Former Lehman Bros. Director Speaks of Wall Street’s Decline

The Wall Street financial catastrophe that has shaken the world was analyzed and explained yesterday in “The Financial Crisis: Implications for Washington, Wall Street and Main Street,” a panel discussion hosted by the Cornell International Affairs Review.
Three panelists dissected the causes and implications of the crisis from the perspectives of finance, economics and politics to an audience of about 220, filling Goldwin Smith’s Hollis Auditorium.
“This is a crisis. It is not obvious to many people, but this is not just a Wall Street problem, but also a Main Street problem,” said Prof. David Easley, economics, one of the three panelists.
Easley gave several examples to illustrate how the “common Joe” could feel the repercussions of the Wall Street crisis. Due to the erosion of confidence in the market, banks are now wary of lending money and may charge higher interest rates for the few mortgages they give out. As a result, fewer mortgages are obtained, which can further drive down housing prices and demand. Moreover, as banks now prefer to save more cash and make fewer loans, small firms will find it increasingly difficult to borrow small amounts of money to finance production.
Formerly a managing director at Lehman Brothers, Robert Andolina, the visiting senior lecturer of finance, explained the cause of the crisis.
In a “debt structure,” banks aggregate mortgages from individuals into a collective pool. This pool is then divided into categories. The worst category, also known as “equity,” was not rated by rating agencies. These are then sold off to special purpose vehicles, subsidiary corporations that issue short term commercial paper loans.
The downturn of the housing market led to the failure of special purpose vehicles and banks that are closely linked with them. The subsequent fall of Lehman Brothers, one of the largest investment banks in the U.S., further shocked the financial markets and led to a crisis of confidence.
Prof. Elizabeth Sanders, government, offered an alternative perspective. She argued that the main culprit of the current crisis was the government’s deregulatory ideology, which began in the early 1980s by former president Ronald Reagan and later continued by Bill Clinton.
Apart from an intrinsic distrust of government regulation, the “hegemony of deregulatory policies” was also a result of huge donations that congressmen receive from the finance industry, according to Sanders. She claimed that the finance industry was the fourth largest funding source for presidential hopeful Barack Obama (D-Ill.). Although his rival John McCain (R-Ariz.) received less money, the finance industry was still his third largest funding source.
“The financial crisis is a problem created by politics, and it can only be solved through the government,” said Sanders, who was disappointed by the dearth of discussions on rebuilding a regulatory system in Washington. She hoped that the newly elected government in November would “get [their] brain-trusts together” and re-establish such a system, which “worked pretty well” in the 1950s.
While Sanders said that the creation of a long-term regulatory policy was immediate and necessary, Easley emphasized the urgency and importance of boosting the market right now.
“Now we need action that is dramatic enough to change the erosion of trust and confidence, and this is what the bailout plan attempts to do,” said Easley.
The $700 billion revised bailout plan passed last night was perceived as a rescue for the elite few at Wall Street using taxpayers’ money, but Easley emphasized that “taxpayers are already on the hook for lots of money and bailouts,” citing previous government rescues of several large institutes, including Fannie Mae, Freddie Mac and the American International Group. Taxpayers also indirectly finance the increase in federal deposit insurance, which guarantees savings up to $250,000 in last night’s bailout plan. Moreover, Easley also said that a further decline in stock markets would also “certainly affect all of us.”
“The free market needs help. The question is how,” said Easley.