Tags: lehman | brothers | greed

Greed Feeds Wall Street's Expanding Crisis

Tuesday, 16 Sep 2008 02:05 PM

By Phil Brennan

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Gordon Gekko, the villain in the movie "Wall Street," was dead wrong: Greed is not good, as he insisted. It is bad, very, very bad.

Gekko didn't understand that greed distorts judgment, and in his case his failure to exercise due diligence as a result of his greed eventually sent him to the slammer.

We're seeing this played out in real life in the collapse of banking giant Lehman Brothers and its effect on the entire U.S. economy. Greed led this old and respected banking house that traces its roots to the mid-19th century to violate the most vital but unwritten rules about lending: Don't buy mortgages from banks that lend money to people who haven't got the ability to repay the loan.

Giant mortgage lenders routinely ignored those rules, closing their eyes to the stark realities in order to make quick bucks out of lucrative cash cows such as lending fees tacked onto closing statements, healthy point charges, and other such fees. They then dumped the flimsy paper on banking houses such as Lehman, which soon were overloaded with high-risk mortgages many of them already sliding into default.

You can't blame the borrowers for obtaining mortgages they couldn't afford. They were innocent lambs set up for a trip to the slaughterhouse by conscienceless mortgage lenders who allowed their greed to distort their judgment and make the riskiest of loans to the riskiest of borrowers.

I recall the case of a decent, hard-working woman who bought an expensive house in a posh Los Angeles neighborhood that was way beyond her means to service should something untoward happen to her, which it did, of course.

She was injured in an accident and could no longer work. Nor could she pay the exorbitant monthly mortgage payments. The lender foreclosed, and now had her $150,000 house on their hands and a loss to boot.

This wasn't the exception, this was the rule. Lenders were ladling out huge mortgages with equally huge monthly payments to folks who would never have qualified for such mortgages in saner times .

Like many other banking houses, Lehman added lots of these so-called sub-prime mortgages to their portfolio, compounding the risk that sooner or later the piper would have to be paid. When the gravy train came off the tracks Lehman was a major passenger.

Once upon a time bankers were famous for their caution in handling other people's money. They encouraged thrift and by their lending practices discouraged people from living beyond their means. The were not gamblers and they were not out to make quick bucks on the backs of their depositors or their borrowers.

If you needed a mortgage, they needed to know you could handle it even when things turned sour for you. The money they lent, after all, was not theirs, but their depositors.

When they dealt with business firms they wanted to know if the company's owners or operators had sound judgment and knew what they were doing.

Today, nobody in the banking trade seems to have had the least concern over what kind of people were at the helm of the mega-mortgage banking companies. They seemed comfortable with the chief executives of the companies they dealt with as long as they appeared to be making money for their firms. As a result, they had no qualms with dealing with the type of businessman of whom Gordon Gekko said, "If this guy owned a funeral parlor, no one would die!"

Unfortunately, their greed and incompetence has led to the financial demise of an awful lot of people who had nothing to do with the financial debacle now being played out at the corner of Wall and Broad, and in the pocketbooks of a lot of ordinary Americans whose 401ks are being battered by the winds of greed.

I don't have the vaguest notion of where all of this is going.

America's prosperity is rooted in the credit economy. Without reasonably available credit, the automobile market would collapse. Without the credit mortgage lenders supply the real estate market, now already in deep trouble as a result of an outrageous price bubble, would vanish.

Installment buying makes possible almost all large purchases in today's marketplace thanks to then Singer Sewing Machine Company President Commodore Frederick G. Bourne, my kid's great-great grandfather.

He set the whole installment buying mechanism off at the beginning of the 20th century by introducing it — then an unheard of gimmick — to encourage buyers to buy sewing machines most could not pay for on the spot. The then-revolutionary idea caught on, and it's been fueling our economy ever since.

This is a borrower's economy. Americans believe in the buy-now, pay-later routine. Take readily available credit away, put iron shackles around lending practices and you in effect transform the economy into a buy-now, pay-now economy and the whole structure built on easy credit collapses.

That's what's at stake here.

It's not that love of money that's the root of all our evils, it's the greed that love creates in us.

Ora pro nobis.

Phil Brennan is a veteran journalist and World War II Marine who writes for Newsmax.com. He is editor and publisher of Wednesday on the Web (http://www.pvbr.com) and was Washington columnist (Cato) for National Review magazine in the 1960s.

He also served as a staff aide for the House Republican Policy Committee and helped handle the Washington public relations operation for the Alaska Statehood Committee which won statehood for Alaska. He is also a trustee of the Lincoln Heritage Institute and a member of the Association For Intelligence Officers.

He can be reached at pvb@pvbr.com.

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