Archive for October, 2008
October 30th, 2008
I watched the Detroit Red Wings advance to the Stanley Cup playoffs this year.
In one of the final games, a furious battle over control of the puck went on for several minutes. It was frenzied, nail-biting, heart-pounding. In sports-time, particularly hockey-time, minutes like those are lifetimes.
Finally, one of the announcers, who had been involved in his own fight to stay on top of the action, took a quick breath.
“Would somebody please call a time out?” he chuckled helplessly before jumping back into the fray.
I’ve been feeling the same way lately.
As the Bush administration scolds banks — it can’t do much more — that accepted federal bailout money but aren’t loaning it to other banks, as once-respected companies teeter on the brink before falling into ignominy, as Wall Street careens recklessly toward scorched earth one day and untold prosperity the next, it’s enough to leave your average business editor breathless.
But I need a time out here. Because I need to revisit something.
Lehman Brothers Holding Co. I almost feel bad about it.
Almost.
The federal government held its breath and rolled the dice on that one, not swooping in at the last minute and bailing out what had been the fourth-largest investment bank on Wall Street.
It allowed the 150-year-old bank to fail. And so far, it’s the only one of the big boys the feds have refused to help, either by throwing money at it outright or giving money to another bank to sweeten its purchase.
Lehman filed the biggest bankruptcy case ever in mid-September.
But what made Lehman so special? Why was this one company allowed to fail when so many others have been propped up by the feds?
Put simply, the feds made the same mistake they always do. They looked at the problem in front of them — the company itself, not the contagion engulfing Wall Street. They figured that the mighty bastions of Wall Street would recover eventually.
They also wanted to set an example — play with fire at your peril — and a loss like Lehman could probably be absorbed.
In other words, they were relying on Charles Darwin’s survival-of-the-fittest theory.
In retrospect, it might have been a little short-sighted on the feds’ part.
Darwin’s theory is a good one only if we assume that cutting the sick wolf from the pack will prevent the demise of the rest.
Thus the government’s assumption: In down times, companies that aren’t strong enough will fail. In fact, they’re supposed to fail.
The Treasury Department assumed that the herd would weed out the weakest and sickest to preserve the health of the many.
Sadly, Wall Street — and, it appears, the folks at the Treasury Department and the Federal Reserve — didn’t read their Darwin. They certainly weren’t reading their balance sheets.
Lehman has too many tentacles. It was one of the biggest dealers in the credit-default swap market, not to mention mortgage-backed securities. And every firm with which it had ever been in cahoots was already looking sickly because of the weakness to which it eventually succumbed.
Darwin applies only when the wolf pack is made up of mostly individual units — like a hockey team. Lose one member and the pack is at a disadvantage, but it won’t fall.
When a company plays fast and loose with its investors and its money, it will fail. It happens every day.
Only the unchecked inbreeding of the world’s financial firms, with the exception of Lehman, is saving them from abiding by the laws of nature.
They may be comforted by this knowledge. I can’t be.
Because of it, companies that should fall will still be alive a year from now, sucking up free money courtesy of the American taxpayer and preoccupied with business as usual.
But “survival of the fattest” is always a doomed proposition. Need proof? Allow me to present the global economy, which can’t seem to right itself after gorging on the fat of the previous decade.
If they don’t learn, the business practices that brought them low will dominate again. Just before they need another handout from the government.
October 27th, 2008
Published Oct. 27:
Dollar stores and discount retailers are reporting mostly positive earnings these days as skittish consumers retrench.
I find some rampant ironies in this.
Not in jittery consumers, of course, or the relative good fortune of certain retailers amid a teetering economy and the ongoing histrionics of Wall Street.
But as we pinch our pennies — a sensible response in such an environment, it seems to me — the government is giving away as many as it can, as fast as it can … more than $1 trillion and counting (that’s a lot of pennies) to make sure the people who drove us to dollar stores are still around to see tomorrow.
Once again, your tax dollars are hard at work as the Treasury Department, the Federal Reserve and Capitol Hill fight over which one gets to hand out the most taxpayer money to the fattest cats in the financial sector.
Oh, and let’s not forget the fat-dumb-and-happy guys who are busily cashing multimillion-dollar paychecks while we stare numbly at the stuff on Wal-Mart’s shelves.
