By HENRY KAUFMAN
Published: October 11, 2008
Every week, the Opinion section presents an essay from The Times’s archive by a columnist or contributor that we hope sheds light on current news or provides a window on the past.
In 1990, in the wake of the collapse of Drexel Burnham Lambert and the failure of savings and loan associations, the economist Henry Kaufman foresaw an unhappy new era in which we would have to pay for Wall Street's recklessness.
February 23, 1990
Wall Street Heads For Darker Days
Henry Kaufman is president of Henry Kaufman & Company, money managers and financial consultants.
By Henry Kaufman
The demise of Drexel Burnham Lambert Inc. has been portrayed as the end of an era, and in many ways it is. But it also marks the beginning of a new, darker era in which Wall Street and the nation will pay a heavy price for the excesses of the last decade.
Drexel Burnham's collapse is symptomatic of a deeper problem: the abuse of the American credit system. The consequences of this abuse now abound.
Hundreds of savings and loan associations will have to be closed down, costing taxpayers hundreds of billions of dollars. Many other financial institutions have been significantly weakened by poor-quality loans and investments. The credit quality of American corporations is at its lowest point since the Great Depression, despite seven years of economic expansion.
The abuse of the credit system began more than a decade ago, through a series of events and developments that loosened the structure of the financial system. That fostered a highly aggressive financial entrepreneurship that severely impaired the remaining code of prudent financial conduct.
The credit system suffered further from the Government's willingness to allow deregulation to proceed in the absence of adequate new safeguards, improved official financial supervision and stricter rules of financial conduct. Instead, from Main Street to Wall Street, excesses multiplied through the employment of novel financial techniques and liberalized credit standards that were unthinkable even two decades ago.
Hardly anyone in authority stopped to question the implications for the financial system. The facile rhetoric was that the ''marketplace'' would discipline the wrongdoers in our financial system.
But relying on the market to discipline financial institutions is generally unacceptable. It is too blunt a weapon for financial institutions, which are thinly capitalized and closely linked through myriads of transactions with other institutions.
Financial institutions are the holders and, therefore, the guardians of our savings and temporary funds, a unique public responsibility. Truly letting the marketplace discipline the financial system would mean acquiescing in an avalanche of potential failures - including many salvageable financial institutions and many of their customers.
The excesses of financial entrepreneurship have been abetted by a kind of ''hollowing out'' of the financial regulatory system. Because of piecemeal legislation, official supervision and regulation is highly fragmented. That has meant heavy and inefficient overlapping authority in some areas and enormous regulatory gaps in other areas.
Specifically, the two agencies with responsibility for the securities industry, the Securities and Exchange Commission and the Federal Reserve Board, hold opposite - and probably irreconcilable - theories of financial regulation and supervision.
In a nutshell, the Fed believes that the holding-company parent and all affiliates of a bank or securities firm ought to be supervised on a consolidated basis. The S.E.C.'s legal authority is narrowly focused on the broker/ dealer operation of a securities firm.
Thus, under the terms of its mandate from the S.E.C., the New York Stock Exchange must concentrate its surveillance on the broker/dealer. It has little authority to go into other affiliates of the broker/dealer's parent, even if they are involved in financial activities.
This regulatory fragmentation, and the loopholes it provides, has not been lost on Wall Street. The leading securities houses have all sought to increase their financial leverage by forming elaborate holding companies. To this end, they use creative, though permissible, accounting techniques to hide from public view their gross asset and liability structures.
Thus, the end of Drexel Burnham does not mean the end of the unwinding of the financial recklessness of the past decade. Continued slow economic growth or a business recession will bring forth failures that are still hidden in the financial fabric.
For many firms in the securities industry, the franchise that they once had will not be recaptured. Wall Street's special role as adviser and investment banker to business and to other financial institutions is waning rapidly. The foundations of this role were based on trust. That trust has been shattered by conflicts of interest that were created when many securities firms rushed to participate in hostile takeovers and direct acquisitions of nonfinancial businesses.
In the wake of the Drexel failure, the task of rebuilding a strong financial base for our corporations and financial institutions will require tax inducements, the strengthening and centralization of official financial supervision and the establishment of standards to hold corporate directors accountable for objective evaluations of corporate management performance.
Under such a stiffened regulatory approach, Wall Street firms would probably be confronted with more stringent capital requirements and closer supervision of all the activities under their holding companies. With the loss of much of their franchise, the number and size of securities firms will eventually shrink. Many will become parts of banks or other financial institutions.
Already, there are voices here and there in the securities industry calling for an end to Glass-Steagall, the Depression-era law that required banking and securities to remain separate businesses. This may signal that a merger with a commercial bank might be a preferred way out of the troubled position that many Wall Street firms now face.
