Fallout: The Financial Crisis

Few signals given before sudden turns

Bob Moon Sep 17, 2008
Fallout: The Financial Crisis

Few signals given before sudden turns

Bob Moon Sep 17, 2008


KAI RYSSDAL: It’s not likely many people would’ve said this is where we’d wind up a year-and-a-half after Fed Chairman Ben Bernanke said the crisis would be contained. For most of that time the tone of the financial markets has been cautious, with occasional moments of doom and gloom. Like during the demise of Bear Stearns back in March. But a couple of weeks ago things somehow changed. And not for the better. Marketplace’s senior business correspondent Bob Moon’s been looking at the calendar since the bailout of Fannie Mae and Freddie Mac.

Hi, Bob.

BOB MOON: I’m still with ya, Kai.

RYSSDAL: That’s right. You’re back, as a matter of fact. . . . I understand how 10 days can change history, right?

MOON: Uh-huh.

RYSSDAL: Why these past 10 days, though?

MOON: Well, you know, there didn’t seem to be any dramatic trigger with the takeover of Fannie Mae and Freddie Mac. But that apparently did set off shockwaves, something of a chain reaction. In a couple of ways, really. We’d been hearing steady assurances from the CEOs of these firms — not to worry, things were under control. But when the government took them over, that action really spoke much louder than words. Investors seemed to take that as an official sign from the government that it really was as bad as it seemed. And that starts raising questions about who else is harboring — or even hiding — big, new losses. What might that say about the reassurances that others have been offering.

You know, investors started having nasty flashbacks to those rosy words that we were hearing from CEOs like John Thain at Merrill Lynch. Remember his conference call with investors at the beginning of the year:

JOHN THAIN: We have great, long-term prospects. As I look out into 2008, I am very optimistic about our ability to perform for our shareholders.

RYSSDAL: “Great, long-term prospects” says the man whose company was just bought by Bank of America, right?

MOON: Exactly. And he kept up that drumbeat of reassuring words all year long until, finally, analysts started calling him on it a few weeks ago, essentially saying, “Look, enough words. Where are the results, here?” Same with Lehman Brothers. The CEO kept trying to buy time. And finally investors just ran out of patience. I guess you could say that there’s really a thin line between buying time and just plain deception.

RYSSDAL: Investors got sick and tired of that. They started bidding down the stock. Is that what then has caused this 10 days we’ve had?

MOON: Well, that’s not all that’s been playing out. I talked with one Wall Street veteran today who told me this really has become not so much a credit crisis, because there’s plenty of money out there to lend. You know, the Fed’s been flooding the market with lots of cheap cash. The problem now is a solvency problem — or at least a perceived problem. “We’ve got money to lend but we don’t trust your balance sheet.” They trusted what Fannie and Freddie were telling them, they got burned. That meant Lehman Brothers and AIG, they were already highly leveraged, living on borrowed money. Couldn’t keep borrowing.

RYSSDAL: Is this, then, as you said, all perception? I mean, they perceived these things?

MOON: Well, it’s not all perception. There is some very real questioning of the fundamentals now. And one big one, in particular . . . We haven’t been focusing a lot on the old story of mortgage defaults and foreclosures. But it’s worth paying attention to the increasingly rapid rate of defaults. They’re up 112 percent from this time last year. So, it’s a crisis of confidence, yes, but it’s rooted in some very real problems.

RYSSDAL: Lemme turn your premise on the head, though, that it was the CEOs of these companies who were buying time and then, finally, they ran out of time. Is it now the government — having bailed out AIG, having bailed out Fannie Mae and Freddie Mac — are they now (Henry Paulson and Ben Bernanke) buying time?

MOON: That is true to some degree. Remember when we chatted here earlier this week, I said the trick is landing this thing gradually without crashing, but you don’t want to drag it out so slowly that you really introduce some torture here. Something else I mentioned then: We seemed to get some clarity with the events on Monday. Well, now, with this very bold action with the takeover of AIG, essentially, we’re back to Wall Street asking, “What’s going on and why now?” And so we’re back to the fear of the unknown.

RYSSDAL: The unknown. And we know, of course, how the markets feel about that.

Marketplace’s Senior Business Correspondent Bob Moon. Thank you, Bob.

MOON: Thanks, Kai.

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