That’s stretching reality a little thin, but it sure sounds outrageous, doesn’t it? I get mad just thinking about it.
Don’t get me wrong — I’m all for the $700 billion bailout plan Congress passed this month, for admittedly selfish reasons.
Without it, it would have taken a good many years for the economy to right itself. Companies and banks in untold numbers would have fallen — maybe rightfully so — but it would have protracted the situation in which we now find ourselves.
If one fell, we probably could have weather the storm. But the storm has grown to mythic proportions, and nothing short of divine intervention will subdue that tempest.
Enter the U.S. government — not exactly divine, but the only earthly presence with the power to march in after the fact and try to jump-start the markets before the rest of us all move to Canada.
And $700 billion is just the tip of the iceberg. Don’t forget, the government first stepped in back in March when the first rescue package was announced — a $29 billion loan to JPMorgan Chase & Co. in a sweetheart deal so Morgan could buy failed investment bank Bear Stearns. Whose executives, by the way, are still under indictment.
Eight months later, $29 billion almost sounds like cab fare, doesn’t it? After weeks of being pummeled by dollar figures so astronomical they’re impossible to fathom, the money we paid to help JP-Morgan buy another company is just … well, cute.
And therein lies the danger. This is real money. Our money. And when it becomes meaningless — understanding $700 billion in any real or meaningful way is like trying to swallow a doorknob — it opens the door to all sorts of unintended consequences.
We are, for the most part, comfortable blaming old-fashioned greed as one of the biggest contributors to this crisis. Can you just imagine what kind of greed kicks in when we start handing out this much free money?
October 27th, 2008
Published Oct. 26:
By now, you know better than to watch the stock market, I hope.
The ugly reality of Wall Street, where the Dow Jones industrial average closed Friday at its lowest finish since the financial crisis began six weeks ago, only reminds us that some of the $7 trillion the market has lost was ours.
Since the Great Tidal Wave of Irresponsible Subprime Mortgages first crested some two years ago, we’ve been battered by one wave after another, each made up of mysterious and exotic-sounding financial whatchamacallits: auction-rate securities, credit default swaps, commercial paper, Alt-A mortgages, collateralized debt obligations and still more subprime mortgages.
And if you look to the horizon, you’ll see another wave coming at us. Fast.
This time, it’s credit card debt. More than $960 billion worth of poisoned plastic powering down on us.
And it will threaten the few banks and brokerage houses that remain solvent. Bank of America, the nation’s second-largest issuer behind JPMorgan Chase, said some $3 billion of its $184 billion credit-card portfolio has soured, a 50 percent increase from a year ago. And American Express, which targets wealthier borrowers, has increased its provision for credit card losses from $810 million to $1.5 billion.
Some estimates call for credit-card issuers to take a $40 billion hit this year and another one, worth $90 billion, in 2009.
And that’s before hedge fund managers start counting the losses from the more than $350 billion market for credit-card-backed securities. C’mon — you didn’t think the Wall Street of the last decade would let innocent debt lie without trying to trade it in some fanciful new way, did you?
Hey, it worked with mortgages. At least, until it didn’t.
And while credit card debt is worth only a fraction of the mortgage market, it’s going to hurt. Because when the debt goes bad, there are no assets to seize to offset the loss.
Oh, and the $700 billion mortgage bailout? No help for credit-card issuers.
In other words, pay off your credit cards and watch your interest rate. Because when more cries for more bailouts reach the government, the burden will once again fall on us.
October 27th, 2008
Published Oct. 20:
We haven’t even gotten past Halloween yet, and hopes for a season of economic holiday cheer are already fading.
The National Retail Federation is expecting a 2.2 percent rise in November and December sales. It’s the lowest growth since 2002.
That’s not great news for a sector used to logging 4.4 percent gains year over year.
But if I were a retailer, I’d be uncorking the champagne. A rise! After months of news about higher jobless rates, dismal housing stats, confusingly high oil prices, tanking home values and a financial crisis worthy of a Steven Spielberg drama, I’m surprised that shoppers aren’t heading for the hills in record numbers.
But as I’ve said, we are optimists at heart.