Outside Wall Street, few will mourn this outcome, especially in view of the excesses of the recent past. But however understandable that reaction may be, there will be an indirect economic consequence that we all will have to shoulder.
In the more concentrated U.S. financial structure of tomorrow, conflicts of interest will flourish. This will invite governmental intrusion, less innovation and, ultimately, a more inefficient allocation of capital.
Source: http://www.nytimes.com/2008/10/12/opinion/12opclassic.html?_r=1&pagewanted=2&oref=slogin
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Sunday, October 12, 2008
Market collapse has frozen presidential contest in place
WASHINGTON — America's economic crisis is shaping its presidential election in ways seldom — if ever — seen before. In past elections, candidates have run with one eye on employment and inflation figures. But this year, it is the tanking stock market that has the rapt attention not only of the candidates but also of the voters as well.
Pollsters have no clear way of calibrating the drop in the stock market with the political fortunes of Democrat Barack Obama and Republican John McCain. "Honestly, there are no simple formulas," pollster John Zogby said. "There are so many variables — age, race, gender, trust and so on."
Still, the stock market decline over the last couple of weeks seems to have frozen the presidential contest in place, to the advantage of Obama. As Frank Newport, editor-in-chief of the Gallup Poll, put it in his most recent report, the economic crisis and its dramatic effect on the world's financial markets "to some degree drowns out the typical campaign back and forth that characterizes the presidential race at this point."
In Gallup's daily national tracking poll, there has been no change in the last 15 days, with Obama currently the choice of 51 percent of registered voters, and McCain trailing at 41 percent.
'Worried about money'
About half of those polled indicated that "they personally had worried about money the day before they were interviewed," Newport said, "underscoring the major impact the economy is having on Americans' lives and the degree to which their presidential choice may be filtered through the prism of economic angst."
Even so, Obama has pulled ahead in key battleground states, especially in the industrial Midwest in areas whose economic slide began long before the financial markets experienced their current difficulties. The McCain campaign, in fact, has all but written off Michigan, which has the highest unemployment rate in the nation, 8.9 percent, and trails Obama in Ohio, where the jobless rate is 7.4 percent, well above the national rate of 6.1 percent.
In the past, "electoral fortunes have been linked to job losses and inflation, not the stock market," said Darrell West, a senior political analyst at the Brookings Institution. "However, if big stock losses translate into big headlines every day, they will scare voters into believing the economy is headed into the tank." And that favors "the party not controlling the presidency," meaning Obama, West added.
As the stock market on Friday ended one of its worst weeks in history, McCain focused his attacks as much on Obama's character and questions about his association with former 1960s radical William Ayers as on his latest economic proposal — to suspend a requirement that investors age 70 1/2 begin to draw down their retirement accounts, which could force them to sell stocks at low prices.
But, as conservative columnist George F. Will wrote, the attacks about Ayers "have come just as the Obama campaign is benefiting from a mass mailing it is not paying for" — the envelopes containing third-quarter reports on their 401(k) retirement accounts "telling each household its portion of the nearly $2 trillion that Americans' accounts have recently shed."
Broad economic problems
"Obviously, the economic crisis has helped Obama considerably, but there is no obvious way to correlate the two," Larry Sabato, director of the Center for Politics at the University of Virginia, said in an interview. "I think Obama's gain is due to economic problems much broader than the stock market — gas, food, mortgages, inflation, stagflation."
It is the stock market, though, that is dominating the presidential campaign and the debates so far. It is likely to be the most talked about issue in the third and final presidential debate Wednesday in New York.
Unable to shift attention away from the economic meltdown, some conservatives are trying to make the case that the prospect of an Obama presidency is what is driving down the market — an argument that John Pitney, a political science professor at Claremont McKenna College, says is "silly."
"The relationship works the other way," Pitney said in an interview. "Bad economic news is good political news for the party not holding the presidency. There is no precise formula. The most you can say is that the stock market plunge has made McCain even more of a longshot."
Consequently, in recent days, Obama has been playing it safe. He has taken to reading his speeches, reducing the chance of gaffes. He has stuck to mostly general criticisms of McCain's economic proposals. And he has not taken questions from traveling reporters in two weeks, a period in which the savings of millions of Americans have vanished and the global economy has come to teeter on the brink of collapse.
Source: http://www.chron.com/disp/story.mpl/business/6052528.html
Pollsters have no clear way of calibrating the drop in the stock market with the political fortunes of Democrat Barack Obama and Republican John McCain. "Honestly, there are no simple formulas," pollster John Zogby said. "There are so many variables — age, race, gender, trust and so on."
