Financial Ruin and the Race to Contain It

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Als ik het onderstaande lees, kan ik een vergelijking met de handelwijze
van de CIA maar niet van me af zetten.
Tegen beter weten in met een beleid/visie doorgaan, totdat de hemel naar
beneden komt.

Uiteraard beide onder dezelfde leiding (kun je dat nog leiding noemen, of
is het welbewuste misleiding?).

Hoe kan het dat al deze signalen niet hebben geleid tot een herziening van
het beleid? Tot opstand van de kiezers/het volk?
Hoe kan het dat al deze signalen niet veel meer werden benadrukt in de pers?

Hoe kan het dat mensen uit een omtrek van honderden kilometers afkomen op
periodieke gratis medische verzorging, in het land van overvloed? Om maar
van die rottende kies, of erger, verlost te worden.

En om dan dichter bij huis te blijven: Hoe kan het gebeuren dat de
medische kosten in korte tijd de pan uitrijzen? Wat is de rol van 'de
politiek' hierin?

Veldslagen worden er in de 2e kamer geleverd over bezuinigingen van €15
miljoen, terwijl bedragen van €600 miljoen kado worden gedaan aan
leveranciers van palmolie/energiebedrijf (door iemand die n.b. de
achterbank van een Prius niet groot genoeg vind voor zijn status!), en
€400 miljoen aan leveranciers van Tamiflu. Wat is de rol van de politiek
hierin?

Groet / Cees

http://www.nytimes.com/2009/07/21/books/21kakutani.html
July 21, 2009
Books of The Times
Inside the Meltdown: Financial Ruin and the Race to Contain It
By MICHIKO KAKUTANI

A year ago it would have been hard to imagine a book about the Federal
Reserve and Treasury Department making it onto people’s must-read summer
reading lists. But the financial calamities of last autumn put the global
economy on the brink of disaster and led to continuing fiscal woes.
Understanding what happened has become vitally important not just for
bankers and economists, but for everyone affected by the fallout, which
means ... well, just about everyone.

For all of us then, David Wessel’s new book “In Fed We Trust” is
essential, lucid — and, it turns out, riveting — reading.

In these pages Mr. Wessel, the economics editor of The Wall Street
Journal, chronicles how the Fed chairman Ben S. Bernanke, with Henry M.
Paulson Jr., then the Treasury secretary, and a small group of associates,
frantically worked to shore up the United States economy, capturing how
this handful of people — “overwhelmed, exhausted, beseeched, besieged,
constantly second-guessed” — tried to catch and stabilize one toppling
fiscal domino after the next.

In this volume Mr. Wessel uses his narrative gifts and a plethora of
sources to give readers a vivid, highly immediate sense of what transpired
in last-minute, high-pressure, seat-of-their-pants meetings in Washington
and New York while placing these events in a broader historical context.
He examines the Fed’s increasingly important (and increasingly debated)
role as an economic first responder, looks at how personality and personal
philosophy can inform policy making and offers a concise explication of
the causes of what he calls “The Great Panic.”

At the same time Mr. Wessel assesses the efficacy of Fed and Treasury
moves — which, in the heat of battle, were often improvised and
contradictory — and offers a telling analysis of decisions made on
critical matters like the implosion and rescue of Bear Stearns in March
2008, the failure of Lehman Brothers in September 2008 (after the Fed and
Treasury Department declined to commit public funds to support the
institution), the bailout of A.I.G., and Congressional passage in October
of a $700 billion economic bailout package.

His overall assessment: “Every time officials at the Treasury or the Fed
thought they finally had gotten ahead of the Great Panic, they turned out
to be insufficiently pessimistic. This would be a distinguishing
characteristic of this chapter in American economic history: even when
officials thought they were planning for the worst-case scenario, they
weren’t.”

Three policy makers in particular receive low scores from Mr. Wessel. He
argues that Mr. Paulson’s abrupt changes of course and failure to
understand “the theater” of crisis management hurt his credibility and
undermined public confidence. He says that President George W. Bush was
“largely a spectator” to “the biggest threat to American prosperity in a
generation” possibly because he knew how unpopular he was and figured “he
would make Paulson’s job tougher if he appeared to be calling the shots”
or because the Bush White House, “stumbling through its last few months,
was simply exhausted and understaffed.” And he takes the former Fed
chairman Alan Greenspan to task for allowing economic conditions to
develop that fueled the credit crisis in the first place.

Mr. Wessel argues that the Greenspan Fed “kept interest rates too low for
too long,” missed warning signs that subprime mortgages were a growing
problem and was reluctant to use its powers to restrain subprime lending.
He adds that the former Fed chairman, revered during his tenure as an
economic wise man, made the incorrect assumption that a national decline
in house prices was extremely unlikely and “put too much faith in
markets,” failing to use the Fed’s “regulatory clout and rhetoric to
restrain the shortsighted, excessively ebullient players in financial
markets and to at least try to resist the worst of the abuses in the
subprime lending market.”

Mr. Greenspan’s successor, Mr. Bernanke, along with Mr. Paulson and
Timothy F. Geithner, then the president of the Federal Reserve Bank of New
York (and now President Obama’s Treasury secretary), Mr. Wessel says, all
“had a gut sense that the U.S. economy was overdue for a financial crisis
of some sort” before the catastrophic events of last fall, but “no one at
the Fed” rang “the gong and warned investors, lenders, business
executives, and consumers that years of easy credit even for risky
borrowers, placid markets, and shared optimism were unsustainable.”