Well, we are consumers first and foremost — for the time being, at least. As I’ve also said, it’ll take a while for most of us to break the habit of easy credit and easy buying. And it looks like we aren’t necessarily shying away from buying for the holidays.
There’s at least one bright spot, according to NPD Group Inc., a market research firm. One you probably never expected.
Just one word: sunglasses.
“The younger market is all over them, and the bigger the logo, the better. They are the most sought-after item by young adults. Sunglasses will be this year’s handbag,” NPD’s chief industry analyst, Marshal Cohen, says.
I hate to think I missed a trend here, but what was last year’s handbag? Or was the handbag the thing that replaced … whatever the previous year’s Really Big Thing was?
I feel so out of touch. But NPD is so bullish on sunglasses, it’s calling it the “sleeper” category.
The projected success of another category makes more sense to me: televisions.
This is the last year for analog TV reception, and consumers probably will want to buy new digital sets and avoid all the nuttiness with converter boxes and so on.
Still, if you’re a retailer — or anyone who sells anything to anyone — be prepared to push hard for the upsell.
“For the first time I am predicting flat to declining sales for the holiday season,” Cohen says. “With consumers already saying they plan to spend less, stores with lean inventories, those inventories on sale as soon as they hit the floor, and tightening credit for businesses and consumers, where can growth come from?”
And credit card spending is expected to fall with the roiling financial markets. Banks are offering fewer cards and they’re not extending credit like they used to.
“Consumers will be keeping careful watch on their credit card spending this season,” Cohen says. “I think many will refrain from purchasing an indulgence or splurge gift, and for the first time in years may actually cut people from their shopping lists.”
And gift cards, those darlings of the retail market, may take a hit this year, too. With companies like Linens ‘N Things liquidating their stores, consumers are hesitant to buy stock in a company that may not be around in a year or so.
Only 38 percent of NPD’s survey respondents said they will buy a gift card this year, while nearly 50 percent said they bought one last year.
Speaking of holiday worries … if you’re hoping to snag a little temporary work at shopping malls and department stores, it will probably be harder to find. Another survey said the average number of seasonal workers each manager plans to hire for the holidays is 3.7 people, down by 33 percent from last year’s average of 5.6 workers.
Mount Morris loses again
Certainly residents of Mount Morris (population 3,013) and its once-vibrant publishing industry aren’t feeling any love as we head further into the fourth quarter of what has been a financially grim 2008.
The New York-based parent of Kable News Co. announced plans this month to move the vast majority of the work done in Mount Morris to the Sunshine State by 2010.
The announcement by Amrep Corp. means Ogle County will lose more than 425 jobs.
It’s the village’s third blow in two years. Last year, Quebecor World Inc., which has a massive printing plant with 700 workers, filed for Chapter 11 bankruptcy protection, and the privately owned Watt Publishing, which was started in Mount Morris in 1917, moved its headquarters and about 70 employees to Rockford.
It makes sense. The company is cutting costs by combining its operations in Colorado, Illinois and Florida. The Florida operation has the largest subscription base and number of employees.
But that’s cold comfort to workers facing the unemployment line.
And it’s none at all to the village, which will lose out on the revenue those 400 workers generated.
Like Alije Dauti, whose restaurant is right across the street and relies on those workers and their lunchtime appetites. With that one announcement, her status may have changed — from small-business owner to statistic — in one fell swoop.
Alex Gary spent the day in Mount Morris to find out what residents think of the news. Read his story on Page 12.
October 27th, 2008
Published Oct. 19:
Sometimes, when you’ve been rich and in charge for too long, you tend to forget the way the rest of the world thinks.
I have known a few people who, in their own little fiefdoms, have become forces of their own making. Just ask them.
They don’t suffer criticism or having their ideas challenged. Hey, they’re rich and in charge.
If anyone raises concerns about the way they’re running things, they tend to brush it off, safe in the knowledge that they are bigger, faster, stronger, richer and more in charge than the other guy.
It happens to the U.S. a lot. When it comes to being rich and in charge, this country wrote the book.
I remember about five years ago, when our leaders made their case against a small, nondescript Middle Eastern country, then immediately drew swords and charged, content in the knowledge that our friends would be charging right behind us. “Once more unto the breach, dear friends!” we cried in stentorian majesty.
