economy recovers, the Federal Reserve will have another problem on its hands—runaway inflation. The U.S. government has taken on a tremendous amount of debt—almost $45,000 owed for every man, woman, and child in America—that cripples the U.S. dollar. In addition, central banks around the globe are printing money, lowering interest rates, and altogether loosening up monetary policy—all of which will lead to inflation and high commodity (i.e., gold) costs. The only silver lining lies in that other nations will experience a similar plight that could cushion the dollar.
• Commercial real estate trouble. The bankruptcy of commercial property developer General Growth Properties served as a warning bell. The commercial mortgage-backed securities market is still frozen, and commercial mortgages are seeing signs of rising defaults.
• Unwind of government bailouts. “As we enter this new phase, we have to begin winding down programs that are no longer necessary and that, by design, are less needed, less important, as the economy recovers,” Geithner told the House Oversight Committee last week. As a start, the federal money market guarantee program is set to end later this month.
Financial Power Brokers of Today and Tomorrow
• Robert Diamond, CEO, Barclays Capital. The Massachusetts-born banker is CEO of British investment bank Barclays Capital, and was instrumental in Barclay’s acquisition of the North American assets of Lehman Brothers. Barclays recently sold Barclays Global Investors asset management firm to BlackRock for $14 billion.
• Jamie Dimon, Chairman, JPMorgan Chase & Co. The Citigroup alum and former Bank One executive oversees one of the healthiest and most powerful banks on Wall Street. He’s on Time Magazine’s 2009 list of 100 most influential people and is a board member of the New York Federal Reserve Bank. Dimon is an ally of President Obama and is one of the most charismatic figures in the financial sector today.
• Laurence Fink, CEO, BlackRock. The 57-year old Fink is a pioneer of today’s mortgage-backed security and the founder of the world’s biggest asset management firm. BlackRock oversees almost $3 trillion in capital, and is a key advisor to the Federal Reserve on numerous fronts, including the Termed Asset Loan Facility (TALF) to support issuances of asset-backed securities.
• Kenneth Feinberg, “Special Master of TARP Compensation.” President Obama’s “Pay Czar” will decide what executives—and their managers—at AIG, Bank of America, Citigroup, and General Motors Co. will earn in the foreseeable future. Currently, much of Wall Street’s power lies in Washington, and Feinberg can help reshape the industry’s compensation structure.
Friends Read Free