Nightmare On Wall Street: Lessons Learned

October 04, 2008

Forget all the psychobabble you're hearing—it's really not that difficult for long-term investors to figure out what to do in such crazy times. 


So far this year, household names like Lehman Brothers, Merrill Lynch, AIG, Bear Stearns, Washington Mutual, Fannie Mae and Freddie Mac have needed bailouts either by us, the taxpayer, or by larger institutions.

And as of this writing, the U.S. stock market is down 18 percent this year. How did it happen and what does this mean for us? Forget all the psychobabble you hear on TV—here it is, plain and simple.

Greed Plain & Simple

When my son was in second grade, I explained the concept of lending to him and he quickly grasped the idea of not lending money to someone who wouldn't pay it back.

Wall Street apparently didn't learn that lesson or, if it did, clearly didn't understand.

They enabled hundreds of billions of dollars worth of loans to people who didn't have a prayer of ever paying them back.

I believe that deep down inside, they knew this was a very bad idea, but shoved that doubt to the back of their minds in favor of "what the heck, I could make a fortune in the short run."

Failure Of The Fed

Advertisements for mortgages with rates like 3.158 percent annually once appeared in nearly every newspaper.

Naturally, these were tricks to lure millions of Americans into believing they could afford these mortgages.

I twice contacted the Federal Reserve Bank to ask why they allowed such advertisements, and got a response that in essence said "not our problem."

Well, it's everybody's problem now.

By my estimates, we are up to a cool trillion dollars now. That translates to about $3,000 for every person in the country.

Personally, I'm sending the then-chairman Alan Greenspan an invoice to reimburse my family, though I won't be holding my breath.

Drinking The Kool-Aid

The large financial institutions actually believed what they were saying. Stuff like this was hard for us to resist:

We believe that our clientswhether institutions, individuals or familiesrequire more than the right advice, investments and services. Our clients also require a profound and fundamental commitment to their long-term success.

This earnest, yet sexy, statement, with its reference to "long-term success," came from the Lehman Brothers Web site on the day it filed for Chapter 11 bankruptcy.

It appears these institutions drank their own Kool-Aid and were intoxicated with the belief that they were smarter than the market. In the cold morning light, however, we're all stuck with the Kool-Aid hangover.


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