We only wheeled when we failed to hear their rousing battle cries behind us.
And instead of beholding a glorious army committed to the cause, we saw a bunch of scowling Europeans, arms folded, feet planted.
We charged in anyway. It takes a while to relearn humility, even if we had been inclined to do so.
Fast forward to 2008, where that singular mindset is manifesting itself again. This time, however, the rich-and-in-charge guys live on Wall Street. And the humility thrust upon them is bitter.
They are lining up at the door of the Treasury Department like the unemployed in a Depression-era soup line.
But despite the billions of dollars the government has promised — don’t for one minute think we’re getting off the hook for the paltry $700 billion bailout passed by Congress this month — the payout is going to be slow in coming.
Here’s the greatest irony of the black comedy playing out these days: Any bank that cashes a check from the feds must put the money back into the market immediately, either in lines of credit or through acquisitions. The idea, of course, is to unclog the flow of credit in the markets and get money moving again.
But no bank wants to do that because the fraternity and backslapping of Wall Street on a good day has given way to suspicion and doubt. With good reason.
Bank A suspects that poisoned loans are eating a hole through its books, but it isn’t opening them to find out — it doesn’t know what those securities are worth, anyway, so it doesn’t make much sense to estimate the danger. Right?
I suppose it makes a twisted kind of sense — more so than actually buying the securities in the first place.
So Bank A officials wait, holding tightly to every dollar. They may need it. If it turns out they don’t, then they’ll start lending again. But for the time being, they figure, safe is better than sorry.
And because they have an idea what’s in their vaults, they figure Investment Bank B or Company C is having the same problem, maybe worse.
But no one knows which companies are the most heavily leveraged. And they have no intention of saddling themselves with more bad debt, which they might be doing if they give some of the money to Bank B. So they wait.
And despite the orders from Congress, they’re only going to lend sparingly.
Kind of makes you wonder who’s in charge anymore, doesn’t it? The more I think about it, no one is — except maybe the poisonous debt holding everyone hostage.
October 27th, 2008
Published Oct. 13:
After the hubbub of the past few weeks, as Wall Street and the world’s financial markets convulsed, I have to admit, I’ve been nostalgic for the good old days.
Say, a year ago.
When Rock River Valley residents were getting a little nervous because the price of a gallon of gas was inching close to $3. Or watching as the local real estate market took a little tumble. Almost overnight. A “market correction,” or so everyone thought.
Sadly, they were right.
Make no mistake, however: The market hasn’t even begun to correct itself. It will, without question. But if you’ve just driven off a cliff, it’s darn near impossible to correct all your bad driving habits before you hit the ground.
Who could have known that the little tumble in the local housing market would become one of the grandest gymnastics displays in modern history? Who knew it would have snowballed into the situation in which find ourselves today?
I’d argue — in fact, I have, as you already know, Faithful Reader — that somebody could have.
I recognize the danger in regulating private businesses. And generally, I’m against it.
Unfortunately, all of us now recognize the danger when Wall Street moguls are allowed to act like the children running roughshod in Willie Wonka’s chocolate factory. And I’d argue, in this case, it wouldn’t be regulating. Let’s name it correctly: baby-sitting.
To be fair, the damage incurred by Wall Street and the global financial markets was years in the making. Even if someone had taken a closer look at Wall Street’s account books a year ago, we’d still be in the pinch we are today.
The world’s finances, in other words, amount to a ship that’s just too cumbersome to turn quickly. It’s a pity, in retrospect, that you and I are paying more than $800 billion for a steerage cabin on the Titanic. After it sank.
Smaller enterprises, on the other hand, are a great deal more agile. It’s one of the greatest strengths I’ve noticed among Rock River Valley companies: the willingness to see danger — or opportunity — approaching and either get out of the way or hang on for the ride.
I most humbly submit, for inclusion in the latter category, the magazine you are holding in your hands.
A year ago, the Register Star embarked on an ambitious project to inform, acquaint and connect businesspeople throughout the Rock River Valley.
I wasn’t the business editor at the time, so the headaches and upsets that invariably accompany the launch of a new publication were, happily, someone else’s job.
I showed up six months later, when the weekly magazine, BusinessRockford.com, and its sister Web site were revving on all cylinders. It was an impressive production. At least I was impressed.
