Bubbles Burst and Banks Go Bust

Earlier this week I was enjoying Fizzy Lifting Drink and swimming among the bubbles whilst listening to the radio when I heard the financial report. Ordinarily I don't normally listen because I don't have much money, or any assets. Compared to what most people my age have, I have tuppence. That is merely due to the fact that I am a perpetual student and without a job.

But the words Lehman Brothers,large drop in the Dow Jones, largest bankruptcy in US history, came tumbling out of the radio. Well this caught my attention.

What the bloody hell was happening to the US financial market?

This is what I was able to gather although my mind is not so financially oriented.
Merrill Lynch was going to be sold to Bank of America.
AIG shares fell 95% and the Federal Reserve intervened.
Lehman Brothers filed chapter 11.


What does this all mean?
Should I be concerned? Should I hide my tuppence in my shoe? Whose fault was this? How could this happen?

A Possible Solution...Time to Reform Wall Street

There is a general problem in corporate America of stockholders being unable to effectively organize to rein in top management. This problem is most serious in the financial industry.

Thankfully, the credit crisis gives us the tools we need to rein in executive pay. Currently, the major surviving investment banks (e.g. Merrill Lynch, Morgan Stanley, Goldman Sachs) are operating on life support. They are drawing money at below-market interest rates from the Federal Reserve Board's discount window. This privilege (for which they pay nothing) can easily be worth billions of dollars a year.

These banks are also operating with an explicit guarantee from Fed Chairman Ben Bernanke to their creditors that he will honor their loans in the event that an investment bank, like Bear Stearns, goes belly up. This guarantee is enormously valuable. Investors who make loans to Merrill Lynch or Morgan Stanley don't have to worry about the health of these companies because Bernanke has said that, if necessary, he will use public money to pay them back.

While we don't want a chain reaction of banking collapses on Wall Street, the public should get something in exchange for Bernanke's generosity. Specifically, he can demand a cap on executive compensation (all compensation) of $2 million a year, in exchange for getting bailed out. For any bank that is not on board, Bernanke could make an explicit promise to their creditors - if the bank goes under, you will get zero from the Fed.

I have always been weary of bankers and investors since a young age after watching an ancient man sing about how great money is then try to steal from a little boy. I guess if I do enter the market I will tread lightly.