Still, the stock market decline over the last couple of weeks seems to have frozen the presidential contest in place, to the advantage of Obama. As Frank Newport, editor-in-chief of the Gallup Poll, put it in his most recent report, the economic crisis and its dramatic effect on the world's financial markets "to some degree drowns out the typical campaign back and forth that characterizes the presidential race at this point."
In Gallup's daily national tracking poll, there has been no change in the last 15 days, with Obama currently the choice of 51 percent of registered voters, and McCain trailing at 41 percent.
'Worried about money'
About half of those polled indicated that "they personally had worried about money the day before they were interviewed," Newport said, "underscoring the major impact the economy is having on Americans' lives and the degree to which their presidential choice may be filtered through the prism of economic angst."
Even so, Obama has pulled ahead in key battleground states, especially in the industrial Midwest in areas whose economic slide began long before the financial markets experienced their current difficulties. The McCain campaign, in fact, has all but written off Michigan, which has the highest unemployment rate in the nation, 8.9 percent, and trails Obama in Ohio, where the jobless rate is 7.4 percent, well above the national rate of 6.1 percent.
In the past, "electoral fortunes have been linked to job losses and inflation, not the stock market," said Darrell West, a senior political analyst at the Brookings Institution. "However, if big stock losses translate into big headlines every day, they will scare voters into believing the economy is headed into the tank." And that favors "the party not controlling the presidency," meaning Obama, West added.
As the stock market on Friday ended one of its worst weeks in history, McCain focused his attacks as much on Obama's character and questions about his association with former 1960s radical William Ayers as on his latest economic proposal — to suspend a requirement that investors age 70 1/2 begin to draw down their retirement accounts, which could force them to sell stocks at low prices.
But, as conservative columnist George F. Will wrote, the attacks about Ayers "have come just as the Obama campaign is benefiting from a mass mailing it is not paying for" — the envelopes containing third-quarter reports on their 401(k) retirement accounts "telling each household its portion of the nearly $2 trillion that Americans' accounts have recently shed."
Broad economic problems
"Obviously, the economic crisis has helped Obama considerably, but there is no obvious way to correlate the two," Larry Sabato, director of the Center for Politics at the University of Virginia, said in an interview. "I think Obama's gain is due to economic problems much broader than the stock market — gas, food, mortgages, inflation, stagflation."
It is the stock market, though, that is dominating the presidential campaign and the debates so far. It is likely to be the most talked about issue in the third and final presidential debate Wednesday in New York.
Unable to shift attention away from the economic meltdown, some conservatives are trying to make the case that the prospect of an Obama presidency is what is driving down the market — an argument that John Pitney, a political science professor at Claremont McKenna College, says is "silly."
"The relationship works the other way," Pitney said in an interview. "Bad economic news is good political news for the party not holding the presidency. There is no precise formula. The most you can say is that the stock market plunge has made McCain even more of a longshot."
Consequently, in recent days, Obama has been playing it safe. He has taken to reading his speeches, reducing the chance of gaffes. He has stuck to mostly general criticisms of McCain's economic proposals. And he has not taken questions from traveling reporters in two weeks, a period in which the savings of millions of Americans have vanished and the global economy has come to teeter on the brink of collapse.
Source: http://www.chron.com/disp/story.mpl/business/6052528.html
No relief yet for local stocks from US crash
LOCAL share prices will continue their dismal tone this week, as they continue to absorb developments in US financial market, analysts said.
"For [this] week, we expect the market to remain jittery as the ripple effects of the US financial turmoil are just starting to trickle into the global economy," DBP-Daiwa Securities, Inc. said.
The same sentiment is shared by Maria Arlysa E. Narciso of AB Capital Securities, Inc. who said there is still no assurance of market recovery in the near term for the Philippines as the local index will still continue its reliance on the reaction of the foreign markets in the coming days.
The Dow Jones industrial average on Friday has again lost 1.49% or 128 points to 8,451.19, while the Standard & Poor’s 500 index shed 1.18% or 10.70 points to 899.22. The Nasdaq Composite index meanwhile managed to gain 0.27% or 4.39 points to 1,649.51.
"A relatively ’quiet’ opening is expected at the start of the week, as players digest Wall Street’s volatile swing last Friday. Most [investors] might check for prospective sell-offs from foreign houses, to gauge if this stance has already ebbed for the market’s blue-chip stocks," 2TradeAsia.com said.
The online brokerage firm said bargain lookers might bid for more time before they enter the market again, although the huge drop in the crude’s future on Friday might provide some incentive for them to gradually position on oversold shares.
