Will September 15 go down as Black Monday in Wall Street history? Will New York City remember two huge hits in future mid-Septembers: 9/11 and 9/15?
Today's meltdown among major financial Wall Street players is unprecedented, really. First, Bear Stearns folds; then, Freddie, Fannie, and countless others; now, Lehman Brothers files for bankruptcy, AIG seeks a government bailout, and Merrill Lynch, a Wall Street brand since before the Great Depression, gets bought out and bailed out. What is next?
This is from MarketWatch:
Global financial stocks sank heavily into the red Monday after Lehman Brothers said it will file for Chapter 11 bankruptcy protection, American International Group reportedly sought an emergency loan from the Federal Reserve and Merrill Lynch agreed to a $50 billion buyout from Bank of America."
This question should be the centerpiece of all presidential campaign debates: How will each candidate fix the now clearly broken American banking system? Wall Street's problems go well beyond those faced by the Reagan administration with the collapse of the S&L industry—and that was a scary period to endure. Personally, I believe Congress made a huge mistake in 1999 when it repealed the Glass-Steagall Act, which prohibited commercial banks from engaging in investment activities. Under Glass-Steagall, customers went to a brokerage house for investments and kept cash and savings in institutions that were unaffected or at least less affected by ups and downs in the stock market.
Glass-Steagall was replaced by Sarbanes-Oxley, which was supposed to increase transparency in the investment industry and corporate America at large. Instead, it allowed banks and investment houses to create new "vehicles," such as the packaging of mortgage loans into investments that were sold as soon as the loans were made. This prompted the mortgage industry to give out mortgage loans to all comers, whether they were qualified or not. This helps explain how mortgages in default now account for 9 percent of all American mortgages. This is nuts! Read this Associated Press piece from September 5:
WASHINGTON (AP)—The source of trouble in the mortgage market has shifted from subprime loans made to borrowers with bad credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments. The Mortgage Bankers Association said Friday that more than 4 million American homeowners with a mortgage—a record 9 percent—were either behind on their payments or in foreclosure at the end of June.
Sen. Barack Obama has already been out stumping for Wall Street reform: "Obama has long called for an overhaul of Wall Street regulations, saying the subprime housing crisis and other problems stemmed in part from lack of transparency and accountability in the financial system."
That's putting it mildly!!! Let's wait and see how Sen. John McCain proposes to right Wall Street. Free marketers cannot claim with a straight face that the market can cure this problem itself.