While Mr. Wessel suggests that Mr. Bernanke was initially timid in his
response to brewing problems, he gives the Fed chief credit for being
“creative and bold” once he realized the risks, pushing “the Fed to places
it had never gone before or at least to places it hadn’t visited since the
Great Depression.” A conscientious student of that calamity, Mr. Bernanke
was determined, Mr. Wessel writes, that “he would not go down in history
as the chairman of the Federal Reserve who dithered and delayed during a
financial panic that threatened American prosperity,” and he “adopted a
new mantra: whatever it takes.”

In this book Mr. Geithner emerges as a usually cool deliberator, admired
by his colleagues at the Fed for his “capacity to size up a situation and
lay out options coherently and calmly.” His experience dealing with the
United States government’s response to the Mexican and Asian financial
crises of the 1990s, Mr. Wessel writes, taught him “a lot about crisis
management and an enduring lesson: smart people solve crises one at a time
and worry about dealing with unintended consequences tomorrow.”

As for Mr. Paulson, Mr. Wessel describes him as “a deal maker”: “Like many
on Wall Street, he could shout ‘No! No!’ before, citing changed
circumstances, abruptly saying ‘Yes!’ The approach provided flexibility in
negotiating the best business deal; it didn’t build lasting credibility in
Washington.” In contrast, Mr. Wessel says, Mr. Geithner understood “that a
tough bargaining stance in a room full of investment bankers made sense,
but that the press, the markets, and foreign officials abroad couldn’t
distinguish a bargaining position from a policy position.”

In Mr. Wessel’s view the collapse of Lehman Brothers on Sept. 14 “caused —
or coincided with — so much financial turmoil in large part because of the
lack of a consistent story.” It was unclear whether the government let
Lehman fall “to teach Wall Street a lesson” about moral hazard or whether
it was “legally powerless to save it.” It was unclear whether the earlier
rescue of Bear Stearns was a one-time thing and whether the government
would intervene to save other major financial firms teetering on the
brink.

Mr. Wessel quotes Alan Blinder, a Princeton economist and former Fed vice
chairman: “People in the market often say they can make money under any
set of rules, as long as they know what they are. Coming just six months
after Bear’s rescue, the Lehman decision tossed the presumed rulebook out
the window. If Bear was too big to fail, how could Lehman, at twice its
size, not be? If Bear was too entangled to fail, why was Lehman not? After
Lehman went over the cliff, no financial institution seemed safe. So
lending froze, and the economy sank like a stone. It was a colossal error,
and many people said so at the time.”

Although an enormous amount of recent attention has been understandably
focused on why the government let Lehman Brothers go under, an equal
amount of attention might understandably be focused on why Lehman — and
other firms like Bear Stearns and A.I.G. — were ever allowed to engage in
the sort of reckless, illogical, self-destructive gambling that turned
them from Wall Street behemoths into combustible houses of cards in the
first place.

Why, in an increasingly interconnected and globalized world where
financial woes can spread virally like swine flu, was there so little
regulation of derivatives, the complex financial instruments that the
financier Felix Rohatyn once described as “financial hydrogen bombs”? Why
was there so little oversight of the rating agencies that drastically
underrated the risk of such flammable, infectious products? Why did the
top management of these companies overleverage their firms, why did they
willfully ignore the warnings of experts, and why did they fail to take
quick, corrective action when the dangers their companies faced became
self-evident?

Such questions are all raised and italicized by “A Colossal Failure of
Common Sense: The Inside Story of the Collapse of Lehman Brothers” by
Lawrence G. McDonald, a former vice president of that firm, with an assist
from the writer Patrick Robinson. Mr. McDonald approaches the story not as
a journalist but as a former employee, a member of a group of dissidents
who believed that Richard S. Fuld Jr., the company’s chairman and chief
executive, and its president, Joseph M. Gregory, were leading Lehman off a
cliff.

Mr. Fuld and Mr. Gregory, Mr. McDonald contends, ignored the warnings of
three of the company’s “cleverest financial brains”: “Mike Gelband, our
global head of fixed income, Alex Kirk, global head of distressed trading
research and sales, and Larry McCarthy, head of distressed-bond trading.”

“Each and every one of them laid it out, from way back in 2005,” Mr.
McDonald writes, “that the real estate market was living on borrowed time
and that Lehman Brothers was headed directly for the biggest subprime
iceberg ever seen, and with the wrong men on the bridge. Dick and Joe
turned their backs all three times. It was probably the worst triple since
St. Peter denied Christ.”

Mr. McDonald depicts Mr. Fuld and Mr. Gregory as out of touch and in
denial: arrogant, reckless, eager to embrace “risk, more risk, and if
necessary bigger risks” in pursuit of short-term profits, willing to
borrow more and more money (on the way to leveraging the firm to “44 times
our value”) in order to buy commercial and residential real estate at the
top of the market, even though one of his lieutenants had warned in 2005
that the housing market was on steroids and headed for serious trouble.

At times Mr. McDonald’s rage or Mr. Robinson’s penchant for melodrama
leads to some hyperbolic writing. Mr. Fuld, for instance, comes across as
a sort of Lord Voldemort, a “strange wraithlike presence,” an “oddball
demigod who ruled everyone’s lives.”

Over all, however, Mr. McDonald’s book gives the reader a visceral sense
of what it was like to work at Lehman Brothers and the fateful decisions
and events that led to the company’s death spiral — decisions that turned
the once-proud firm into a grim illustration, in the words of one of the
author’s colleagues, of the “colossal failure of common sense.”

A COLOSSAL FAILURE OF COMMON SENSE
The Inside Story of the Collapse of Lehman Brothers
By Lawrence G. McDonald with Patrick Robinson
351 pages. Crown Business. $27.

IN FED WE TRUST
Ben Bernanke’s War on the Great Panic
By David Wessel
323 pages. Crown Business. $26.99.

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