The information contained in its pages represented the best of the business world in the Rock River Valley: who was winning, who was losing, who was moving up, who was moving on. My respect for local businesses was earned because of what I learned in the magazine’s pages.
And now, a year into it, we’re making a few changes. And, not to show up Wall Street or anything, we’re expanding.
You’ll find more business news in each issue — but with the same sharp focus on the Rock River Valley. We’ve grown our audience, so the magazine will be distributed free to 20,000 readers through direct mail, home delivery and retail outlets.
You may not be familiar with it. Yet. But I have every confidence you will be.
October 27th, 2008
Published Oct. 6:
When my grandmother decided to sell her house a few years ago, the family got together to help her clean the place out.
When we were finished, we had assembled the usual collection of furniture, clothing, bric-a-brac and mementos collected over more than 80 years.
Then we ventured into the attic, where a surprise awaited: Distributed carefully among the old paintings, dusty steamer trunks and broken appliances and furniture from decades past — they no longer work but, you never know, might come in handy someday — were dozens of coffee cans stuffed with money.
Thousands of dollars, as it turned out.
After about 10 seconds of puzzled glances, we realized what we were looking at.
Insurance.
A child of the Great Depression, my grandmother remembered the terrifying days of the 1930s, when thousands of banks failed, taking the life savings of my great-grandparents with them. When the unemployment rate reached nearly 25 percent nationwide and many remained out of work for years. When lenders foreclosed on untold numbers of homes and farms. When expendable income became a distant dream and shoes were only bought in winter — if they were bought at all.
She had been squirreling money away for years, ever since she had landed one of the thousands of good-paying manufacturing jobs that sprang up in the wake of World War II.
She had no education beyond high school, and was gentle and generous to a fault. But she clearly understood one of the fundamental rules of finance: Make the most of the good years, because lean times are ahead.
I’ve been thinking about her a lot lately, as Wall Street banks and investment houses fall from grace and various federal officials — notably Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke — try to effectively convey the urgency of the Fed’s ever-growing intervention on behalf of thousands of U.S. companies teetering on the brink of collapse.
Grandma, you see, had one significant advantage over the financial wizards who helped engineer this crisis: She was there. She might not have understood all the complexities that led to the collapse, but she remembered. And she had a healthy respect for the harsh lessons taught in that terrible, grim decade.
She allowed banks to hold most of her money. But she never trusted them.
I think the problem is that we humans just don’t live long enough.
We keep forgetting, from one decade to the next, that too much corporate and individual debt will eventually overwhelm us. It helped bring about the Great Depression and has played a significant part in every economic downturn since … well, since the first vestiges of the modern economic model appeared in the waning years of the 1800s.
The guys trying to make a fast buck by coming up with more and more outlandish mortgage payment schemes had no respect, ultimately, for the people to whom they were offering the mortgages.
The guys who snapped up the mountains of new mortgages and dreamed up the exotic financial instruments that eventually led to the collapse had no experience with the consequences.
The average Wall Street genius was just graduating from college — some of them from high school — during the last major recession. They might have been card-carrying members of the Young Republicans, but they weren’t there.
They didn’t feel the chill or taste the bitterness.
Not until recently, anyway.
What, I wonder, will they do now that they have? Will they do as my grandmother did, teach that fundamental rule to future generations?
More to the point, will future generations listen?
October 27th, 2008
Published Sept. 29:
The most oft-quoted legislator last week was Sen. Jim Bunning, a Kentucky Republican who called the Bush administration’s $700 billion bailout plan for Wall Street “financial socialism and un-American.”
He’s half-right.
It’s part of the socialist agenda — everyone should benefit from capitalism as long as the free market is controlled. In this case, by the federal government. Funded by you and me.
But it’s hardly un-American.
In fact, it’s a rerun. In 1933, the Roosevelt administration created the Home Owners’ Loan Corp. to buy $3 billion — that’s a cool $47 billion or so in 2008 dollars — in bad mortgages and refinance them to homeowners to stem a rise in foreclosures. The government even made a profit on the deal.
Actually, the government has a long and storied history of stepping in when capitalism runs amok, more than a dozen times in the past 80 years. In 1989, the Resolution Trust Corp. was created by Congress to take over bad assets after the collapse of the country’s savings and loans.
