Sunday, September 14, 2008
Government policies led to Wall Street meltdown
Today's refusal by top federal and bank officials to intervene on behalf of Lehman Brothers, the United States' fourth-largest investment bank, probably says more about the U.S. government than it does about the greedy banking industry. The crisis on Wall Street, where hundreds of billions of dollars have been lost in recent months, was precipitated by the still-unfolding collapse of the real estate market. Yet even as officials were deciding to let Lehman Brothers fail, they managed to find a buyer for another prominent investment bank, Merrill Lynch. Hopes of a federal rescue for all of the famous firms were dashed Saturday after a series of meetings in Manhattan between top business and government officials, the New York Times said. Bank of America and Barclay's had discussed a plan to buy some or all of Lehman Brothers' still-profitable assets, but that plan fell through when the two companies failed to get a commitment from others to spread the losses by buying the rest of the assets, the Times said. But the investment banking collapse owes itself to lax regulation on the part of government -- assuming, as everyone most likely does -- that capitalist greed drives the money market. As we saw with the nearly $9 billion collapse of California-based IndyMac Bank, federal bank regulators let bankers lend money on mortgages backed by other mortgages. When home values began to fall, a fairly cyclical event that happens periodically, unpaid mortgages guaranteeing other unpaid mortgages guaranteeing more unpaid mortgages were bound to begin to fail. The resulting cascade of failed loans now threatens the stock market and the entire economy. Other economic casualties expected this week include insurer AIG and Washington Mutual Bank.