Banks try to win back trust

The entrance to a Lehman Brothers bank

TEXT OF STORY

Doug Krizner: When you think about it, the banking system really comes down to trust. We give banks our money, and we trust they'll give it back. Banks have a similar relationship with each other. Every night, they lend each other billions. But lately the trust between them has broken down.
And that is the heart of the credit crisis. Marketplace's Amy Scott reports on what banks are doing to restore faith.


Amy Scott: A funny thing happened a few weeks ago when Lehman Brothers announced its first quarter earnings.

Erin Callan:Good morning everybody, and I really wanna thank you for joining us today to give our first quarter update and also the opportunity to give you a lot of information...

What information? Typically these briefings last maybe 20 minutes or so, and they don't include much detail. But that day Lehman's Chief Financial Officer Erin Callan talked for nearly an hour about the investment bank's finances. Then she took questions for about as long.

Christopher Whalen: And the reason was is that they came so close to disaster.

Christopher Whalen is managing director of Institutional Risk Analytics. He says Lehman Brothers was trying to prevent the same kind of crisis of confidence that pushed Bear Stearns' over the edge. Not only did Bear's investors run for the exits. Other banks lost faith in Bear's ability to repay overnight loans. And they stopped lending.

Whalen says if the Federal Reserve hadn't offered emergency financing to investment banks a few weeks ago, the same thing might have happened to Lehman.

Whalen: Lehman is next in the line of fire, because they were a much bigger mortgage player than Bear Stearns. Mortgages were a very important part of their business. But all across the board, the investment banking world is taking a hit right now.

So investment banks are opening up, trying to reassure investors and other banks that all is under control. Analysts say Morgan Stanley and Goldman Sachs also offered more detail than usual in their first quarter briefings. But analyst Greg Larkin with Innovest says if banks really want to win back trust, they'll come clean on exactly what kinds of subprime loans they have on their books.

Greg Larkin: I would like it to be broken down at that level of granularity, because I would come away with full confidence that we're not gonna be surprised. We know exactly what these banks are dealing with, what they're sitting on and how toxic or healthy these subprime assets are.

But Larkin is skeptical that even this new level of transparency will last long. As soon as banks start making investors happy again, he says it'll be back to business as usual.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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