Investors Still Nervous About Economy
KORVA COLEMAN, host:
Despite what Mr. Obama means to do, Wall Street isn't so sure. All the major stock indexes plunge this week to levels not seen since 1997. Traders were already gloomy, but now they're really spooked about the banking sector. And here with us to talk about the current perils in banking is editor and CEO Henry Blodget of the business Web site the Business Investor. Hi, Henry.
HENRY BLODGET: Hi there. Thanks for having me.
COLEMAN: You bet. First, Henry, we know that Mr. Obama is proposing a really eye-popping budget for the next fiscal year. How is this request seen on Wall Street?
BLODGET: I think probably two ways, depending on who you are. One, it is eye-popping, absolutely a shocking number, and if you look at the debt levels that are required to fund this, basically we're going back to a debt as a percentage of GDP that we haven't seen since after the World War II with the war debt. And people who are worried about that are panicked, but I think the bigger subject that's obsessing Wall Street, obviously, is the bank bailout and exactly how that's going to be done and how much of a taxpayer giveaway there's going to be - and so forth.
COLEMAN: Well, there's been a lot or resentment from average Americans who've hated the idea of this type of bailout going to banks that have made a lot of bad loans on purpose and then try to hide that. Why should the federal government use taxpayer dollars to keep these banks afloat?
BLODGET: It's a tremendously complex situation, and people have every right to be outraged, especially at the way it was handled last fall, where it really just was a huge transfer of wealth in order to protect bank investors and bank bond holders who, a lot of people think, really didn't deserve to be protected. But if you'll let me, what I'll do is - it's such a complex situation, it's very hard to understand if you just think about in terms of the banking system, and so, I think everyone in America understands cows and farmers, and I think if we just sort of talk about Citigroup, for example, as if it's a massive farm that went out and bought thousands and thousands of cows that are giving milk and suddenly half the cows died, and yet we all need to drink milk, and that's the situation we're in. And obviously everybody is furious at Citigroup for buying sick cows, but we need milk; we don't have any other farmers that can handle the load of the milk. And so, we got to figure out how to deal with that, and pretty much every option you look at is going to involve a lot of pain; it's just a question of who takes the pain.
COLEMAN: Henry, we also need to explain a bit about your background. During your time as an equity-research analyst for Wall Street, you were fined for wrongdoing. You were then banned forever from the securities industry. And given what happened to you and to other Wall Street finance workers, why do analysts continue to market questionable financial instruments?
BLODGET: Well, I think if you're going back - thank you for that charming rendition of my background, which is never easy to hear...
(Soundbite of laughter)
BLODGET: The - I think you had a situation where, for 10 years, the housing market was on fire. You had everybody wanting to get into the housing market; you had lots of people espousing the idea that owning a house is the be all and end all of being an American citizen; we've got to find lots of different ways for people to do that. And because house prices kept going up, banks didn't have to worry about credit. Basically, they could lend the entire value of the house to you, and if you couldn't pay it back, no problem, because the house was going to be worth 20 percent more next year, and so, the bank's loan would be protected. And that worked for as long as it worked. If you go back into that time and you try to say, hey, banks, stop, you're going to get outrage from the public, saying, this is ridiculous; I'm happy to take on the risk and the bank is happy to lend me the money, so why would you stop that? So, it's very easy to point fingers at, especially, a lot of players in the mortgage industry, but I think you have to spread the blame around. You have to blame regulators; you have to really force people to say, look, you borrowed hundreds of thousands of dollars to buy a house, and it shouldn't have been lent to you, but on the other hand, you borrowed it. So, people also have to take responsibility for that.
COLEMAN: Henry, there's also a lot of people who didn't do any of these things. There's a lot of suspicion, and there are people listening who are even more suspicious. Why should they listen?
BLODGET: Well, they don't necessarily have to listen. But I think the - what the government is trying to do is avoid a situation like we had last fall, where Lehman Brothers was allowed to go bankrupt, and what that did was, basically, so spook the financial system that nobody would lend money to anybody. And if I go back to my farm analogy, in this town people need to drink milk, and suddenly there's no place to get it because no one will lend anybody any money, and so the system has to be protected in that way. And I think what everyone is outraged about is that we have been doing it in a way that allows a lot of the people who made the decisions that got us into trouble to come out whole or at least come out taking a lot less pain than they deserve for the situations they make, or the decisions they made. And so, the question is, how do you get through this and apportion all the pain fairly? And I think the government has a long way to go with that, and I think the real point of frustration for a lot of people on Wall Street is that so far, the government has not asked the folks who lent the banks' money to take a hit. They have completely protected them. And this is a big pool of money; those people made the decision to lend money to the banks thinking they were in good shape, and it turned out they were in terrible shape, and a lot of people think that they should be made to take some pain for that.
COLEMAN: Henry Blodget is currently the CEO and editor of the Business Insider, a business news and analysis Web site, and he joined us from our New York studios. Henry, thank you.
BLODGET: Thank you.