Dear Editor,
I disagree with one aspect of the critically thoughtful editorial titled, ‘Institutional failures’ (SN June 24). All the other areas were on target and unerringly so.
As quoted from David Stockman’s massive The Great Deformation, “the so-called financial meltdown was purely in the canyons of Wall Street, where it would have burned out on its own and meted out to speculators the losses they deserved.” This is surprising coming from a former Budget Director and later Wall Street denizen. I thought that his comprehension would have been less narrow and less shortsighted.
It would have taught real life-altering, and many overdue lessons to Wall Street moguls, who gambled with financial fission, and almost blew up everybody else along with themselves. On this point, I am in total agreement with Mr Stockman and the editorial. On the other hand, many from that broad and deep realm of “speculators” would have included pension funds, regular mutual funds, money market funds, municipalities, and a host of other government and quasi-governmental agencies. The list was endless, given the mania and the ignorance of the times. More specifically, behind those speculative (investment) groups were tens of millions of retirees, blue collar workers, struggling counties and so forth. The hard earned monies of these ordinary citizens in reputable and venerable houses, which were then gambled with and recklessly so, would have left them with the spectre of poverty, if not inevitable bankruptcy as the only fallback option. I will contest that, while those they trusted did foolishly speculate with their funds, the ultimate pain (the worst, perhaps unrecoverable pain) would have been that of the Main Street family, and not the risk-taking Wall Street powers. The unconscious man-in-the-street did not deserve such a fate.
But that is only half the story of the 2008 meltdown, and it was that and more. It was not as the extract quoted in SN’s editorial indicated that the fallout would have been limited to Wall Street alone and its greedy speculators. First, the monumental debt-to-equity ratios of just about all the participants were crippling to begin with, and that debt was spread near and far and in the hundreds of billions, if not possibly trillions.
Second, the interconnectivity and interdependency of Wall Street are not bounded by the real estate between Cortland Street and Water Street in lower Manhattan. Rather, due to the telecommunications and technology revolutions, Wall Street is global and round-the-clock. It is not just about old fashioned investment vehicles like stocks and bonds, but includes currencies and interest rates instruments, among an endless host of the esoteric and stealthily deadly. Thus, the pillars of Wall Street buckling under catastrophic failure conditions would have brought down many a not as unhealthy institution elsewhere. Why, all the way over here in this sometimes admittedly backwater region, there was the casualty of Clico, and the related injuries that followed. It should be remembered that here in Guyana it was the little people who got scorched, and who are still searching for answers.
Third, the dollar amount of that great spellbinding Wall Street (witch) craftsmanship labelled derivatives was and still is unknown, but reported by authoritative sources to be in the hundreds of trillions. The problem was that knowingly or unwittingly just about everyone owned a piece of that radioactivity. I recall clearly almost ten years to the day of one top performing Managing Director telling me flat out that I have no business talking about oversight in that area, as it was unregulated. The damning thing about that was that the man was right. Now if that was not a nuclear time bomb, then I do not know what is. My contention is that the fallout would have been unlimited, in view of the omnipresent reach and the explosive nature of that one product, of which there were many variations and cousins.
Fourth, all the protective insurances and mechanisms such as FDIC, MBIA, AMBAC et al were very thinly capitalized and coverage overwhelmed to the point of being insignificant. They would not have been able to meet even a fraction of their insured obligations. And that would have brought down the interconnected fragile house of cards on a far reaching scale.
Fifth, overnight Repos, which are the lifeblood of highly leveraged Wall Street businesses had seized up. Trust and credibility, the very oxygen of the system, had evaporated. And where there was no trust, there was only the financial Black Death of downward spiral. It was an uncontrolled contagion in the works and on the rapid move. And it was not contained to Wall Street by itself, or to its clever speculators alone.
Now I will agree that there was heavy fear, and well-placed Wall Street men in Washington, the other power centre. I agree with Stockman that it is a harrowing scenario played out decade after decade with metronomic frequency. There is agreement that the bailout (vitally necessary) was followed by wrongheaded bonuses (an outrage), and tepid regulatory reform (Band-Aid).
But I will argue that panic did not take hold. This was about more than self-preservation. It was about the unknown and the sweep of an onrushing tsunami that called for the best in crisis management, which was what was delivered, however imperfectly.
Yours faithfully,
GHK Lall
