Did Greed Cause Markets To Tumble? After the huge drop in the U.S. market Monday, markets in Europe and Asia tumbled as well. A former analyst for Merrill Lynch breaks down what he sees as a culture of greed on Wall Street. Then, Slate.com's Jim Ledbetter discusses why he thinks the government should have bailed out Lehman Brothers.

Did Greed Cause Markets To Tumble?

  • Download
  • <iframe src="https://www.npr.org/player/embed/94667073/94667067" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


From the studios of NPR West, this is Day to Day. I'm Madeleine Brand.


And I'm Alex Cohen. We begin with Wall Street, and the news today isn't getting any better.

(Soundbite of people shouting)

Unidentified Man # 1: There's just panic in the air.

Unidentified Woman # 1: It's a little scary, yeah.

Unidentified Man # 2: I think a lot of people are going to be hurt.

Unidentified Man # 3: We are in crisis. We all know that.

Senator BARAK OBAMA (Democrat, Illinois; 2008 Democratic Presidential Nominee): This turmoil is a major threat.

Unidentified Woman # 2: It was the worst day for the major averages in seven years.

Unidentified Man # 4: This just increases the fears that somebody else is next in line, and you've got AIG sitting there.

(Soundbite of AIG advertisement)

Unidentified Girl: College, retirement, you need a smart financial claim, you know.

Unidentified Man # 5: We're with AIG, honey.

Unidentified Man # 6: So I'm just thinking about butterflies.

Unidentified Man # 7: AIG must not fail.

(Soundbite of voices)

Senator OBAMA: And on Wall Street, we're minding the store.

President GEORGE W. BUSH: And Wall Street treated the American economy like a casino.

(Soundbite of ringing bell)

BRAND: Normally, that opening bell is greeted with enthusiasm. Not today. Let's go now to someone who knows a little something about financial bubbles bursting. Henry Blodget had a front-row seat during the dot com boom. He was a tech stock analyst at Merrill Lynch from 1999 to 2001. Well, now Merrill is gone, sold off to Bank of America over the weekend, and Henry Blodget is gone, too. He's banned from Wall Street after being charged with fraud. Henry is here, though. Welcome back to Day to Day.

Mr. HENRY BLODGET (Former Tech Analyst, Merrill Lynch): Thanks, especially for that horrific introduction.

(Soundbite of laughter)

BRAND: I'm sorry about that, but you know...

Mr. BLODGET: That's all right.

BRAND: Context is everything.

Mr. BLODGET: It never gets easier to hear.

(Soundbite of laughter)

BRAND: OK. Well, you lived through that dot com bubble, back in those heady days, and, you know, people were making lots and lots of money. Help us understand what it was like and what it's like now for brokers. Don't they seem to remember that, you know, it's not always good times and lots of money to be made, that maybe they should think that bad times might be just right around the corner?

Mr. BLODGET: Well, Wall Street's always been a cyclical business, and the problem is that the peaks and valleys are too far apart for most individuals to remember them and to behave on that. And really, if you look at the way people on Wall Street are paid, they are paid on a year-to-year basis. So everybody works for that year-end bonus.

When things are going well, the trade-off is, well, perhaps at some point, things will stop going well, but it certainly doesn't look like it's going to happen in the near future. And boy, we can make a lot of hay in the months we have left, months or years, and so full speed ahead. And that, unfortunately, usually gets you to overshoot on the upside, which is why we have these catastrophic corrections that we're going through now.

BRAND: Mm-hmm. Well, is it a bit more than that, in terms of intent? Do they think, well, I know the bad times are around the corner. I'm just going to make my pile of money and, you know, let someone else figure it out?

Mr. BLODGET: I don't think so for most people. I mean, I think, again, it is make hay while the sun shines. And in the housing market, for example, you had the entire country making hay while the sun shone, and you had lots of people saying, don't worry, it's going to go on forever. They aren't making any more land. House prices have never dropped.

It's very easy in that environment to be persuaded by that and also to see just how much money everybody else is making. And yes, while that's happening, certainly, if you knew it was going to crash and when, you wouldn't play, but everyone is saying it's going to continue. And the theories of a downturn seemed to be proved wrong year after year.

And again, you're - in Wall Street, you're aiming for that year-end bonus, and you're not going to get paid to say, you know what, enough is enough. And that is the job of senior management at these companies, and what we've seen is a wholesale failure across Wall Street to actually provide that adult supervision.

BRAND: Now, John McCain is calling for some kind of accountability for the CEOs. What can possibly be done?

Mr. BLODGET: Well, any time you have a market disaster like this, and this is really shaping up to be something that will be every bit as painful as the market crash of '29 and some of the other salient events in Wall Street history, what follows on from that is a period of recrimination and scapegoating and investigations, where lots of people will be accused of lots of nasty things. And if the market gets bad enough, there will be such public outrage that you'll see a lot of people convicted and thrown in jail and so forth.

Unfortunately, as on Wall Street, part of the issue is that you're never going to fix a cyclical economy by tweaking some rules and enforcing after the fact and so forth, and I think, hopefully, what will happen here is that the U.S. will use this experience to really revisit all the regulatory agencies, all the different policies, and come up with some smarter rules, smarter regulation and so forth.

And again, there is precedent for that. If you go back to the Great Depression, that's where the SEC came from, and it's where a lot of our security laws came from. And those have now - an integral part of the system. We now have an opportunity to radically improve this system, and let's hope that we do that.

BRAND: Henry Blodget is CEO of Silicon Alley Media. Henry, thank you.

Mr. BLODGET: Thank you.

