Q&A With A Wall Street Woman: "We Are In A State Of Devastation Across All Areas Of Finance And Business"

Illustration for article titled Q&A With A Wall Street Woman: "We Are In A State Of Devastation Across All Areas Of Finance And Business"

If you're anything like me, the financial state of the U.S. terrifies you, but in an amorphous way. You try to read numerous newspaper articles about Lehman and Merrill Lynch and Fannie Mae and Freddie Mac, but it's like reading Don Quixote with seventh grade Spanish: a certain grasp of the vocabulary is missing. We decided to ask a Wall Street woman to explain just what the sam hell is going on. This financial female wanted to remain anonymous, so we're going to call her Katharine Parker after Sigourney Weaver's moderately duplicitous but whip smart financial analyst in Working Girl. We ask our expert about what happened with Lehman, whether cutting interest rates is helpful, and if it's time to take our savings out of Citibank and shove it under our mattresses. Our Q&A with Katharine, after the jump.Jezebel: Why is this happening now? I know Lehman has been showing signs of weakness for a while now — what was the trigger? Katharine Parker: Similar to Bear Stearns, LEH had a great deal of exposure to sub-prime mortgage-backed securities. Because of this, they were forced to "write down" nearly $700M last year (devalue their assets), which included commercial property and mortgage exposure. One year later, the economy has not improved, housing prices have not gone back to "hey-day" levels, we have plunged further into a recession and the value of these assets had to be written down again by ~$7.8B, which is the largest net loss in the history of the bank. The bank still continues to have a large amount of exposure to these devalued securities. Wall Street, knowing the impact of this write-down and realizing that LEH would have severe liquidity issues forced the shares of LEH to plunge, resulting in the lack of capital to cover these losses. J: Why did the fed agree to bail out Bear Stearns and not Lehman? KP: Bear Stearns was the first to go down and they had a first mover advantage in this case. As this continues and the markets worsen, the Fed cannot continue to use tax payer's dollars to support investment banks that made huge mistakes and that didn't take the necessary corrective actions. They are addressing the moral hazard issue. John Thain at Merrill Lynch was smart. As soon as he realized that there were going to be liquidity problems, he began selling assets and raising capital. The government is helping the economy in other ways, i.e., making sure there is available liquidity for regional banks. If we continue to operate in an environment where the Fed bails out every investment bank that fails, we set ourselves up to take risk without consequence. J:: I know the fed is considering lowering interest rates. Is this a bad call? KP: No. Although some think a cut will signal panic (like we're not already in a PANIC???), the facts remain clear: we are in a recession, fears of inflation have abated (due to lower commodity prices and labor costs) and financial stresses have intensified. J: Beyond the employees at Lehman and the other struggling firms, how does it affect people in finance? And how will affect the rest of us — those who don't work in finance or industries directly dependent on finance? KP: It affects pension funds, banks (domestic and international, all those that have exposure to the credit default swap market), hedge funds, private equity firms and every entity that has business ties to LEH. It affects institutions that have put their money in LEH because they will now have liquidity issues and it is an opportunity cost of their capital. The credit crunch will tighten, which will not only affect lending to buyout firms and companies for acquisitions, but it will affect the average joe who needs a loan to start his own small business. The fundamentals for entrepreneurship and risk are seriously threatened. It affects EVERY industry, because we need capital to do business and continue operations. In the current environment, access to capital will continue to be difficult for companies that need even a minimal amount of leverage (debt) to operate. Without the growth of new businesses and the expansion or even continuation of existing businesses, we will inevitably enter a depression. Consumer confidence overall has plummeted leading to less demand for consumer goods / durables and decreasing discretionary spending. The best companies will be those that sell the fundamentals, those that experience inelastic demand and / or have lower-priced substitutions. The real estate markets will drop even further. With the flooding of unemployed professionals, supply will come on-stream and people will be forced to move out of high-cost urban centers. Additionally, the constrained amount of capital available to homebuyers will prevent any short-term recovery of real estate values to further fuel the economy. We are in a state of devastation across all areas of finance and business. Last, but not least. This affects the families, friends and colleagues (at other institutions) of the employees at LEH. We are all saddened by the demise of a really talented group of people. J:: Is there any hope that things will turn around in the near future, or should we start stuffing our 401K's under our mattresses? What can we do to keep ourselves financially solvent? KP: Never put money under your mattress. Believe it or not, this is a losing proposition because you can always earn a modest rate of return in very liquid investments and your money will be worth less just by the basic rules of time value. Money markets are still safe. I am mostly in cash right now and have done better than most of my friends who have been trading in and out of their PAs (personal accounts) on a daily basis. The only thing I am going to do with my money right now besides keeping substantial liquidity is invest in U.S. and European fixed income. To stay financially solvent, make an investment in yourself and your career through education and hard work. I know it sounds old school, but it's a great hedge. I don't know what other advice to give when the world is blowing up. Related: Wall St. In Worst Loss Since '01 Despite Reassurances By Bush [NY Times]



Blame this clusterfuck on George W. Bush and his deregulation of the industry. Also, you can blame the leaders of these companies who bought groups of mortgages from unsavory biz as Countrywide, who gave huge loans to people who can't afford them and misled them into thinking they could afford a too good to be true mortgage. Read the article in this month's Harper's Magazine for an interesting look into the foreclosures.