Sunday, September 21, 2008

It's a Blunder-filled Life!

Great Zuzu’s Petals! What a week on Wall Street! These past seven days have had more epic collapses and stunning rebounds than Tom Cruise’s career. And much like Tom Cruise, Wall Street will continue to freak us out, take our money and prove that we, somehow, can’t live without them. Wall Street, I can’t quit you!

This week brought with it the warm fuzzy feeling we get when a nation comes together to bail out a bank who otherwise would have collapsed under the weight of its own ineptitude. Why just replace the name Fannie May, Freddie Mac and AIG with George Bailey, and we all just took part in a multi-billion dollar re-enactment of ‘It’s a Wonderful Life”.

There really are a lot of parallels between the goings on in Wall Street and the goings on in the fictional Bedford Falls of Frank Capra’s classic film. As we all know, George Bailey (played by Jimmy Stewart) is the manager of a bank who provided the much needed capital for his little community to grow and prosper. Until one day, George Bailey made the sub-prime decision of putting all of his money in the hands of Uncle Billy. Anybody who knows anything about Hollywood knows that Uncle Billy was going to lose the money, after all, the man has a pet bird. If Hollywood has taught us anything it is this: people with pet birds cannot be trusted. I am talking to you Jafar!

Well, needless to say Uncle Billy lost the money which would have caused the bank to close and sent George bailey to jail. Than, amazingly, the town got together, pooled its money and saved the bank. Community bail-outs, a true Christmas miracle!

The current crisis on Wall Street was every bit as foreseeable as Uncle Billy’s slippery fingers. Four years ago, I was driving down the street near Sacramento California when I saw a sign advertising starter homes in the $400,000’s! That is in dollars, people, not pesos.

Who would honestly pay $400,000 for a home the size of a lunchbox? Upon seeing this sign I turned to my wife and said “where are the people who work at Wal-mart living?” And that is the question Wall Street never asked. Anybody with two eyes and enough grey matter to fill a cereal bowl could tell that prices this high were more symptomatic of a bubble rather than true market value. If your median wage earners cannot afford your median value home, you are out of balance.

Far from failing to foresee the problem, the Banks were complicit in creating it. Making credit so cheap and so readily available allowed prices to sky-rocket further beyond what the market supported. Imagine if the banks had required income verification and a 20% down payment. This bubble would have never happened. Home prices would have reflected actual earnings and people would have been force to live with in their means. Instead, the banks offered adjustable rate mortgages with no income verification, allowing McDonald’s employees to buy McMansions of their own.

Despite the Bailey-esque blunder of making mortgages easier to get than shoe rentals from a bowling alley, the government, sigh, did the right thing and stepped in to bail these companies out.

In a perfect world, I would rather chant “burn baby burn” and watch these inept corporations suffer the natural consequences of their own foolish hubris. But much like “It’s a Wonderful Life”, sometimes the only thing standing between an appealing Bedford Falls and an appalling Pottersville, is a solid banking and financial system. While there are some banks we can afford to do without (like the Lehman Brother’s Bank) there are other institutions that are too integral to the financial system as a whole to see go under. The people of Bedford Falls may have paid to save George Bailey’s Bank but as the alternate universe shown to us by the angel proves, they would have paid far more without it.

Now each time a bell on Wall Street rings, rest assured, another hedge-fund manager got his blings.

1 comment:

Sara said...

Thank you for explaining this in language I can understand. Fabulous post!