A Colossal Failure of Common Sense

During the month of October in 2008 I ran in the Des Moines Marathon. During about that same month, Bill O'Reilly had Congressman Barney Frank on his show. Here is the video.
http://www.youtube.com/watch?v=bijtBkKQwY8
Some of you reading this may not be fans of Bill O'Reilly, but that's not the issue. When I saw this video during the same month that I did the Des Moines Marathon of 2008, the last words that Bill said really struck me. "....the biggest financial collapse in federal history." That was the very first sign that I saw that a metaphorical tidal wave was coming. I recall wondering what this means, if it's true. And less than two months after that I read online that Bank Of America announced that they will cut 35,000 jobs over the next three years. Also, my Uncle Gary who owns his own firm had to let three people go. And, of course, damn near every place of work was reducing the number of their staff, while simultaneously breaking a few hearts along the way. After realizing how serious this catastrophe was, there were two questions that needed to be answered:
1) How do we get out of this mess?
2) How did we get in it in the first place?

First of all, you must realize that the two questions are very different from each other. The first question asks for a cure, the second asks for prevention from this being repeated. This post that I'm writing is all about the second question. And a book that you should read immediately talks all about that. It's called A Collosal Failure of Common Sense by Lawrence McDonald. It's about the collapse of Lehman Brothers. Lawrence McDonald was actually a Vice President of Lehman Brothers. Before I started reading the book I was told by my Grandma Marilyn that she had lost $10,000 because of Lehman Brothers. I remember telling my friend that fact to which he responded, "Be glad that it was only $10,000." Like the book CHINDIA, a vital reason why I chose to read this was to become knowledgeable about something I was clueless about. I knew nothing about what Lehman Brothers did as a business. I also knew nothing about why they filed for bankruptcy.

The big thing that you need to know about Lehman Brothers is what a derivative is. No, I'm not talking about calculus, I'm talking about an agreement. If I go to a store and buy an apple, that is not a derivative because it's actually buying a product. But, if I call that store, ask them if they have any apples left, they then offer to hold onto that apple until I come to the store, that is a derivative. Also, if a farmer talks to a local grocery store and they agree to a certain price that the grocery store will buy the farmer's food, that agreement is a derivative. That agreement provides security to both the farmer and the local grocery store. That's because even if the market fluctuates the value of food, the price that the farmer and grocery store agreed to stays. Lehman Brothers was all about this business of derivatives because of people buying houses through mortgage loans. And those loans were transferred to about any person on planet Earth through Lehman Brothers. A Scandinavian living in Norway, Sweden or Finland could actually be the person who you yourself are paying with your mortgage payments.

This book is not a promotion or a slander on Democrats or Republicans. It tells us how this mess took place. Shortly after the Great Depression began, there was a bill passed in the Senate called the Glass-Steagall Act. It said that investment banks and commercial banks have to be separate. Essentially, it was intended to prevent banks from betting your house on the market. And the Glass-Steagall Act was repealed when Bill Clinton signed the Gramm-Leach-Bliley Act right before he left office. The signing of the bill gave the potential to cause this economy to be ruined. So a bill that was urged by Phil Gramm, Jim Leach and Thomas Bliley (all of whom were Republicans) was signed off by a President who was a Democrat. When Clinton signed the bill, Mr. McDonald actually thought it would be great because it would increase the flow of money. But it ended up blowing up in everyone's faces. And the icing on the cake was that before this bill was actually passed, the bank Citicorp was already engaged in both investment and commercial banking. Which, of course, was illegal.

Sometimes, when you read about something, there is so much technical jargon, it's practically nonsense. If you don't know what I mean and you'd like an example look no further than this wikipedia page. http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000
After reading this article, I feel that this does not help clarify what the Commodity Futures Modernization Act of 2000 actually did. In a Colossal Failure of Common Sense, I learned that people used to be able to buy "insurance" on for instance boats. Because of these "insurance" agreements, if that boat actually sinks to the bottom of the ocean the person who bought that insurance actually makes money. I'm not kidding!!! How stupid is that??? And for a while it was illegall, but our US Congress did legalize that kind of "insurance" in the Commodity Futures Modernization Act of 2000. And I'm willing to bet that if you look at that wikipedia page, you won't realize that that's what it does.

In a previous post that I wrote, I talked about a tv series that I was very fond of called The Wire. There was an event that happened that I still remember today. The Mayor of Baltimore becomes aware of an absolutely absurd idea that a subordinate of his has taken into effect. The press gets a hold of the information, and Mayor Royce's chances of reelection is damaged. His response when he first hears that it happened was "I didn't know that it was going on." To that a character responds with "That's even worse." Basically, what I'm getting at is that the person in charge is the person in charge. When all hell broke loose at Lehman Brothers, former CEO Dick Fuld had a lot of eyes pointed at him, wondering what his explanation was. In a youtube video that I saw of him, he was in a courthouse presenting his side of the story. He stated "I take full responsibility for the decisions that I made, and the actions that I took." That tells me that he challenges every person to explain exactly why the collapse of Lehman Brothers is his fault. I won't tell you why, but A Colossal Failure of Common Sense meets that challenge very well.

Lawrence McDonald did a fantastic job of presenting his side of the story in this book. He talked about how he worked his way to landing his dream job at Lehman Brothers. Before getting hired at a firm, he actually pretended to be a pizza delivery guy coming to these firms. "I have an order for a double cheese, triple sausage pizza for Mr. (insert name of person who can help him get a job)." He mentions that this scheme didn't work very well. After a few failed attempts, he was finally given some advice about how to work his way to landing a job here. Sell something. Anything. I don't care what it is, but learn how to get people to buy your product. He tried that out by selling some kind of meat. Later on, he did get a job with Morgan Stanley, and then he got the job with Lehman Brothers. And right before the collapse, he was fired.

A Colossal Failure of Common Sense was as good of a read that it could have been. From start to finish, the book was extremely engaging, and only in my wildest dreams would I be able to do it justice in this post. Here's one last link that I'll let you click on, and if you do read this book, please remember this when you finish it.
http://virtualopinion.files.wordpress.com/2008/10/47_lehman_brothers.jpg