Originally posted on sciy.org by Ron Anastasia on Tue 22 Apr 2008 11:19 AM PDT
It was 1792, and Wall Street was enduring its first crash. A
speculation in government bonds had gone horribly wrong, and a formerly
wealthy and influential man named William Duer was being chased through
the streets of New York City.
In the end, he was lucky that the sheriff got him rather than the mob. As a result of his machinations, Steve Fraser reports in “Wall Street: America’s Dream Palace,†“real estate prices collapsed, credit dried up, house building stopped.†The decline spread from businessmen to shopkeepers, widows and orphans.
Does that sound familiar?
With the American financial system apparently threatened by paralysis after an era of easy credit that now seems ridiculous and venal at the same time, Wall Street may be about to endure another of its periodic brushes with public scorn and reprisal. Already we have seen the specter of failed executives being asked to explain to congressmen just why they deserved hundreds of millions of dollars for running their companies into the ground. And there are criminal investigations of mortgage lenders, some of whom are already bankrupt, for luring home buyers into taking out loans they could not hope to repay unless house prices continued to soar.
The history of American attitudes toward the financiers of Wall Street, as shown in newspapers, novels and prosecutions, is the subject of Fraser’s book. It’s a remarkable tale, not just for the plain facts of what they did but also for the dramatic swings in their image. Were they heroes or con men, aristocrats or immoral scoundrels? It depended on the era, and to some extent on whether their successes seemed to be enriching the rest of us.
The prosperity of recent years no doubt reduced public anger at the corporate scandals earlier in this decade, in which some of America’s greatest financial institutions profited by enabling Enron to deceive investors; even Warren Buffett’s Berkshire Hathaway took in fees for helping an insurance company seem healthier than it was. “Certainly,†Fraser writes, “compared to the aftermath of the crash of ’29, Wall Street escaped severe censure for its systematic betrayal of public confidence.†The moral outrage, he adds, “seemed tepid compared to what had nearly befallen William Duer.†But can Wall Street’s hold on America’s respect continue now, with the credit markets shutting down and the possibility that millions of Americans will lose their homes? Not if Charles R. Morris has his way.
In his brief but brilliant book, “The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash,†Morris describes how we got into the mess we are in, with bankers making loans that they expected to sell to investors through ever more complex securities. Bond rating agencies and financial insurance companies blessed the process, and Alan Greenspan, then the Federal Reserve chairman, cheered, assuring the public that American regulators would not spoil the party.
“When money is free, and lending is costless and riskless, the rational lender will keep on lending until there is no one left to lend to,†Morris writes. “You logged in the loans, collected your fees and sold them off to yield-hungry investors. The investors were ‘insured.’ Your fees were real money. The loans might even be paid off.â€
“Might†is the operative word. It turns out that the rational lenders were not so rational. They did not know when to stop, and are now stuck with a lot of bad loans and securities that they cannot sell. Some have gone broke. Morris, a lawyer and former banker, as well as the author of 10 books, thinks that by the time all the losses are toted up, from mortgages to corporate loans to credit cards, the total could hit $1 trillion. And that is before considering some risky areas he thinks are as yet unquantifiable.
Few writers are as good as Morris at making financial arcana understandable and even fascinating. Confronted with a report by British regulators warning of a “financial stability level event,†he explains that the language is “civil-service speak for a credit-market Chernobyl.â€
One of the most important aspects
of the financial architecture that is now collapsing was the way it
allowed investors to believe they could make perfectly safe investments
when they financed very risky loans. Or, as Morris puts it, “Highly
rated bonds magically materialize out of a witches’ soup of very smoky
stuff.†He adds, “Very big, very complex, very opaque structures built
on extremely rickety foundations are a recipe for collapse.â€
The collapse is now under way. In recent years Wall Street profits were built on leverage and on taking risks that were obscure both to regulators and even to the top managements of the banks themselves. Every three months now, we see banks disclosing huge losses from risks that they had never admitted they were taking.
No one — not investors, not managers, not regulators — is sure when this process will end. And that uncertainty has created a credit freeze, with lenders reluctant to lend both because they do not know whom they can trust and because they fear they may need the money to cover losses that are yet to materialize. As the recession gathers steam, there are likely to be more corporate failures than there need to be, because credit has gone from virtually free to all but unavailable.
In recent years, Wall Streeters have often been seen as “responsible guardians of the public trust,†wealthy men who could be relied upon to act in the national interest, as J. P. Morgan did in halting the Panic of 1907 when the government seemed powerless to do so. Former chairmen of Goldman Sachs served as Treasury secretary for both of the occupants of the White House in this century.
As Fraser shows, there has been another view, one that may come to the fore if the recession lingers and millions lose their jobs or homes, while those who brought on the disaster remain wealthy beyond any dream available to normal people. “By the time of the American Revolution there was already a robust plebeian resentment of the aristocrat as parasite, a privileged nonproducer living off the hard labor of those he lorded over,†Fraser writes. It has not helped that the financial lords have not always been subtle about their superiority, as when Jay Gould, the robber baron who ran railroads in the late 19th century, boasted he could hire one half of the working class to kill the other half.
It is one thing to be seen as venal but brilliant, and another to be seen as both greedy and stupid. That is the risk Wall Street now faces.
As Fraser says in writing about the aftermath of the 1929 crash, “Wall Street had proved itself not only ethically challenged and dangerously omnipotent but, more damning than that, omni-incompetent.†And he continues: “During the boom years of the 1920s, the white-shoe world of J. P. Morgan had accepted credit for the nation’s good fortune and been portrayed as a conclave of wise men. Now, under the new circumstances of economic ruination, that same world was treated as criminally irresponsible, pathetic even, an object not only of censure but of mockery. And there is perhaps nothing more fatal for the life expectancy of an elite than to be viewed as ridiculous.â€
Floyd Norris is the chief financial correspondent of The Times.
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