Some Observations On The Current Financial Market Crisis

There is so much one could write about the events of the last week in our financial markets. And, no doubt, in weeks to come, I'll touch on many of them, in retrospect.

This morning, however, I have a collection of reflections I'd like to convey.

The first is my reaction to an article discussing the MUFJ rescue of Morgan Stanley. In this morning's Wall Street Journal, there is a long piece purporting to describe how, now that it has linked itself to MUFJ, Morgan Stanley and it's embattled CEO, John Mack, can go about 'repairing' its financials and 'righting' itself.

C'mon, who are they kidding?

Mack mismanaged the one-time investment bank, now newly-minted commercial bank, into near-oblivion. If Morgan Stanley had been perceived by regulators as the same sort of buccaneers as Lehman, with an equally-dislike able CEO as Fuld, and as narrow a range of businesses, it, too, might already be out of business.

Is it too much to ask people to realize that, despite the fresh capital, the same boneheads are in place at Morgan Stanley? The gang that brought them to the brink of insolvency are now recharged with more billions to squander.

No, I'm not arguing that we tank the international financial system to punish Mack and his mismanagement team.

Rather, let's not all lose perspective with respect to the firm. A large, slow-moving, capital heavy foreign bank has rescued the brand franchise of a once-storied American investment bank. It would be surprising if Morgan Stanley doesn't meet the same fate as its erstwhile competitor, First Boston Corporation, now merely a fragment of CSFB.

The fact is, what were, some twenty years ago, fast-moving, lightly-capitalized underwriters, M&A advisers and corporate financial advisers, with smallish, client-oriented trading operations, became unsustainably-leveraged, thinly-veiled publicly-owned hedge funds.

Don't expect what is left of Morgan Stanley to be anything to write home about when it comes to future performance.

Now to my other thought for this morning.

Roughly 90 minutes ago, President Bush announced the expected headline measures that the US government will take, via the Fed, Treasury and FDIC, to join its European G8 and G20 allies in insuring inter-bank lending, business DDA balances, and forcibly taking non-voting, temporary equity positions in major banks.

Both Bush and his Treasury Secretary, Hank Paulson, emphasized how distasteful it is to them, personally, and, they believe, to most Americans for the government to be owning shares of otherwise-publicly-held companies.

It ostensibly flies in the face of our brand of free enterprise capitalism and free market ideology.

But, before we all visit a Jesuit retreat, self-flagellate, and wear hair shirts, let's remember how we got to this point.

Our financial markets are in the shape they are in because of government intervention and mandates on the free market.

We began nationalizing the financial sector when we created Fannie Mae and Freddie Mac. These institutions implemented Congress' force-feeding of capital markets with low-income borrower, low-quality residential mortgages. As time passed, Congress continually set the goal for securitized low-quality mortgages ever higher. As high as 50% of the GSE's pass-through volumes!

Then we have the CRA. Government mandated commercial banks to lend to poor credit risks for low-income housing. Again, we, through our government, already screwed around with our financial system.

We allowed our government to override private credit risk controls.

This isn't Act One of the nationalization of our financial system.

In reality, it's Act Two: The Cleanup.

What will Act Three be? Exit? Or 'fascism?' And I mean fascism, technically defined.

In any case, before we all moan and groan about this new nationalization of banking by a Republican administration, let's be honest.

Congress and two Presidents- Clinton and Bush- pushed our financial sector to make badly-considered loans for homes to people who were too poor to afford them.

That was the nationalization of our financial system.

Despite what many believe, 'Wall Street greed' simply fed into the system that the government had already set in motion.