The financial markets have been reeling. The unthinkable has happened. Bear Stearns, Lehman and Merrill Lynch no longer exist as independent firms. These are companies that weathered two world wars, the Great Depression, Vietnam, Watergate and yes, even the Jimmy Carter presidency.
Specially painful was Merrill selling itself to the Bank of America. I trained at Merrill at the World Trade Center in 1976 at the Coffee Cocoa and Sugar Exchange. It is hard to imagine Merrill people taking orders from the Bank of America.
Mercifully, the Fed intervened and stopped AIG from going under. WAMU traded below $2.00 a share. Both WAMU and Wachovia have more loan resets in 2009 than they did in 2008. I would be surprised if either of these two banks survive without some type of bail out.
On Thursday the 18th of September, Morgan Stanley had a 100% swing in its stock price. State Street Bank also had the same type of swing. Goldman Sachs, which wisefully did not participate in the subprime market, at one point was down over 30%.
Foreclosures at are all time high and real estate prices in California, Florida, Nevada and Arizona have dropped over 35%. Fannie Mae and Freddy Mac no longer exist. The US government (you, the taxpayer) now holds 60% of all mortgages in the United States.
Politically there enough blame to go around. The Republicans for their lack of regulation of Wall Street and the Rea Estate Market and the Democrats who forced institutions into giving loans to people that could never pay them back.
The only bright spot as far as the government goes are Bush appointees Ben Bernanke and Paulson of the Federal Reserve and the Treasury Department. They have been firemen working weekend after weekend to manager the disaster we find ourselves in. They are to be commended.
In order to avoid this from happening again what should we do?
1. On the Real Estate side.
Eliminate national mortgage loan brokers such as Countrywide. Let local banks make lending decisions. Make loan officers, real estate brokers and mortgage brokers responsible for the information that is submitted to the lenders. If you submit fraudulent information, to the lender you go to jail.
Make appraisers fully independent. Establish a method that appraisers can file complaints against mortgage brokers, real estate brokers, banks who demand appraisals that are fraudulent.
No more no down payment loans. No liar loans. Make real estate brokers fiduciary responsible to their clients. If a person can't buy a home, don't sell them a home. This is done on Wall Street. It is called the " know your customer rule". If you knowingly sell a home to a person that can't afford it the real estate broker should be liable for the losses. This works on Wall Street it should suffice on Main Street.
Let housing prices fall to the point that the average person can afford to buy a home. This will happen with or without government interference.
2. On Wall Street.
No more bundling of toxic real estate loans that no one knows their worth.
No more allowing CEO'S such as Stanley O'Neil who destroyed Merrill Lynch to walk away with $163,000,000 dollars or Angelo Mozillo who walked away with $43,000,000 dollars at Countrywide. Both of these guys should be in jail for the destruction of the firms that they headed and the job losses they caused. Congress should carry out an investigation on these rogue CEO's and discover if any laws were violated.
Wall Street should be limited to real estate investment trusts (REITS) and limited partnerships in specified properties. No involvement with real estate loans to individuals. Make CEO's responsible to shareholders. No golden parachutes. You produce as a CEO, or die.
Regulate short selling. Make the big players play by the same rules as the individual investors.
I have never seen a situation like this. I have been involved in investing for 37 years. Hopefully we will get through this.
As Tiny Tim said in A Christmas Carol, "God bless us, every one."
Alberto Marrero Salas:
Worked on Wall Street (Merrill Lynch - Prudential Bache) during the 70's amd 80's.Currently partner Nacara 2000 / Carvajal Law Offices practicing immigration law. Email the author