So far, the only thing President Bush’s bailout plan has created is a lot of noise.
But despite all the harrumphing on Capitol Hill, the rumpus and ballyhoo from Wall Street to Main, the real problem is that no one can say whether it’s a good idea. That’s because no one, least of all the financial geniuses who got us into this mess, knows whether we’re getting a solid bang for our 7 billion bucks. No one, in other words, has any idea what we’re buying, what it’s worth, what we’re getting ourselves into or what it will look like when the dust settles.
But make no mistake. It has to be done.
Think of it this way: Wall Street is a lonely country road, lined on both sides by telephone poles, strung together by the phone company’s heavy-duty cables.
Nobody has paid much attention to this little road, particularly those charged with making sure it doesn’t get into any trouble, because it hasn’t gotten into any trouble. Hey, no news is good news, right?
Then one of the poles falls over. A crew is dispatched to shore it up before it puts too much pressure on the poles around it.
But by dangling, even briefly, it has already put stress on its companions. The entire interconnected line is thrown off kilter.
Another one falls. The crew leaves the first pole, which they’re pretty sure they’ve repaired, and runs to the other one.
Then another goes, and another — and this one manages to take out an electrical transformer, too. Suddenly, the neat, orderly line of telephone poles begins to look a little sinister.
The crew has a choice. It can leave the pole it’s fixing and move on to the others, but the latest repair won’t be particularly sturdy. In the end, it could do more harm than good.
In the meantime, no one has bothered to look for the source of the trouble. They’re too busy fixing the symptoms to see that the poles are rotting from the bottom up.
Once they see it, however, they move fast. Before any more of the poles fall, they decide to shore up the entire line while they replace the faulty poles.
That, my friends, is what happened on Wall Street. And the federal government is the only place left to turn, the only entity with the financial clout to clean up the debris and start over.
Leaving the geniuses on Wall Street to their own devices — letting them sort out the mess they’ve made — is a grimly satisfying picture. But at this point, they’re not the problem. In fact, they have deftly taken their problem and made it ours.
And the effects — housing losses, job losses, credit losses and one heck of a money pinch — will be felt for decades.
It took at least six years to unravel all the threads of the S&L debacle, and that was only with the help of $125 billion — $200 billion today — from taxpayers.
“I share the outrage that people have,” Treasury Secretary Henry Paulson told the Senate last week. “It’s embarrassing to look at this. I think it’s embarrassing to the United States of America. There is a lot of blame to go around.”
October 27th, 2008
Published Sept. 22:
For the sake of argument, let’s assume you don’t vote.
There are millions upon millions of people who don’t. Those who do? Usually about 25 percent of the population. Thirty percent to maybe 40 percent when it’s a presidential election.
So I feel fairly safe in assuming that at least one of you doesn’t.
But I’ve finally found the reason you should — the proof you need that your vote, in fact, counts. I’ve actually uncovered several billion reasons.
Once again, may I introduce Wall Street.
The brain trust of the country’s beleaguered financial markets is learning a harsh lesson this year. (Well, no. They’re probably not, in point of fact, actually learning anything.)
But we can, even if they never do. And that’s our real, fundamental importance to this country. And best of all, it doesn’t rely on lofty and noble rhetoric.
No high-minded blathering about how precious is the right to vote, how it involves things like duty, privilege and right. About treasuring your freedoms and the republic in which you live. Which, in the interest of full disclosure, I believe.
None of the dithering about how one vote — yours, presumably — can change the outcome of an election.
No, this is about what happens when hundreds of thousands of us start talking with our pocketbooks. Or, more precisely, stop talking with pocketbooks.
Like, for example, when we walk away from mortgage payments we really couldn’t afford in the first place.
I think we sent Wall Street one heck of a message, even if it appears to be a law of unintended consequences.
As of this writing, several of the country’s most storied financial institutions were either remembering their humiliating falls, actually falling, planning their downfalls or still able to work feverishly to avoid it.
In order, just in case you haven’t been keeping a list: Countrywide Mortgage. Bear Stearns & Cos. Fannie Mae, or the Federal National Mortgage Association. Freddie Mac, or the Federal Home Mortgage Corp. Lehman Brothers Holding Inc. Merrill Lynch & Co. American International Group. Washington Mutual. Goldman Sachs.
