Tuesday, October 20, 2009

The Financial Crisis - A Recap

I just heard a really great interview with the author of this book: http://www.amazon.com/Too-Big-Fail-Washington-System/dp/0670021253/ref=sr_1_1?ie=UTF8&s=books&qid=1256103580&sr=8-1
and a New York Times financial reporter.

The interview is here:


He gives a pretty graphic behind the scenes description of what happened during the financial meltdown...

What most people don't realize was how close both Morgan Stanley and Goldman Sachs and GE were, all three, in going bankrupt.

A few days after Lehman went under, AIG had to be rescued... Then Morgan Stanley, Goldman Sachs and GE were on the brink and would have went under except for a few things that happened (Morgan would have went taking out Goldman, taking out GE).

What saved them was allowing Goldman and Morgan Stanley to become bank holding companies and that Warren Buffet invested in Goldman and some Japanese investment firm invested in Morgan, this brought more money into those firms. Saving those firms saved GE... This save was only temporary. What really saved the companies and the entire system was the TARP money that came in October.

The author makes a point I really believe in. That Hank Paulson acted in good faith. That he really believed we were on the brink, and we probably were, and that he did what he did because he really believed he had to to save our entire economy - indeed the world economy.

He also makes the case that what's happening now is not right either. Both Morgan and Goldman are making record profits and giving their employees huge bonuses. To be fair, they are not making the same risky bets that were made before the crisis (author's words), although these profits have come through trading and winning on an increasing stock market..

But what's sad is these firms were bailed out by tax payers and there's not a firm recognition by these firms of that fact.

And the greater question is even bigger? What does this crisis tell us about capitalism.

The problem is that our system is designed to incentivize people to do what it takes to make money for the shareholders... Nothing about an obligation to the broader community as a whole, and that really is capitalism's greatest weakness because often what is good for a shareholder is not what's good for all of society...

A lot of what happened pre-crisis was legal but reckless and pretty evil. And many people want stronger regulation, which would probably help... But regulation is a flawed approach to this problem because we had regulation pre-crisis, but the regulators simply did not do their job.

Democracy and capitalism only work well when individual people as a whole are honest and ethical, work hard and try their best to do right by themselves and their community. In many ways we've lost that in our society, and we've lost it broadly.

I'm not sure government or regulation or new laws or anything else can really solve that problem.

No comments: