Impertinent Inquiries

We Ask Questions
About Wall Street
Who is to Blame?
What to Do Next?

By Henry J. Stern
September 19, 2008

We wanted to write about the Wall Street crisis after it settled down. Apparently, however, matters will remain unsettled for awhile as Congress considers a massive bailout, and other developments are sure to come.

Rather than waiting for the dust to settle (We predict it never will), we would like to make a few observations today and ask two dozen questions that occurred to us over the last week as we watched seismic shifts take place the world of finance. 

These deconstructive events are likely to have a substantial  negative effect on the finances of New York City and the economic and social well-being of its residents, as well as the thousands of New Yorkers who have lost their jobs in the private sector and those in the public sector whose jobs are endangered by shrinking tax revenues.

We do not try to discover the secrets of human behavior which generated a fiscal catastrophe for so many people. We know greed is a major factor, but not the only one. We simply ask questions, some of which may be peripheral, but which we would like to have answered by people who know about these matters, or who may be more perceptive and insightful than we are.

Anyone who cares to offer answers to any of the questions listed below is invited to do so. Your responses, if not obscene or libelous, will be posted on our blog. You may sign your birth name, park name, screen name, initials or respond anonymously, as you indicate to us.

The Twenty-Four Questions We Would Like to Have Answered

1. We know that this is not a crisis initiated by terrorism (9/11) or a natural disaster (Katrina or a tsunami).  It appears to be the result of bad decisions made by individuals who managed institutions of great wealth and power.

Who, if anyone, should be held responsible for the losses which may exceed a trillion dollars, and what, if any, penalty should be imposed?

2. What would the consequences of this loss of value have been if social security had been privatized, as President Bush recommended in 2005?

3. We agree that outside investors who buy stocks in the hope of a prompt and substantial increase in value ought not be protected by the government if the company they have a stake in does poorly, and its stock falls rather than rises.  Capitalism has its risks as well as rewards, and the state cannot insure prosperity.

What, however, about the loyal employees of a firm, saving for retirement, who have  401(k)s invested, conservatively in their minds, in their employer’s company?   Should they be treated the same way as speculators?

4. Is it possible for an insurance program, to be paid for by the employee, the employer, or both to guarantee all or part of a 401(k) or similar plan from catastrophic loss?

5. Should people who hold stock in these plans be warned periodically that their holdings are not insured by the FDIC or anyone else, and are subject to partial or total loss? The Montana Power Company case is a particularly sad example of such a misfortune. Should there be any requirement for diversification in employee stock ownership plans?

6. We know that the sub-prime mortgage crisis did not appear overnight. It surfaced publicly around January 2007, twenty months ago, and was known in the industry before then.

Executives in finance and real estate were well aware that the CDOs (collateralized debt obligations) were in great danger.  Yet they continued to sell them to unsophisticated investors - people who did not want to get rich quick but simply wanted a safe place with a reasonable rate of return to store their money. They were told that auction rate securities were perfectly safe.

7. What should be done with those who sold CDOs with knowledge that they were unlikely to be redeemed at face value?  Does it make any difference if the sale was made to another trader, or to an uninformed or misled individual purchaser?

To put it another way, what if a broker knowingly suggested the purchase of a CDO to a customer who had never heard of them (that includes many of us before the current crisis), and was completely unaware of the difficulties to which they were subject?

8. Why should the Federal government save some large institutions while allowing others to go bankrupt?  What criteria have been used to make these decisions, apparently on a day’s notice?  Is “too big to fail” an adequate standard for government intervention?

9. What is the total amount of mortgage debt outstanding that will not be repaid? How much of it was sold irresponsibly, with no down payment required, to people who had bad credit and no jobs? How many mortgages were sold with low interest rates for the first years, jumping to much higher rates thereafter?

10. Who is responsible for the false statements that accompanied many of the mortgage applications?  Did anyone rely on the information on these applications, were the banks aware of what the mortgage sales companies were doing? Some of them must have been. Should they have done due diligence on the people who were getting mortgages which they were funding directly or through a mortgage broker?

11. Why should Countrywide Financial, said to be among the worst offenders in selling worthless mortgages, escape into the sheltering arms of the Bank of America, without any penalty or sanction imposed on the officers and directors of Countrywide, who appear to have overseen, or failed to oversee (its opposite, but equally bad) the perpetration of what now appears to be massive fraud?

12. Conrad Black, Dennis Kozlowski, Bernard Ebbers, Kenneth Lay, Jeffrey Skilling and others were convicted of various crimes in connection with the failure of their companies. Were their convictions and sentences justified by the extent of their misconduct? Are executives in any way responsible for the bad decisions they make? Errors of judgment in the ordinary course of business should not be punished. People have the right to be wrong. But what about an intentional strategy which will inevitably injure others, particularly the ordinary shareholder or owner of an IRA.

13. After Hank Greenberg was forced out of AIG (American International Group) in 2005 by NYS Attorney General Eliot Spitzer’s threats against the AIG Board, was the company that he built managed better or worse by his successors? How many billion dollars in shareholder value have been lost since he was removed? As Mark Antony said, "the evil that men do lives after them." Is that a fair statement applied to this case? You can take either side.

14. Would Greenberg have loaded AIG with the toxic paper the company purchased, which caused the Federal government to have lent the company $85 billion to prevent what they felt would be a worldwide financial disaster?  Would he have disposed of the junk sooner than the new management tried to do? Was his offer to assist in the final days of the crisis worthy of consideration?

15. Should executives of bankrupt or rescued companies receive the golden parachutes their boards gave them in happier days?  Should limits on officers’ and directors’ compensation be imposed as a condition of taxpayer rescue of these companies? Why should the corporate elite benefit personally from their misjudgments, while their employees are thrown out of work or see their IRAs evaporate?

16. Did the Federal government, through HUD or any other agency, play a role in inducing companies to grant mortgages to people who could not afford to make the monthly payments in order to promote "equal housing opportunity" or some other social goal?

17. Since the crisis developed over a period of years, and was widely known in banking circles, why did the Feds take no action to stop the process, or to protect anyone until major financial corporations were about to collapse?

Who was responsible, the SEC, the Federal Reserve, Fannie Mae, Freddie Mac, the Administration in general, Congress, the GAO, any other acronym agencies? Was there a point person in the Federal government handling this issue? Did s/he ever issue a report, a public warning, on the situation?

19. How much have the banks, the mortgage issuers, the investment bankers, Fannie and Freddie et al. spent on lobbying Congress in the last five years? What favorable results for them can fairly be attributed to their lobbying efforts and the political contributions they made to individual candidates and party organizations?

20. What (if any) was the role of the 50 state governments in all this. The mortgages were bought and the properties foreclosed all over the country. Were there any state or local objections to what was going on? What was the attitude of the Feds to state regulation of the securities or mortgage industries? (We think we know the answer to the last question, they argued that the states were pre-empted from doing anything.)

21. What will the next financial scandal be, and when is it likely to break?

22. Is the subprime crisis part of the larger weakness in the economy, possibly caused by our transformation from a manufacturing to a service economy? Are there problems out there which we are not yet dealing with?

23. What will we do about our national debt, which now exceeds eight trillion dollars and is increasing by one and a half billion dollars every day, before any bailout?

24. What will happen if other nations stop buying and turning over our borrowings, as the banks did when they stopped lending to New York City in 1975?

#499 09.19.2008 1640wds