COHEN: Yesterday never should have happened. Surely a lot of investors feel that way. It's also the opinion of slate.com's James Ledbetter. He's editor of Slate's new website called The Big Money, and in his first piece for the site, he writes that Lehman Brothers should have been bailed out by the government.

James Ledbetter joins us now, and you know, Mr. Ledbetter, a lot of people disagree with you. They say, you know, it was time that the market got a firm lesson, that they deserve the tough love that they got. You disagree. You say in part that's because of competition. What's your argument?

Mr. JAMES LEDBETTER (Editor, The Big Money, Slate.com): Well, I think that we're in a position where the U.S. economy is fundamentally broken and needs to be rebuilt. And I think that even the free market people, who might have posed the argument that I've put forth, would agree that having five independent investment banks in a position to help the market rebuild is better than having only two, and that's what we're left with this week.

COHEN: You also wrote about the fallout, and you wrote this piece before the markets even opened. Now that you've seen some of the reaction, what do you think?

Mr. LEDBETTER: Well, I'm sad to say that I think the market reaction on Monday completely vindicated the opinion that we took, the worst losses in this country in the stock market since the attacks of September 11th. It's hard for me to accept that that's a better outcome than if the U.S. government had said, OK, up to a certain amount of money, say 50 billion dollars, probably would have been less than that, say 30 billion dollars, we will guarantee certain kinds of Goldman losses. So that a company like Bank of America or Barclays, who were very interested in acquiring Lehman, could have done that, could have made that transaction and kept their own books happy. I just don't accept that the disaster that happened in Monday's stock markets had to happen.

COHEN: And to those taxpayers who say, we're tired of shouldering the burden of these companies' mistakes, what's your argument there?

Mr. LEDBETTER: Well, I can sympathize with taxpayers who think that too much money has been thrown after some of these firms, but where were those arguments when the laws were being deregulated? Why can't we at least say that government needs to play a role in the marketplace and come up with effective, transparent, and consistent criteria by which these bailouts or supports will happen or not happen.

I mean, the fact is that Lehman Brothers could have been saved with a minimal or nonexistent commitment from the U.S. taxpayer. So I think people need to look a little more carefully at what we're talking about, before immediately assuming that this amounts to a corporate bailout.

COHEN: Attention's now turning to American International Group, the insurer that's known as AIG. What about them, do they deserve help as well?

Mr. LEDBETTER: Well, again, this is part of the argument that we make. It is literally impossible now to predict on what basis the government is going to provide or not provide assistance. With AIG, what we see today is it looks like the government is bending over backwards in order to try and keep this, what is the world's largest insurer, alive. I'm not really taking a position about which of these remedies are good and which of these remedies are bad. I am saying that there is a virtue in transparency. There is a virtue in consistency, particularly when you're talking about regulating financial markets.

COHEN: James Ledbetter is editor of The Big Money, it's the new financial website launch this week by Slate.com. Thank you.

Mr. LEDBETTER: Thank you.

BRAND: OK. So maybe by now, your eyes are glazing over, and you're struggling to pay attention because, really, all this talk of mortgage-backed securities, write-downs, mark-to-market pricing, it's all pretty abstract. Well, Bill Barker is here now to break it down and tell us why we average Joes and Josephines should care. Bill is a senior analyst with the Motley Fool, an investment news and analysis service. And, Bill, really, why should I care that Lehman Brothers and Merrill Lynch are now history?

Mr. BILL BARKER (Senior Analyst, Motley Fool): What is probably going to affect people is things like just taking out money in loans or at all now is going to get a lot tougher. The contraction of these companies, and all - the whole banking system just has a lot less money to lend to anybody for mortgages especially, but also auto loans and other types of consumer loans. So, although the rates for loans are going down, the availability of getting any loan at all has gotten a lot tougher lately.

BRAND: Because the requirements are a lot greater, a lot tougher?

Mr. BARKER: Yeah. The banks, they've got to maintain a certain amount of capital in order to make loans. They can't just fabricate money without having a certain percentage of money on hand. So, if you don't have a very good credit rating, it's going to be very tough in the coming months to get any kind of a loan.

BRAND: So if I want to buy a car, I want to buy a house, I want to start a small business, it's going to be a lot harder.

Mr. BARKER: Yeah. Clean up your credit rating, I guess, would be the best way to go about it. And also, you know, because of this lack of availability of loans for mortgages, you're going to see continuing trouble in the housing market, I think, as new buyers are going to be having a very tough time finding money to buy a new house with.

BRAND: Let's talk about AIG, the insurance giant that's at the top of the news today, in trouble. How would that affect the average person?

Mr. BARKER: That's not going to affect the average person directly. It is going to affect if it fails, and that is the real action on Wall Street, what everybody is paying attention to. But if it fails, a lot of financial institutions around the world have open dealings with AIG, and the ripple effects of that are going to make all the things that we've talked about before in terms of access to capital that much tougher because there just have to be a lot of further write-downs throughout the financial system. So a lot of people are very nervous today.

BRAND: And, of course, if I have a 401K, and that's invested in these companies, obviously, that'll be affected.

Mr. BARKER: Yeah, if you've got a direct stockholding of a company like AIG, then, you know, you've seen the stock go down. You've seen a lot of other related financial stocks go down. If you own something that's much broader, like Standard and Poor's 500 index funds, you've seen that go down less than the financials. But stocks are down nearly 20 percent, so it affects virtually everybody that's got any savings in the stock market.

BRAND: Bill Barker, senior analyst with the Motley Fool. Thanks, Bill.

Mr. BARKER: Thank you.

Copyright © 2008 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.