Too Big to Fail

I read Sorkin’s book this weekend and found it a very comprehensive discussion about the financial meltdown. Even though I intently following this as it was unfolding in the press real time, having the recap of the sequence of events and the behind the scenes look was fascinating. I very often find myself being a witness to history but not knowing the full extent of the historical implications of the events until long after the events have passed.

I was Left with the feeling that Dick Fuld was to blame for Lehman’s demise. Having had several offers, legitimate offers to merge with worthy candidates he simply felt that each of the offers was too low. At that point he put his own self interest before that of the shareholders and his creditors. Even to the end he was disillusioned to believe that after any merger that he would not only have a role on the management team but also potentially be on the executive committee. To me, these are shocking revelations.

The description of the steps taken to save AIG by asking JP Morgan and Goldman Sachs to come up with a plan to resolve the hole in the balance sheet was interesting. I particularly found it interesting when Lloyd Blankfein left the negotiations because Jamie Dimon was not present and found it was below his pay grade to be there.

Perhaps the thing that was most impressive, when learning about all of the back door wheeling and dealing was done was how both Paulson, Bernanke and Geithner were asking the fiercest of competitors to collaborate with each other to solve these huge problems. The behind the scenes negotiations that occurred in parallel to the larger conversations (i.e. the Bank of America discussion with Merrill at the same time they were going through the motions with Lehman brothers.) The balance that these executives had to strike when they clearly mistrusted each other immensely was eye opening.

I found the book a really good read and now feel that I have a fuller understanding of the situation. On the surface it seemed that since Lehman was second to fall and not wanting to make a habit of these bailouts the government decided to play favorites and let Lehman die. However the opposite was true. The government set up multiple opportunities for Lehman to save itself however in their end their own greed and egos stood in the way.

Jingle Mail

I learned the phrase Jingle Mail in a recent WSJ article and its one I am not too happy about. This refers to home owners simply mailing their keys into the bank when they decide to walk away from their house because it’s value has declined to appoint lower than they owe on their mortgages. I am astonished.

When thinking about one of these once in a lifetime events, I often wonder, what would my father do. I can say without exception that the behavior of many of these people would make my father sick. My father was a man of his word. If he said something or committed to something, it got done. It was the code of his life and that of his generation.

I sit in amazement with the seemingly care free approach that people are taking in walking away from mortgages that have recently become under water. Where are the morals? Where are the ethics? Do they understand the ramifications of such a decision? Beyond the obvious hit to their credit report there is the question- has anything been learned? What examples are being set for their children?

Clearly the situation is a very complicated one and I don’t mean to over simplify it here. The financial crisis that led to the plummeting house prices was triggered by an age of excess and greed. Some of the victims today were not greedy but rather unwise and definitely unlucky. Others were excessively greedy and did not manage their own personal finances wisely.

The problem is exacerbated by the “bailout” nation we have become. It seems that everyone is looking for a hand out. How repulsive is it that even people that can afford to pay their mortgages have decided to stop paying them, trying to take advantage of these extraordinary times? Some people are just standing there with hands out because they have been taught that somehow the government owes them something because they have been wronged.

I don’t believe the government is there to backstop companies or people that make greedy or stupid decisions. I think that the market has a natural way of dealing with these situations. In fact I think that the markets have a self healing mechanism that will naturally reduce the tendency for this to happen again in the future. However because of intense interference in the natural market forces (keeping people in houses they can’t afford, rescuing Wall St. firms that overexposed themselves to risk so that they can merely do it again, and again). The self healing mechanism is that people that are more calculated with risk survive and thrive while those that have overdone it are punished with failure. By stepping in and lessening the blow to both the perpetrators and the victims, a valuable lesson is not learned. Surely there are those smart enough to understand what could have happened and changed their ways, but there are others that will not realize how lucky they were to be saved, bailed out, extended and will simply return to that abusive and reckless behavior again. However the next time it will be exponentially worse because people will have an expectation that the government has to step in and do something.

I wonder how history will look back on these truly remarkable times. I hope there won’t be any more sympathy for those that walk from their houses than there is today. Somebody has to stand up say, “Wait a minute. Something is very wrong here.”

Financial cycles are hard to predict however one may conclude that with the significant amount of liquidity that has been put in the market, we are due to have a time of higher than normal inflation. It is possible that high interest rates lead to high inflation and in 5-7 years the value lost in the housing markets by many Americans can be recovered. I wonder what will happen then? Will the same people that walked away from their homes as they were under water, demand the gains on them that would have materialized had they only stayed in them, all the while saying, “It’s just not fair, it’s just not fair!” Guess what… Life is not fair.

That leads me to the next phrase that I learned…moral hazard. Wikipedia defines this as, “…Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully than it alternately would, leaving another party to hold some responsibility for the consequences of those actions.”

If people don’t fear the harsh ramifications of walking away from their mortgage- an obligation they signed and should make good on, who is to say they won’t do it again, and again? Who is to say that people won’t start walking away from all kinds of difficult situations?

I am astonished to see the type of behavior all around me. I am astonished that people passively allow this to occur. I am outraged at this however don’t see anyone else sharing the same feelings.

People that do not feel the pain of bad decision making are only prone to repeat it again, again and again. I grimace at the remark too big to fail, and bailouts. They prevent the markets from punishing the bad behavior and rewarding the good.