Titans of business all. At least, they used to be.
They thought they were being smart, packaging the never-ending stream of home mortgages into complex instruments they could trade. They thought they were being resourceful, creating previously unknown and largely irresponsible mortgage options.
Wall Street’s inability or unwillingness to foresee the storm took them the rest of the way, and their desperate attempts to right their ships came far too late.
By the time they really bothered to notice the danger, the tiny wave in the middle of the ocean had grown to monstrous proportions and, in the end, swamped their unsinkable ships.
But make no mistake. Greed, with a healthy dose of Wall Street flimflamming mixed in, actually created their troubles, but the humble American taxpayer made it all possible.
Imagine the chaos in the political world if everyone who defaulted on their mortgages exercised their right to vote this year. Talk about sending a message.
October 27th, 2008
Published Sept. 15:
Just so you know, this isn’t the column I planned to write this week. In fact, it’s the fourth.
But of all the hullabaloo in the financial markets of late, this one is by far the most significant — certainly the most foreboding.
The original column was about recessions — what they are, how to get there and how to identify one once you’re in it. Given the state of things, it seemed relevant.
Then came the recent call to challenge your property assessments in Winnebago County. Just announced, it seemed particularly timely.
Both became less so last week. I abandoned them after Treasury Secretary Henry Paulson announced the federal bailout of floundering mortgage giants Fannie Mae and Freddie Mac. There’s a lot of confusion about the two companies and their roles in the overall economy, it seems. I can deal with that later, too.
All of it paled next to another Wall Street announcement last week. It didn’t get anywhere near the attention that swirled around Fannie and Freddie, but I fear it will prove far more consequential:
Kerry Killinger is out of a job. As of last Monday.
His isn’t a name you would immediately recognize, and anyway, it’s not the important part. The important part is the timing of the announcement.
Killinger is the now-former CEO of Washington Mutual Inc. The nation’s largest savings and loan gave him the boot a day after Paulson’s announcement.
Not that his board of directors didn’t have cause. WaMu shares have fallen nearly 90 percent since July 2007. The thrift has lost nearly 70 percent of its market value this year alone.
But it sure took them long enough.
Three other major banks made the move months ago. Merrill Lynch & Co.’s Stanley O’Neal and Citigroup Inc.’s Charles Prince were forced out nearly a year ago, when their banks’ respective portfolios — led by collapsing mortgage-backed securities — fell off a cliff. Same at Wachovia Corp., although CEO Ken Thompson managed to hang on to his job until June.
About the same time, WaMu’s board finally responded to investors’ dwindling confidence in Killinger’s leadership and stripped him of his chairman title.
A thrift, remember, is strictly a retail bank — it handles consumer business, like, say, checking and savings accounts. And it counts much of its wealth in the strength of its — you guessed it — mortgage loans.
Makes me wonder what the WaMu board was waiting for.
Why fire Killinger now? If the man was trustworthy — and I use the word cautiously — enough to lead the company this far through the crisis, closing the barn door at this stage seems a little counterproductive.
But they can read. And the writing on the wall is only getting bigger.
The house of cards that Wall Street built is about to come crashing down, and banks will face their real comeuppance.
And, once again, we’ll be forced to pick up the tab because only our rich Uncle Sam can deal with the global consequences of the collapse of the big investment banks.
Certainly it’s already started. Fannie and Freddie are just the tip of the iceberg.
The day after Killinger got his pink slip, investment bank Lehman Brothers faced a run on its stock because it doesn’t look like it will be able to raise the capital it needs — a tune hauntingly like that of Freddie Mac.
The Detroit Three have joined the chorus, too — a bill working its way through Congress would commit billions in low-interest loans to General Motors Corp., Ford Motor Co. and Chrysler LLC.
The Federal Deposit Insurance Corp. has called on the feds to keep an eye on banks — and the paltry amount of money the FDIC has in reserve to insure the funds held by failing banks.
With all of those headlines competing for space, it’s not surprising that WaMu’s announcement was greeted with a yawn. It’s just another CEO termination, after all.
Unless it isn’t. Unless the board thinks it may need to justify help from Uncle Sam.
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