It had been a long time coming. Many of us who follow the market everyday have been calling for less government bailouts in the financial markets.
While that may lead the U.S. economy to face some harsh realities, it certainly is better than the opposite scenario, one that would include the government bailing out all of the troubled Wall Street investment banks and U.S. taxpayers footing the bill.
The worst part about it would be that those who engaged in this risky activity and profited heavily from it would not have to face the responsibility of reporting to investors the eventual massive losses.
Many thought that Lehman was going to be the next firm to be bailed out.
The government had committed $30 billion to supporting JPMorgan Chase’s emergency takeover of Bear Stearns, and just last weekend put up $200 billion in its rescue of Fannie Mae and Freddie Mac. Later came the AIG loan.
As market losses look to approach in excess of $1 trillion, it was only a matter of time before another bank decided that a government bailout was in order.
But the Federal Reserve and Treasury Secretary Henry Paulson finally heeded to some of the ideology that we thought they believed in: let the private sector figure out its own problems.
Obviously, nobody wanted to see Lehman Brothers go into bankruptcy. It hurts the economy, and it’s a sad day for one of Wall Street’s oldest banks.
The harsh reality is that Lehman Brothers made a $60 billion bet on mortgages and asset-backed securities that didn’t work.
The market must have some room to correct itself, and today it sent a major message to Wall Street banks: Beware.
There will be several other mortgage lenders and investment banks that will go under.
Many have speculated about the likes of BankUnited and Washington Mutual, among many others, becoming the next bank to seek a handout from the Fed.
My suggestion to the Fed: Say no!
You can’t fix long-term problems with short-term solutions.
On that note, 10 Wall Street banks have agreed to set up a collateralized borrowing facility, and committed to a pool of funds for $7 billion each, totaling $70 billion.
The banks are Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS.
The banks said that they are cooperating to maximize market liquidity through ongoing trading relationships, dealer credit terms, and capital committed to markets.
While it's not the solution to the entire financial situation in Wall Street, it’s a start.
Leaving the market to sort itself out will lead to a sizable consolidation in the banking sector. As we see Bank of America acquire Countrywide and Merrill Lynch, and other once-legendary financial institutions come under fire, we should be mindful that such is the nature of the markets.
There is boom. There is bust. There is expansion. There is contraction.
This is the ebb and flow of a market-based economy. However, we have to trust that a market economy is the best way to encourage entrepreneurship, innovation, and sound business practices.
That’s the real situation that we should be worried about. As long as we don’t have excessive government bailouts, and over-regulation as a result of the recent financial times, the economy should be fine and rebound eventually.
It is when government steps in and rewards those who have engaged in risky activity, and tries to micro-manage the economy, that the market economy doesn’t work.
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