this economic mess were in.
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From: "michaelrivera0619@gmail.com" <michaelrivera0619@gmail.com>
Date: Thu, 18 Sep 2008 11:08:29 -0400 (EDT)
Subject: CNN - Commentary: How we got into this money mess
To: "michaelrivera0619@gmail.com" <michaelrivera0619@gmail.com>
Cc: "michaelrivera0619@gmail.com" <michaelrivera0619@gmail.com>
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Commentary: How we got into this money mess
"Greed is good."
At least, that's what Michael Douglas' character Gordon Gekko claimed
in the movie Wall Street. But, just like Gekko, the modern-day
companies that followed that motto now find themselves wondering how
everything could collapse so fast.
You know the names by now: Countrywide Financial, Bear Stearns,
IndyMac, Fannie Mae, Freddie Mac, Lehman Brothers, AIG. And that's not
even counting companies like Citigroup, Merrill Lynch, and Goldman
Sachs that, while still in existence, have lost untold billions in
market value and have laid off thousands of employees.
Maybe greed isn't so good after all.
Lehman was founded in 1844 when Henry Lehman, a German immigrant,
opened a small shop in Montgomery, Alabama. His brothers joined him
six years later and, by 1858 they were busy turning cotton provided by
local farmers into a cash crop -- a business that didn't have anything
to do with helping low-income families afford 27-bedroom McMansions.
More than 150 years later, after surviving the Great Depression, Black
Monday, the savings and loan crisis and the dot-com bust, Lehman
Brothers filed for bankruptcy protection. They had gone 14 years as a
public company without ever reporting a single quarterly loss. Now
they will never again post a profit.
Bear Stearns' story is eerily similar. Founded in 1923. Survived every
crisis. Never posted a quarterly loss until last year. Gone without a
trace.
So how did 235 years of rock-solid American finance disappear
virtually overnight? Well, it's not as complicated as you think. If
you replace all of the acronyms invented by the brainiacs on Wall
Street with references to things that Main Street understands, it
becomes a lot easier to see how it all happened. Here's a quick story
I invented that does just that.
(Note to any Wall Street executives who might be reading this: I know
this simple little story isn't perfect, but let's remember that you're
the ones who tried to make everything complicated and I'm the one who
still has a job.)
It's just before Christmas,1996, and as you watch overeager parents
trample each other to buy Tickle Me Elmo dolls for their kids, you see
an opportunity. "This isn't a Tickle Me Elmo bubble," you think to
yourself, "this is a long-term trend. Every person in America will
soon own a Tickle Me Elmo, maybe even two. It's the American dream."
You approach your local banker about a loan and, naturally, he loves
your idea. In fact, he loves it so much that for every $1 you have in
your account, he's willing to lend you $34. Great deal, you think, as
you max out your credit line and buy as many Tickle Me Elmos as you
possibly can.
Sales are easy at first. People are lining up to buy your dolls and
the prices are going far higher than you ever thought. The only person
happier than you is your banker.
But the following year something unexpected happens: Kids stop asking
for Tickle Me Elmos. You try to cut the price, but no buyers show up.
You cut the price more, but your store remains empty.
Panic sets in.
You're pretty sure that this downturn is just temporary (after all,
who wouldn't want a Tickle Me Elmo?) but you're quickly running out of
cash. Your only option is to buy time and hope that Tickle Me Elmos
start flying off your shelves again.
You visit every bank in town and, using your piles of Tickle Me Elmo
dolls as collateral (which, of course, you purchased with money you
didn't have) you get as much new capital as possible.
Soon that money is also gone. Even your friends and family refuse to
give you any more loans. At the end of your rope, you go to your town
council, which gives you a "bridge loan" to get you through the next
few months (something that makes your Furby-selling competitors
extremely upset).
Unfortunately, no matter how much you borrow, there's still one
nagging little problem: No one wants to buy your stupid Tickle Me Elmo
dolls anymore.
The longer you wait, the less they're worth. You sell some for pennies
on the dollar, but pretty soon you can't even do that. Then things get
even worse: News breaks that China is poisoning some Tickle Me Elmos
before shipping them to the United States. Now your dolls are not just
out of favor, they're toxic. You literally can't even give them away.
Soon the rest of your money dries up, as do the people who are willing
to lend you any more of it. Now you're out of cash; out of a job, and,
if not for the pile of poisonous Tickle Me Elmo dolls in your
basement, completely alone -- which sounds kind of like the CEOs of
Lehman Brothers and Bear Stearns.
Believe it or not, this ridiculous story may be far from reality, but
it's not that far off from describing what these financial and
mortgage companies did to themselves. Just replace the Tickle Me Elmo
references with the once popular, then discounted, now completely
toxic subprime mortgages and you're pretty much there.
When you cut through all the noise about "bridge loans" and "discount
windows," what you're left with is the fact that too many companies
still own way too many Tickle Me Elmos that no one wants to buy.
Giving those companies more money doesn't solve anything, it just buys
time. Unless and until the underlying problem is fixed, no real
turnaround can happen.
But we all know that investors (and elected leaders worried about
their careers this November) aren't all that patient. That's why the
new chorus you're likely to soon hear will be from people arguing that
the only way out of this mess is for the federal government to step in
and purchase all of the toxic mortgages themselves. That would allow
the companies with eyes bigger than their balance sheets to start
over, with barely any repercussions whatsoever and without ever taking
responsibility for their mistakes.
Come to think of it, maybe greed isn't so bad after all.
Would the government actually consider that idea? They already are. In
fact, the only thing stopping politicians from "rewarding" us with a
new government agency that will put billions more of our tax dollars
at stake is, ironically enough, the election of new politicians.
Disclaimer: Tickle Me Elmo is still an extremely popular, non-toxic
product and, to the best of my knowledge, is not responsible for the
credit crisis.
The opinions expressed in this commentary are solely those of the writer.
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