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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Although we have been glued to the news these past few weeks, I am cognizant of the fact that the exact sequence of development with regard to the financial crisis is not a hundred percent clear to everyone.

In an effort to demystify the code, I recently put together a laypersons’ blogpost for Inspired Economist. Check it out to understand exactly how America went from mortgage to bailout:

From Mortgage to Bailout: How Did The Problem Arise?

The beginnings of another new economy are taking shape as Morgan Stanley and Goldman Sachs prepare to close the curtain on investment banking.

Mitsubishi UFJ Financial Group Inc., Japan’s largest bank, will inject 900 billion yen ($8.4 billion) into Morgan Stanley to help it transition to a bank holding company. Goldman Sach’s strategy is slightly different albeit with the same ultimate objective i.e. to become a commercial bank. According to Bloomberg, Goldman already has in excess of $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S.

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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? [...]