In the last few weeks we have witnessed financial history on a grand scale. Stalwarts of Wall Street crumbling under the onslaught of fiscal karma. Venerable giants of high finance wiped out by bad decisions and an overzealous fed putting its own shingle above the door of private sector finance. In the coming days and weeks, it appears that the fed will act to consolidate its holdings and cement its position as the primary source of capital to the markets. Our markets are irrevocably changed.
In the Beginning, There Was Liquidity
While the foundations of the financial sector began showing signs of damage as early as 2004, it wasn't until August of 2007 that the depth and breadth of the looming disaster began to draw attention. The bad decisions and high risk bets of many Wall Street stalwarts began to show up in the bottom lines. The early stages of the sub-prime disaster were coming due in the reporting cycle and the numbers were bad. These early losses were nothing compared to the eventual numbers, but they were bad enough to begin the federal handout that continues to this day.
While I have yet to find a definitive amount of this early taxpayer financed injection of "liquidity" to the capital markets, it must have been substantial. The free cash at our expense did manage to cover up the problem for several more months.
In October and November of 2007, the boards and majority shareholders of several major institutions began to realize the magnitude of the problem. CEO's and chairmen at Citigroup, Merrill Lynch, Wachovia and others got the boot from their cushy jobs. They left the companies they had destroyed with millions in golden parachute payouts, so don't worry, they wont suffer like you and I will as their bills come due.
It was March of 2008 when the CDO hit the fan. Bear Stearns, that 800 pound gorilla of the capital market, had a come to Jesus meeting with its bad investment practices and promptly saw the light. That light was the federal government butting in with its checkbook at the ready. In a hastily brokered deal, Bear Stearns was "sold" to J.P. Morgan for $2.00 a share later adjusted to $10.00 a share. How that late day adjustment of 800% was financed will likely be an interesting tale.
Things stabilized in the market for short time, at least on the surface. The bills were coming due though. As the reporting season progressed, the huge losses at most of the Wall Street titans could no longer be kept from the headlines.
The next to go was Indy Mac, seized by the feds in July 2008. After posting huge losses on bad investments, this publicly traded giant collapsed to the tune of $4 billion to an estimated $8 billion the FDIC has to pony up.
I wont detail the other ten banks, thus far this year. None were publicly traded, but the total that the fed has to shell out to cover these others is $1.961 billion on the low estimate, $2.066 billion on the high side.
The Fall of Giants
In September,2008 with a new found taste for taking over the financial sector and the continuing slide in the value of the bad investments, the next to go would naturally be at the heart of the problem.
In spectacular fashion, the federal government moved to nationalize the mortgage business, and insure the fiscal servitude of our children and their children. Fannie Mae and Freddie Mac, those illegitimate offspring of congressional dalliance , conceived to further the American Dream, were swooped up with barely a pause to consider the implications to the taxpayers that foot the bills.
With a direct cost of 25 billion to $100 billion( nice spread there, don't you think?) and a purported risk of a mere $300 billion, this is the largest financial interference since the Great Depression. By the way, lets correct the math here. Between the two entities, they hold several $trillion in paper and debt, the federal government, meaning we taxpayers, are now on the hook for the entirety, since they have been nationalized. So, how is the risk $300 billion, not the several $trillion? Must be some of that fuzzy math, similar to the $75 billion spread in the direct cost estimate. Try filing your taxes with math like that. I dare you!
The next to fall was Lehman. Truly one of the most respected institutions on Wall street. Perhaps they saw the writing on the wall and hoped for a taxpayer rescue like everyone else was getting. The prejudice of the fed showed its colors in a refusal to either write a blank check or broker another taxpayer funded sweetheart deal. Lehman filed what may be the largest bankruptcy in history.
