Wall Street quakes

Former Federal Reserve chairman Alan Greenspan is calling this the worst crisis he's seen in his career.

By JERUSALEM POST STAFF
wall street traders 88 (photo credit: )
wall street traders 88
(photo credit: )
Henry, Emanuel and Mayer Lehman formed Lehman Brothers in 1850, in Alabama, to trade in commodities, mostly cotton. Eight years later, having shifted to investment banking, they opened a New York office. Fast forward a century and a half: Lehman Brothers (no member of the actual family has headed the company since the 1950s) announced yesterday that it was filing for bankruptcy protection. Its fate and that of the global economy seem intertwined. People who don't ordinarily pay a great deal of attention to financial news are taking notice. How could they not, with the Wall Street Journal telling readers that "the American financial system" has been "shaken to the core;" the Financial Times fretting that the stock market is facing "the most radical reshaping" in its history, and the BBC reporting that we've just witnessed the "most extraordinary 24 hours since the 1920s"? Former Federal Reserve chairman Alan Greenspan is calling this the worst crisis he's seen in his career. The drama began at 6 p.m. Friday, when US Treasury Secretary Henry Paulson and Fed Chairman Ben Bernake met with key bankers and decided that the United States government would not bail out Lehman, America's fourth-largest bank - it would not, to be precise, provide prospective buyers of the bank with loan guarantees. Lehman is heavily invested in the sub-prime mortgage market, speculating in companies which raise money in order to lend it to people who are poor housing-loan risks. But these people couldn't repay the loans, while housing values declined by an average of 25 percent. Thus the value of the investments plummeted. It's hard to muster sympathy for a company that entices people to take risks they they can't really afford. Having rescued Fannie Mae and Freddie Mac - quasi-public mortgage companies - and helped keep Bear Stearns afloat, the US government, in an election year, simply did not have the political will for an even greater bailout. Though the Fed had established a fund to help troubled banks, Lehman's needs far outstripped the available resources. The US government was telling Lehman: You and others in the subprime market took greater risks than you should have, and profited from them. Had you taken fewer risks, you would have made less money in the "good years." While no capitalist would hold that taking more risk is necessarily wrong or irrational over the long term, actions have consequences. The good news is that most US banks are on solid ground. So we won't be seeing 1920s-like scenes of bankers selling apples on Wall Street. In fact, 10 of the world's biggest banks are pooling their resources to create a $70b. liquidity fund - a self-insurance scheme to mitigate the crisis. But there's no doubt that Americans are in for a bumpy ride. For the situation to improve, housing prices must be stabilized to reflect their true value. PARADOXICALLY, Israelis have little to worry about. Israel has no subprime mortgage market, and so is largely immune to the kind of crisis that has hit the US. Says Hebrew University Prof. Dan Galai: "When it pours in the US, we're bound to get a bit wet - but no one here is going to get the flu. There's no reason to expect a crisis or recession in Israel." That said, Israel is part of the global economy; if it slows down, so will ours. Seventy percent of our economy is export-based. And if there is a worldwide liquidity problem - because of increased risks - our banks will also have difficulty borrowing money. Israeli banks are not obligated to publicly report their exposure to Lehman, but the Bank of Israel has been successfully encouraging them to reduce these links. Bank Hapoalim yesterday announced its involvement with Lehman - $109m., down from $160m. By press time, Bank Leumi and Israel Discount had not released any data. The approximate exposure of Israeli firms is a modest $250-300m. Israeli regulators' more conservative approach to the economy, in seeking the right balance between government regulation and market freedom, seems to be paying off. And for being alert to the US housing and banking crisis, and encouraging local banks to minimize their vulnerability to it, the Bank of Israel is to be complimented.