Wall Street’s New Gilded Age

Since its birth, the United States has grappled with the problem of an over-mighty financial sector. With the exception of Alexander Hamilton, the Founders' vision was of a republic of self-reliant farmers and small-town tradesmen. The last thing they wanted was for New York to become the London of the New World—a mammon-worshiping metropolis in which financial capital and political capital were rolled into one. That was why there was such resistance to creating a central bank, and why—despite two attempts—we have no Bank of the United States to match the Bank of England. That was why populists railed against the adoption of the gold standard after the crash of 1873. That was why there was so much suspicion when the Federal Reserve System was created in 1913. That was why government regulation of Wall Street was so strict from the Depression until the 1970s.

But now, barely a year after one of the worst crises in all financial history, we seem to have returned to the Gilded Age of the late 19th century—the last time bankers came close to ruling America. A few Wall Street giants, led by none other than -JPMorgan, are back to making serious money and paying million-dollar bonuses. Meanwhile, every month, hundreds of thousands of ordinary Americans face foreclosure or unemployment because of a crisis caused by … a few Wall Street giants. And what makes the losers in this crisis really mad is the fact that there's now one law for the small debtors and another for big ones. If you lose your job and fall behind on your $1,500 monthly mortgage payment, no one's going to bail you out. But Citigroup can lose $27.7 billion (as it did last year) and count on the federal government to hand it $45 billion.

 

The Banker Who Saved Wall Street

Duff McDonald

How JPMorgan Chase CEO Jamie Dimon bailed out Bear Stearns and the federal government—and lived to turn a profit.

What CEOs Got Away With

The Rich Behaving Badly

The Recession is Over. Kinda.

How Lehman Shook the Global Economy

Left Behind By Lehman

 

A hundred years ago, people angrily compared the House of Rothschild to a giant octopus with its tentacles wrapped around the U.S. economy. Today it's the turn of Goldman Sachs to be likened to a "great vampire squid." To understand why, you need to go back 12 months.

With the bankruptcy of Lehman Brothers Holdings Inc. last September, 9/15 supplanted 9/11 as the costliest day in the history of New York City. It was also the most cataclysmic American bank failure since 1931.

The Lehman bankruptcy was in fact only one of seven events that, in the space of just 19 days, signaled the end of an epoch. On Sept. 7, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) were nationalized. On Sept. 14, Merrill Lynch was bought by Bank of America. On the same day that Lehman failed, the money-market fund Reserve Primary "broke the buck" because of losses on unsecured commercial paper it had bought from Lehman. The next day—to avoid a lethal chain reaction in the market for credit default swaps—the insurance giant AIG was given an $85 billion bailout by the Federal Reserve. On Sept. 22, the investment bank went extinct as a species when Goldman Sachs and Morgan Stanley converted themselves into bank holding companies. Finally, on Sept. 25, Washington Mutual was placed into the receivership of the Federal Deposit Insurance Corp. (FDIC).

Not everything that has gone wrong in the world economy since 2007 can be blamed on these seven events, much less on the Lehman bankruptcy alone. At most, about a fifth of the total 50 percent decline in the U.S. stock market between the peak of October 2007 and the low of March 2009 could be attributed to what happened in September of last year. (October 2008 was an even worse month for stocks.) But other indicators better reveal the scale of the financial trauma. In the 24 hours after Lehman failed, the London Interbank Offered Rate (LIBOR, for short)—the rate that financial institutions charge each other for unsecured borrowing—soared 3.33 percentage points, to 6.44 percent. The commercial-paper market froze. The resulting credit crunch set off a chain reaction. Firms canceled orders and started laying off workers. International trade collapsed.

Equally dramatic—and more long-lasting—has been the effect of the crisis on government policy. Prior to 9/15, it seemed unlikely that Congress would approve a large-scale bailout for Wall Street. Treasury Secretary Henry Paulson had told potential buyers of Lehman Brothers there would be "no government money" to sweeten any takeover deal. Even after the Lehman failure, it still took two attempts to secure passage of the $700 billion Troubled Asset Relief Program through Congress. Since then we've witnessed the fiscal equivalent of a dam bursting. We're now looking at $9 trillion of new federal debt in the decade ahead.