Busted: Bankers and The Global Economy

September 14, 2008

Wall Street: Strength or Poor Collateral?

economic checkmate?

economic checkmate?

With each succeeding bailout through nationalization, the U.S. government grows larger. Innovation rarely happens within government, so nationalization is rarely a good prospect for a growing and dynamic economy. The U.S. economy is clearly in a decline. More bailouts only prolong the pain and do little to spur the nation forward as it languishes and flounders. Bailouts appear to be a prop, but in reality further weakens the economy in a downward spiral.

More and more businesses want government money to move their business projects forward, especially for public works and energy projects. Arguably, either business is so bad that business doesn’t want to take risks or business has become lazy in risk department, unwilling to set aside funds for projects that might be considered in the public interest. Big Business is coming into the habit of standing by for government loans at “public expense.” Even the Big Three auto manufacturers are looking for handouts or cheap loans from the Federal Reserve.

All weekend, bankers of prominent standing have been visiting the Federal Reserve Bank of New York in round robin style, while the U.S. Treasury pounds away in the hope of negotiating an agreeable deal for Lehman. The prospect of saving the majors of Wall Street and preventing economic collapse around the globe as investments are compromised is what is at stake.

Investment bankers have been able to borrow from the Federal Reserve since the collapse of Bear Stearns. Based on certain rules, the Federal Reserve has allowed investment bankers to borrow operating capital for the short-term to sustain business. Investment banks have supposedly stopped borrowing from the Federal Reserve since April of 2008.

On the surface, this lack of borrowing is indicative of an improvement in health. However, if the quality of the collateral held is so poor that the Federal Reserve will not accept the collateral for a short-term loan, this is indicative of far greater failure than is being publicly admitted. Could this be why bankers are being called to the Fed in the hope of sequestering a bailout deal and leave running the other direction?

Bankers are naturally eager to survive and unwilling to soak up any more failed collateral. If the government doesn’t come up with an enticing enough proposal to persuade a private bailout, the collapse of Lehman is likely to lead to global losses and more financial dominoes. Henry Paulson has been reluctant to promote more bailout fever, perhaps fearful of more weakness and more bailouts on his shoulders.

Clearly, the U.S. government is incapable of bailing all business out, nor should it be expected to. Business holds a certain amount of risk that can be largely anticipated to a certain point. Bankers have been heavily impacted from the financial derivitives that were expected to create endless wealth. Smaller commercial bankers in the United States have been largely protected from these risks and continue to make poor decisions because they can. International bankers and bank holding companies cannot afford to eat more huge losses while borrowing heavily from foreign nations for more financial sustenance. If there is no profit in a deal, they won’t be making one.

The U.S. and perhaps the global economy is at a crossroads this week. We are going to find out whether Uncle Sam can find a way to entice bankers into a private bailout. Perhaps reality is so bad that the deal is virtually untouchable. Has “tough love” finally come home?
~ E. Manning


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