Light, sweet crude for November delivery plunged to its 13-month low, losing as much as $9.50 to close at $77.09 a barrel on the New York Mercantile Exchange.
Nevertheless, 2TradeAsia.com said predicting an end to the "global portfolio liquidation" process will be the toughest challenge for investors, as anxieties to an acceptable solution to the global financial crisis persist.
The Philippine Stock Exchange index last week posted its largest drop since August of the Asian Financial Crisis, crashing for five consecutive days by 18.3% or 468 points to 2,097.80 week-on-week. No stock was spared from the sell-off.
All six subindices also suffered a double-digit drop week-on-week — industrial stocks tumbled by 20.72% to 2,379.19; property companies plummeted by 19.77% to 689.74; holding firms went down by 18.53% to 1,087.79; the services sector shed 15.79% to 1,270.42; financial stocks lost 15.17% to 546.52; and mining and oil companies slipped by 14.86% to 4,985.26.
Foreign investors last week were also seen unloading their stocks, posting a net foreign selling of P3.20 billion for the entire week. That has brought the year-to-date net foreign selling to P30.38 billion.
Despite the continuous downward spiral in the market and foreign investors’ exit from risky markets, DBP Daiwa Securities said the local market still has a long way to go before it dries up.
"We believe investors will become wary of the companies’ bottom line to contract in the coming months due to the global economic slowdown. Moreover, we feel that the market is slugging it out to maintain at current levels while investors remain bearish," DBP Daiwa Securities said.
The local brokerage firm, however, said that long-term investors could opt to start building up their portfolio while share prices are beaten down and are at discount levels.
This week, DBP-Daiwa Securities said the main index is seen to trade within the range of 2,200 to 1,800 levels.
"For [this] week, we expect the market to remain jittery as the ripple effects of the US financial turmoil are just starting to trickle into the global economy," DBP-Daiwa Securities, Inc. said.
The same sentiment is shared by Maria Arlysa E. Narciso of AB Capital Securities, Inc. who said there is still no assurance of market recovery in the near term for the Philippines as the local index will still continue its reliance on the reaction of the foreign markets in the coming days.
The Dow Jones industrial average on Friday has again lost 1.49% or 128 points to 8,451.19, while the Standard & Poor’s 500 index shed 1.18% or 10.70 points to 899.22. The Nasdaq Composite index meanwhile managed to gain 0.27% or 4.39 points to 1,649.51.
"A relatively ’quiet’ opening is expected at the start of the week, as players digest Wall Street’s volatile swing last Friday. Most [investors] might check for prospective sell-offs from foreign houses, to gauge if this stance has already ebbed for the market’s blue-chip stocks," 2TradeAsia.com said.
The online brokerage firm said bargain lookers might bid for more time before they enter the market again, although the huge drop in the crude’s future on Friday might provide some incentive for them to gradually position on oversold shares.
Light, sweet crude for November delivery plunged to its 13-month low, losing as much as $9.50 to close at $77.09 a barrel on the New York Mercantile Exchange.
Nevertheless, 2TradeAsia.com said predicting an end to the "global portfolio liquidation" process will be the toughest challenge for investors, as anxieties to an acceptable solution to the global financial crisis persist.
The Philippine Stock Exchange index last week posted its largest drop since August of the Asian Financial Crisis, crashing for five consecutive days by 18.3% or 468 points to 2,097.80 week-on-week. No stock was spared from the sell-off.
All six subindices also suffered a double-digit drop week-on-week — industrial stocks tumbled by 20.72% to 2,379.19; property companies plummeted by 19.77% to 689.74; holding firms went down by 18.53% to 1,087.79; the services sector shed 15.79% to 1,270.42; financial stocks lost 15.17% to 546.52; and mining and oil companies slipped by 14.86% to 4,985.26.
Foreign investors last week were also seen unloading their stocks, posting a net foreign selling of P3.20 billion for the entire week. That has brought the year-to-date net foreign selling to P30.38 billion.
Despite the continuous downward spiral in the market and foreign investors’ exit from risky markets, DBP Daiwa Securities said the local market still has a long way to go before it dries up.
"We believe investors will become wary of the companies’ bottom line to contract in the coming months due to the global economic slowdown. Moreover, we feel that the market is slugging it out to maintain at current levels while investors remain bearish," DBP Daiwa Securities said.
The local brokerage firm, however, said that long-term investors could opt to start building up their portfolio while share prices are beaten down and are at discount levels.
This week, DBP-Daiwa Securities said the main index is seen to trade within the range of 2,200 to 1,800 levels.
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