September 16, 2008

Examples of Excess-7: "Excessive Leverage and Greed"

Eric Fry over at the Rude Awakening offers the following quote today in his post:

Looking back, what was the cause of this credit crisis?” CNBC’s Maria Bartiromo asked Bank of America’s CEO, Ken Lewis, during an interview yesterday morning. “What caused this whole mess?”

“Excessive leverage and greed,” Lewis responded.

Wow. At least they know who they are -- I've always thought Richard III was less evil than Iago, when comparing those two great Shakespearean villians, because at least Richard III was honest about what he was doing.

Today's News - Lehman, AIG, and Merrill Lynch

In today's news, banks are pack-ratting their cash in a way that would make Ebenezer Scrooge proud -- Bloomberg is reporting that the cost of borrowing money doubled overnight -- to the highest rate since the fears right after 9/11 - and there's rumors it's not just Lehman Brothers Holdings Inc. and American International Group Inc. that are in serious trouble. (AIG stock has lost 94% of its value over the past year, and Lehman just filed bankruptcy.)

In response, the Federal Reserve added $70 billion to reserves - and news is still breaking by the hour on what's happening with the Dow and when the other shoe is going to drop (or if it's going to drop, or if there is another shoe ...).

The Big Kahuna Meeting

The Scotsman has a good read on the Lehman story -- the Big Kahuna meeting on Sunday where Lehman wasn't saved by Fed Reserve Chairman Bernanke (the stuff of movies, who will George Clooney play?), how Lehman began as a small little business in Alabama to become the "biggest overseas bank in America," ....

That was a big meeting on Sunday, by the way -- as The Scotman describes, not only was Lehman's fate decided, but so was AIG's and Merrill Lynch ... who had a happier ending to the day: Bank of America (remember that quote at the start of this post?) rode in like the cavalry and tookover the stockbrokerage firm for $50,000,000,000.00.

And it was just last week that we were reeling from Fannie Mae and Freddie Mac.

Long ago, in a time far away, I studied finance - and I remember my professor being almost in despair at the continued deregulation of the banking industry. He foresaw doom, he valued frugality, and he bought gold. To give you an idea, back then the market hadn't hit 1000. That's right: 1000. That wasn't so very long ago, you know.

Today, I see his face clearly and I remember his concerns: money is a temptation best left in different pots, and we're so far from being out of the woods. Letting a major national bank takeover a stock market firm is troubling to me. Should banks own brokerage firms?

"Excessive leverage and greed. " Indeed.

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