October 8, 2009

Last month marked the first anniversary of the disaster that
hit the financial towers of New York. The meltdown on Wall
Street reverberated around the world.

The point of impact was Lehman Brothers, that seemingly
invincible bastion of financial services with tentacles that
circled the world.

Sinclair Stewart, a Canadian business reporter, was close to
the epicenter of the meltdown on Monday, September 15, 2008.

"This wasn't just the failure of a once-venerable brokerage
house. More broadly, it was an indictment of market
fundamentalism, and it didn't take long before the
necrologists were out in force, etching the epitaph for
American-style capitalism."

Two days later, on September 17, aftershocks were still
rippling throughout the financial world. Sinclair Stewart
still remembers eating lunch on the patio of a New York
bistro on a warm Wednesday afternoon. He and his lunch
companion, a banker, tried to make sense of the events of
the last 48 hours in which all hell had broken loose.

The tranquility of the bistro belied the boardroom chaos.
Some of the biggest financial and insurance institutions
were sinking. American International Group was listing
badly. Their lunch was interrupted by the banker's phone;
Morgan Stanley and Goldman Sachs were getting clobbered.

News that these twin towers of Wall Street might topple
darkened the mood. "For the first time since the subprime
crisis began, nobody was safe."

Just three days earlier, Bob Kelly, chief executive officer
of the Bank of New York Mellon met with other high-ranking
CEOs, the U.S. Treasury Department and Federal Reserve.
Canadian-born Kelly and the other big players worked late
into Sunday evening to plug the holes in the system. Little
did they know just how bad things were.

Kelly reflects on what a colossal blunder it was to allow
Lehman to fail, although the commonly-held opinion was that
failure was nature's way of culling weak businesses. "In
hindsight, that was a mistake - - it shouldn't have been
allowed to collapse," he said. "Within days, we walked right
to the edge of a global depression - - and it was
breathtakingly bad."

Over the next several months, the U.S. government threw
billions of dollars at the problem to make it clear that
they would not let another massive institution fail. If
another staggering giant fell, the damage could be
overwhelming.

A year later, what are the lessons from the near-death
experience?

Goldman Sachs learned that if you are big enough, you can
pick up the party where you left off. They repaid government
aid of $10 billion in months and are now ready to hand out
$11 billion in bonuses.

Goldman Sachs is so big that it's like a shadow government.
Alumni of the firm infiltrate the halls of power. George
Bush's last Treasury secretary, former Goldman CEO Henry
Paulson, was one of the architects of the trillion dollar
self-serving bailout to his old friends on Wall Street.

Canadians learned that there is a virtue in dull, prudent,
risk-adverse banking regulations. However, that wasn't
always their inclination. A decade ago, Canadian banks
wanted to swim with the big fish but the Chrétien Liberals
wisely put a stop to that. Now, boring is in. Three Canadian
banks are in the top 10 in North America by market value,
and the remaining two are not far behind.

Who knows what a Conservative government might have done?
Prime Minister Harper makes no secret of his love of all
things American and unregulated markets. If banks had
proceeded with the "innovative" ventures so admired in the
U.S., they might have been part of the collateral damage of
September 15 instead of the darlings of the financial world.

The PM knows that when things are going well but contrary to
Conservative ideology, a good tactic is to shut up and
smile. Another potential embarrassment is that public
investments are profitable: the government stands to make $2
billion on mortgage investments. Ottawa's emergency mortgage
purchase program stepped in when banks were too nervous to
lend. The profits could double if the plan is extended.

The government of Canada has learned, to their chagrin, that
public investments pay off while private corporations are
paralyzed by fear.

More lessons are on the way. Soon it will dawn on taxpayers
that if they are paying the bill, they should have more of a
voice in the way that their newly-acquired public
acquisitions are run.
 

David Charbonneau is the owner of Trio Technical.
He can be reached at dcharbonneau13@shaw.ca

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