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(TALKZIMBABWE) The global economic crisis: How the West failed the world

The global economic crisis: How the West failed the world
Olley Maruma - Opinion
Thu, 08 Oct 2009 00:18:00 +0000

A YEAR after the banking and financial crisis that shook the world's economic system, people the world over are still trying to understand all the repercussions of what went down. How to prevent similar crises in future was at the top of the agenda of the G20 summit at Pittsburgh in the United States.

The irony is that Western business and political culture is in such a crisis that, as on many other matters, from the land issue in Zimbabwe, the Iranian nuclear issue, to the political crisis in Honduras, the G20 leaders are obsessed with dealing with symptoms of the disease and not its cause.

That means that the disease will not be cured any time soon. World leaders need to cultivate a habit of crafting global economic policies that lead to genuine development and not just to higher corporate profits and GDP growth.

Although Western leaders lecture political leaders from the Third World constantly about transparency, accountability and good governance, they pay very little attention to transgressions of these values in their own backyards. This is because top executives on Wall Street are often the ones who drive American economic and foreign policy, often moving chairs from the business to the political sector with great ease.

The trouble is that Western transnational corporations, whose activities are inseparable from those of the stock markets where the value of their assets is determined, now operate as oligarchies on whom neither governments nor the voters have got much power and influence. If one doubts it, one should read Lawrence McDonald's book, "A Colossal Failure of Common Sense: The Insider Story of the Collapse of Lehman Brothers," which has been rising steadily on the New York Times Bestseller Book list.

When the New York merchant bank, Lehman Brothers filed for bankruptcy last year and the brokerage firm Merrill Lynch was bought out by the Bank of America for $50 billion, stock prices plunged in Asia, Europe and the United States. The crash, which was comparable to that of 1929, caught most Western political leaders by surprise. In New York, the Dow Jones Industrial Average closed 504 points down, or 4.4 percent.

The Nasdaq composite lost 3.6 percent, its worst single session percentage decline since March 24 2003. It left the tech-fuelled average at its lowest point since March 17 of that year.

In Europe, the FTSE index in London declined by 3.92 percent, while the CAC in Paris was down 3.7 percent. It was the worst day for the index since the 9/11 terror attacks in 2001. Major Asian indexes were closed but India's Sensex fell 5.4 percent. Taiwan's benchmark dropped 4.1 percent and Australia's key index by 2 percent and the Singapore index by 2.9 percent.

The turmoil at Merrill Lynch and Lehman Brothers immediately led to a world-wide banking and financial crisis and major job losses in the already hard-hit financial services industry. The chaos followed a roller coaster weekend for a Wall Street already concussed by woes at other major financial firms, particularly the American mortgage financial titans, Fannie Mae and Freddie Mac.

The US Federal Reserve Bank was forced to step in, announcing plans to loosen lending restrictions to the banking industry in an effort to calm stock markets, while a consortium of ten leading domestic and foreign banks agreed to a $70 billion fund to lend to troubled financial institutions.

In his book, Lawrence McDonald sums up what happened at Lehman Brothers very aptly and succinctly: "There's 24 992 people striving hard, making money and 8 guys losing it." It is a quote that highlights how 8 top executives of an old and highly respected merchant bank can run amuck with credit and other people's money, ultimately leading to the demise of an old firm and a world financial crisis. And this was a company that had survived the American Civil War, two World Wars and the 9/11 terrorist attacks. Yet it was brought down by the sheer recklessness of 8 people, through poor board leadership, leverage and a lack of risk understanding by its Chief Executive Officer, Richard Fuld.

According to McDonald, at one point the company had almost 40 percent of its net tangible assets in essentially 3 huge commercial real estate projects. In other words, the company had essentially become a hedge fund and private equity firm that was running 40:1 leverage at the time. It was by any standards a recipe for disaster.

For four years, McDonald served as vice-president of distressed debt and convertible securities at Lehman Brothers. While conducting research for his book, he interviewed more than 150 people who worked for Lehman.

He says that the company "was never never rotten at the core. That's where all the beauty was. This place was rotten at the head."

The executive leadership of the company worked on the 31st floor, which McDonald characterizes as "one of the most mysterious places on Wall Street." Richard Fuld, both Chairman and Chief Executive Officer of Lehman, contrary to best practice in corporate governance these days, had his office there, but despite his senior position, McDonald never met him. Neither did most of his colleagues, even at the highest levels of the company.

McDonald says even on the company's best days, Fuld never appeared on the trading floor to congratulate Lehman Brothers employees. McDonald observes: "Fuld surrounded himself with every type of yes man and woman you could possibly get. By the time 2007 rolled around, he had a real steam-roller. They increased the balance sheet between 2007 and 2008 by over $120 billion."

How the company could manage to do this when there was essentially a financial crisis brewing in the American economy because of a credit crisis in the sub-prime mortgage sector, in which Lehman Brothers was heavily committed, was a great mystery, until of course the bubble burst.

It turned out that while the crisis in the sub prime mortgage sector was getting worse, Lehman was taking on more debt to pay high level employees.

"They were using leverage to increase the bonus pool and to increase the compensation flow," to the point that if you made it to the 31st floor, it was like "hitting the New York lottery."

McDonald says of Fuld: "He had a team of people that were really pressing on the gas pedal." McDonald says Fuld's fate was sealed the moment he met with the then Treasury Secretary Henry Paulson in the spring of 2008 when the government was still trying to save Lehman from bankruptcy.

When he came out of the meeting, Fuld "tried to put Lehman staff at ease. He sent an e-mail that said, "We have huge brand at Treasury," meaning that Lehman Brothers had a lot of respect there. McDonald says the reality was that the meeting had been very tense. According to those in attendance, Fuld told Paulson: "I've been in my seat a lot longer than you were at yours at Goldman Sachs. Don't tell me how to do things. I'll do things at my speed."

McDonald believes that that was the start of a lot of problems. Lehman was not trying to sell quickly enough as the government wanted.

Like the great city of New York beyond its massive glass windows, Lehman Brothers never slept. McDonald writes that when he first started working for the company, "I looked forward to meeting this famous CEO (Richard Fuld). When I mentioned this possibility to Larry McCarthy, I recall him laughing, a touch sardonically, which was not all that unusual for him. 'That probably is not going to happen, buddy,' he said. 'I've never met him myself' Huh? A managing director, the head of distressed debt trading, had never met the CEO! Beat the hell out of me."

Later, McDonald learnt that Fuld was treated like a king at Lehman. When he arrived by limousine in the morning at a VIP entrance at the back of the building, his driver had already called ahead to alert the front desk in the lobby of "his majesty's arrival." The front desk attendant then hit a button programming one of the lifts in the rear bank to go directly to the 31st floor. A security guard would then hold the lift until Fuld's arrival on the 31st floor. After work, he left the building the same way.

This sort of behaviour, McDonald says, helped Fuld to preserve his godlike existence. In the process, he separated himself from the most modern technology and the ultra modern trading of credit derivatives. In other words, he was a leader who lived in an ivory tower and did not have a clue what was happening to his debt managing divisions.

In many ways Fuld is symptomatic of what is wrong with the way Western corporations, which have a powerful influence on their governments, operate. They are extremely remote and watchful characters who surround themselves with a coterie of like minded cronies who are often out of touch with reality because they have almost no contact with anyone else.

Labels: GREAT DEPRESSION II, NEOLIBERALISM

posted by MrK @ 3:38 AM