Reenita's Wisdom

The failure of Lehman Brothers is seen as the last straw that broke the credit market. Did Paulson make a big mistake?

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In view of the current Wall Street crisis, America’s credibility as a bastion of free markets has come under the radar. The Fed’s recent bailout of AIG, Fannie and Freddie are perceived by many as a free market detour.

The government’s latest bailout news involves a plan to make the biggest intervention in the financial markets since the 1930s. Central to this plan would be a mechanism to bad assets off the balance sheets of financial companies or instead perhaps to create a federal insurance for investors in the money market funds. Additionally, the Securities and Exchange Commission is getting ready to propose a temporary ban on short selling financial stocks.

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In view of the current financial crisis, it is hard to grasp the fact that overnight investment banks once regarded the kings of Wall Street, are teetering on the edge of stability. The bankruptcy of Lehman Brothers has threatened the survival of Morgan Stanley in spite of the fact that it has just declared great earnings. All eyes are on Morgan and Goldman Sachs, the two big I-banks left standing. Will they go next? What will this mean for corporate social responsibility in the investment banking sector?

Investment Banks have long been the entrepreneurs of Wall Street. Sure they take risk but then look at the return that they bring. In a capitalistic society, who doesn’t respect the work of an entrepreneur? Time and again they have been instrumental for fueling the economy. A high return on investment has enabled many of the investment banks to show a solid to commitment to corporate social responsibility in the last few years:

• Lehman Brothers partnered with Spelman College a year ago to create a center for Global Finance and Economic Development at the college to prepare women of African descent for successful careers and leadership in the corporate world.
• Morgan Stanley announced last year the creation of the Morgan Stanley Carbon Bank to assist clients seeking to become carbon neutral.
• Goldman Sachs has just announced 10,000 women, a series of non-profit and academic partnerships that provide business an d management education to women in Brazil, India, China and the Philippines.

There has been much question about the Fed refusing to bail Lehman out for a paltry amount in comparison to what it was willing to pay to bail out AIG. Although their claim is that it is not socially responsible to bail out an investment bank with taxpayer dollars, the larger questions lies in that is it socially responsible for the Fed to allow the entrepreneurs of Wall Street to fail when they are actually working to serve society by demonstrating commitment to CSR? [...]

I received an email from a friend in Hong Kong this morning:

Asia is watching in shock and wondering why if the problems are in the US, are the markets here selling off more dramatically.

It is back to fear tactics which immediately offset the fight or flight syndrome. In this case it is definitely all about flight. Asia in particular appears to be more volatile than other markets. It is based on sentiment according to Dan Parr, the Asia-Pacific head for BrandRapport, a consulting firm. Morgan Stanley might have released very positive third quarter earnings but nobody wants to believe that this is any indicator of their health. It is like withdrawing your bet from the fastest runner in the race because everybody else tells you that he’s surviving on steroids. Morgan and Goldman stock has come under such selling assault that their share price has gone down drastically. Investors are instead snapping up three-month Treasury bills with virtually no yield pushing gold to its biggest one-day gain in nearly 10 years. The only truly happy person must be the Indian housewife who has become rich overnight by virtue of her stridhan (gold jewelery inherited by an Indian woman at the time of her wedding).

My friend continues her email:

Also America’s credibility as bastion of free markets has fallen hard.

Indeed the Fed’s bail out of AIG, Fannie and Freddie are perceived by many as a free market detour. A free market economy refers to a system where the buyers and sellers are solely responsible for the choices they make. Free market gives the absolute power to prices to determine the allocation and distribution of goods and services. However, the notion of free market is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities.

Whether the bailouts were a good idea or not remains to be seen. Some remained concerned about the depletion of the Fed’s resources, others remain incensed about the use of tax dollars. However one has to consider the the ripple effects of the failure of a Fannie, Freddie or AIG on the US and then global markets. Shockwaves in Asia are case in point. Personally, I am still annoyed that the Fed would not put up a paltry $4 billion to bail out Lehman Brothers. Had it done so, Morgan Stanley and Goldman Sachs might be having a better day. Not to mention the 15,000 Lehman employees who did not get bought by Barclays.

Yesterday we struggled to stay afloat a sinking ship in the bloody seas of the Wall Street crisis. Despite our superior-than-average swimming skills, we did not have much hope for survival. Any internal gossip indicating that an acquisition deal might be done had the caveat ‘perhaps,’ a word that did not have much standing given that Lehman Brothers had fallen down on every hope and promise in the last few days. It was no consolation when a colleague called us last evening, upset that the head of M&A at Lehman was out drinking rather than trying to get the Barclays deal done.

There is irony in that as elevated as my mood was at the outset of 2007 when Lehman’s stock price was at an all time high, today I was faced with the reality that our family would be an integral part of history’s biggest bankruptcy. What a remarkable story to pass down to our future generations. Yay! Papa’s famous, came my ten year old’s childlike enthusiasm. She immediately cocked her head to the side and thought again, Wait, famous in a good way or a bad way?

We ran into a bunch of friends at the boulangerie this morning, after dropping the kids off at school. Although the condolence calls have been coming through in a steady stream over the last few days, it is much more awkward to face the dead man walking directly. Uneasiness interspersed the aroma of coffee as people greeted us with feeble smiles that said I feel for you but just do not want to bring anything up.

And then all morning while I tried to occupy myself with my core work of encouraging the world to go green, my inner voices reiterated the same questions: Will Barclays and Lehman reach a deal or not? Will the rest of Lehman Brothers go into bankruptcy tomorrow morning? When should we begin pounding the streets for a job?

Charlie Gasparino, an on-air editor at CNBC stated that working for a British bank with an entirely different culture would be the second worst nightmare for a Lehman employee, the worst being outright unemployment. Call me unadventurous but I am okay with the prospect of a paycheck from London. Perhaps because as an Indian I can say that working for the Brits is a known entity. But I hardly think that Lehman employees would scoff at the chance to get their hands on an entirely new deal book.

The word from the trading floor late morning today was that Bob Diamond, the chief executive of Barclays and Bart McDade, the president of Lehman Brothers were walking floor to floor at Lehman’s offices in New York to announce the acquisition deal: Barclays will buy the U.S. capital-markets businesses of Lehman and as many as 9,000 Lehman employees will find jobs with the U.K. bank. This is minus the bad assets that will be left with the holding company to level to be liquidated according to the bankruptcy court’s instructions.

Breathing room! Can things change in just a day? Have Barclays and I both gotten what we wanted in the first place?