Walking downtown Thursday, Sept. 11, I looked up at WaMu Center. I could not help but think of a day in 1991 when I entered the Continental Illinois National Bank and Trust building in downtown Chicago.
At the time, my Washington, D.C., consulting firm was providing public-policy advisory services to institutional investors, including Continental Illinois, which was ending a seven-year struggle to survive after private-public efforts to save it had failed. I was visiting my client there, the bank's chief economist, and took an elevator to his floor. Getting off the elevator, I passed hundreds of empty desks and computer stations before I got to his corner office. He was, literally, the only person on the floor.
It was a surreal conversation. We talked about the Federal Reserve, pending tax legislation, and related matters as if nothing unusual were taking place at the bank. On parting, my client friend told me he would not have funds to continue our services. Out of curiosity, I got off the elevator one floor down before leaving the building. There, too, I found hundreds of empty offices and work stations but no living person.
Continental went down, you may remember, because of bad risk management. Mainly, it got stuck with a ton of bad energy loans — just as Seafirst Bank did here in Seattle. Other previously unnoticed weaknesses came to light. Despite valiant rescue efforts over several years by the feds and financial partners, a bank thought "too big to fail" failed.
Will WaMu Center be similarly empty soon? Washington Mutual is not as important to the national financial system or economy as Continental Illinois was. My gut instinct tells me it will — unless some foreign or domestic entity is willing to buy the assets at bargain prices. The $7 billion capital infusion earlier this year, by Texas investors, diluted stockholder value then and has fallen far short of meeting the bank's capital requirements. WaMu's stock price has tanked. Who would buy the bank or the stock? Who will infuse new capital? Would you?A Lehman sale is urgently being pressed
As this was written Thursday evening, the feds were doing a Bear Stearns to save Lehman Brothers. That is, the Treasury and Fed were trying to sell Lehman in one or several pieces to foreign and domestic buyers — hopefully without commitment of taxpayer money. The aim, apparently, is to get it done over the weekend, before Asian then European and U.S. markets open.
This comes less than a week after the federal takeover of mortgage giants Fanne Mae and Freddie Mac, with potentially large taxpayer exposure.
A walk through The Wall Street Journal's Business and Finance left-hand column Thursday morning yielded, additionally, the following items:
- Some Wall Street firms were marketing allegedly abusive deals to help foreign hedge-fund investors avoid U.S. taxes.
- Sharply lower European growth forecasts heightened recession fears; European policymakers seemed unlikely to try U.S.-style stimulus policies.
- Falling currencies were causing more governments to intervene with their largest defensive moves in years.
- As was well known locally, WaMu's hiring of a new CEO was drawing tepid response from investors; the stock continued to fall.
- Slumping auto sales in Europe and a possible slowdown in China were fueling worries about the global industry.
All of this is following a slew of continuing reports about hedge-fund failures and near-failures, the riskiness of supposedly "sophisticated" financial instruments invented to generate greater volume for their sponsors, and reports of boards of directors granting huge, multimillion-dollar exit packages to failed CEOs whose institutions' bad performance had hurt investors, taxpayers, customers, and ordinary employees.Masters-of-the-Universe mentality
Much of this flows, in my judgment, from a Masters of the Universe mentality which pervades the big-time financial community.
In this mentality, money and power to the Masters are what really count. There are ridiculous fees being derived from middle-man financial services which add no real value to the economy. "Instruments" are invented which even their own inventors do not understand, except that they provide a new source of revenue. Salaries and annual bonuses are obscene and in proportion to the obscenely high revenues harvested by the firms. An executive getting a $10 million Christmas bonus can fall into clinical depression when he learns the guy in the next office got $12 million. Even when revenues fall off sharply, the huge salaries and bonuses continue. Winter homes, summer homes, Upper East Side condos, limos, facelifts, and a certain smug arrogance are a part of the life. If they are so rich, they must deserve to be rich, the Masters believe. Certainly, they possess a brilliance and superiority not to be found in the investors and customers who provide their income. They are celebrities, legends in their own time.
Except that these guys really are not all that smart. They bet billions on street rumor. They know about numbers but lack common sense about the actual working economy. They take on risk as if it did not matter. Things go bad. Their institutions teeter. Taxpayers should come to their rescue. When a lead dog fails and gets dumped, the firm gives him farewell millions. After all, who knows which Master might be next and want to exit the same way? An offshore buyer, even a sovereign state fund from the Middle East or Asia, might rescue us? That is OK. Capital should move freely, even if it that capital comes from a source which could at a critical moment exert political leverage on vital U.S. policy. The last thing the Masters expect, ever, is that their castles will fall. But big-time financial community CEOs are biting the dust. Household-name institutions are being rescued, even at public expense, whereas little known local and regional institutions are left to fail. But big institutions can fail, too.
Depression-born kids, such as myself, have expected something like this for a long time. Asset prices cannot keep rising, never falling, indefinitely. Greed is not good, too much risk not virtuous.The final outcome
Are we headed, right now, for a New Black Friday? Will 9/11 be remembered not only for a terrorist attack on the World Trade Center towers but as a date marking the beginning of a financial unraveling? That is not likely.
But we may be entering the beginning of The End of an Era of Excess in which bubbles of all kinds become deflated.
If that is what we are seeing — and we can escape a real financial collapse — today's painful adjustments will have been worth it. Short term, though, there is not much comfort in that moral lesson inside the WaMu Center, at Lehman, at Bear Stearns, at Freddie and Fannie, and at other places which, like Continental Illinois, thought themselves "too big to fail" and destined only for success because of their national or regional importance. Time to get real.