As one major financial institution after another succumbs to crushing losses this year, it is mourning in America for the hopes of average working people who believed in the myth of stock ownership as a sure path to a better life now and a safe retirement later.
It may sound like a gross exaggeration to say that the dreams of Main Street are dying on Wall Street this week, but it is a fair interpretation of recent events. For the capital that is required to fund businesses, schools, streets, farms, vacations, homes and cars is quite literally evaporating like dew at the start of a summer day with the untimely death of every bank, brokerage and insurance company.
Where did the money come from, and where has it gone? It's an interesting saga, and it will take just a few minutes to tell. Let me warn you first that it starts out like a fairy tale but quickly becomes a horror story, so I'll be sure to tell you when to cover your eyes.
The times that Wall Street forgotFor years, banks, brokers and insurance companies have besieged us with marketing claims that the regular purchase of shares in public companies would effortlessly grow in value forever.
Never mind that there have been long periods in the past century -- such as, roughly, 1929 to 1932, 1937 to 1949 and 1965 to 1982 -- when this simply wasn't true. It has been valid enough in the recent consciousness, from 1982 to 2000, and with that hopeful seed planted, the same ad whizzes who depend on our natural human optimism to buy all manner of fluff took it from there.
This hasn't always been the case -- far from it. During the first 90% of the industrial age, companies that wanted to grow their businesses were required to convince committees of stingy men at banks that their projects were worth investing in. Those committees were loath to put their firms' capital at risk, so they demanded both collateral and personal-liability agreements from supplicants. Except for brief and disastrous interludes of public participation in Europe -- each of which ended with 100 years of citizens' abstinence from capital markets -- only people of great means financed industry.
- Talk back: Do you see the American Dream slipping away?
But in the middle of the 20th century, an unchecked ambition to build big projects across the United States and Asia was married to the development of mass-market advertising techniques, and the practice of persuading average moms and dads to put hard-earned money to work in big business with little fear as to its safety was born.
Railroad and shipping barons of earlier times would be shocked to discover how little concern most people have exercised in the past few decades when plunking their salaries into mutual funds or individual stocks. The idea of risk-free investing, to people who really take the risks and thus understand them, is laughable.
It is only now, during this period of acute crisis, that individuals who won't go on a bicycle without a plastic-foam helmet are coming to grips with what business risk really means. And that is why a childlike innocence is dying along with the stock market this week, making people feel as sad, helpless and angry as when they first discovered the truth about other realities of adulthood.
Unfortunately, it is not just working people who are learning these lessons. It is investment-industry workers, too, and supposedly sophisticated hedge fund managers and bank executives, not to mention government officials and regulators. For virtually all have succumbed to the falsehood that risk is just a four-letter synonym for opportunity to some degree or another. They have stumbled into making bets at a casino whose rules they don't really understand and that are not, in any case, written down.
Neither a borrower . . .At this moment, at trading-desk workstations and brokerage back offices around the globe, there is a process of creative destruction taking place -- not just of capital but of beliefs. Every financial institution is trying to come to grips with how much exposure it has to , the 158-year-old investment bank that has just declared itself insolvent with almost $650 billion in liabilities.
These institutions are likewise trying to figure out how much exposure they have to thrift, which may find itself in bankruptcy court before the week is out. (Insurance titan has also been a worry, but a government rescue announced Tuesday evening will likely keep it out of bankruptcy.)
You might think it would be a simple matter for businesses to figure out how much money they have at risk in their relationships with these troubled companies, but that's not the case. I'm told by insiders that even in this digital age, billions of dollars in liabilities are toted up each day on paper and must be hand-counted, double-checked and cross-referenced by branch managers who are much more accustomed to long golfing weekends than tedious back-office work.
As one example, consider that Lehman was one of the 10 largest dealers in the world of a type of widely popular bond-insurance instrument called credit default swaps, or CDSs, which meant they were the middlemen between two parties -- a buyer and a seller -- that didn't know each other. CDSs allow bondholders to hedge against the possibility that their security will default and allow speculators to bet on the possibility of bond defaults. It's one of the largest types of instruments in the world, with a total of about $60 trillion in nominal value, but also the least regulated.