After four years as US business correspondent, Andrew Clark is heading home. He recalls the extraordinary events that nearly bankrupted America – and how it’s bouncing back
Each morning, Wall Street awakens to the clitter-clatter of helicopter blades thrashing through the air. The financial industry is awash with men in a hurry – and for the most harried members of this money-pushing elite, a chopper ride is truly the only way to commute to the office.
There’s a helicopter landing pad on a pier poking into New York’s East River at the end of Wall Street. Chartering a four-person chopper for a one-way trip from the summer seaside playground of the Hamptons costs $3,000. After a long slump, corporate traffic is, very tentatively, beginning to re-appear.
“2008 was wonderful. 2009 was a crash. 2010 started off a little bit with a roar in the first two quarters – then it levelled out,” says Michael Roth, owner of charter firm New York Helicopter . “Everyone’s still under the assumption that they don’t know where they’re going. They don’t know where their discretionary money’s coming from.”
As I prepare to leave New York after four tumultuous years as the Guardian’s US business correspondent, the vast heartland of America is mired in gloom. Unemployment is at 9.6%, worse than Britain’s 7.8%. The average price of a house is $182,600, compared with $230,000 in 2006. America’s national debt has risen from $8.5tn to $13.4tn in four years.
Much of the US is struggling to clamber its way out of the deepest economic crevice since the Great Depression. But Wall Street institutions, viewed by many as the villains behind the financial crisis, are getting back to their old selves as engine rooms of wealth, prosperity and excess. The failure of Bear Stearns and Lehman Brothers, not to mention a $700bn government bail-out of the financial system, is gradually being consigned to history.
There are the ubiquitous black limousine-style town cars outside each bank. Bars and restaurants are humming again, while Manhattan property prices have risen 9% in a year, fuelled by average Wall Street bonuses of $123,850. The US banking industry, which employs 1.86 million people, reported $21.6bn of profits in the second quarter of 2010 – its best period since the end of the economic boom in late 2007. It’s nearly, although not quite, back to business as usual. So how did they get off the hook?
In common with many in the financial world, Richard Ramsden, chief banking analyst at Goldman Sachs , is unapologetic. Ramsden, speaking in a cool, minimalist meeting room at Goldman’s brand new $2.1bn, 43-storey headquarters overlooking the World Trade Centre site, sees banks as the dynamos that power the rest of the economy. He says risk-taking is vital: “You can construct a banking system in which no bank will ever fail, in which there’s no leverage. But there would be a cost. There would be virtually no economic growth because there would be no credit creation.”
Has Wall Street changed as a result of the credit crunch? Not really, he says. “Is there a fundamental shift? Clearly the banking system is less leveraged and therefore less risky than it was – and I suspect it will be for a while – but the core business hasn’t changed.”
It could all have been so different. For a few cataclysmic weeks in the autumn of 2008, I wondered whether I would end up filing a story to the Guardian that began with the words: “The global financial system collapsed today.”
At the time, unthinkable events were happening so fast that, in business journalism terms, it was the closest reporting equivalent to covering a war. Bear Stearns, Lehman Brothers, AIG, Washington Mutual, Wachovia, Merrill Lynch, General Motors and Chrysler all hit the skids. In a panic, the Bush administration swallowed its laissez-faire pride and cobbled together a hasty $700bn financial rescue plan. But on the first attempt, the bail-out was voted down by a bolshy House of Representatives, sending the blue-chip Dow Jones index plummeting by 777 points – its worst ever one-day drop in points terms. The Guardian’s deputy editor phoned me that day and said: “This isn’t something I often say to reporters – but don’t spare the adjectives.”
After he left office, President Bush’s treasury secretary, Henry Paulson, revealed just how close to the precipice he felt the economy had gone. Paulson suggested that a failure of the financial system had been “a mere hours” away when, on the evening of 16 September 2008, the US government wrote a cheque for $85bn to stop the insurer AIG from going bust. AIG had become infected by toxic financial insurance policies written by staff at its office in London. These policies protected huge banks such as Goldman Sachs, Citigroup and JP Morgan from default by investment counterparties. If the government hadn’t helped AIG to cough up, those banks could have been threatened – leading to a “complete collapse” of finance, with unemployment rocketing as high as 25%, according to Paulson.
It is worth considering what a failure of the financial system would have entailed. Nicholas Colas, director of research at the financial technology firm BNY Convergex, says the credit crunch exposed the sheer precariousness of the global economy. He points out that there are only about $850bn worth of US banknotes and coins in circulation, of which about half are overseas at any time. That means there’s little more than $400bn of actual money in the world’s largest economy, which has an annual gross domestic produce of $14tn: “The economy runs on making sure every party trusts every counterparty. And there’s really not a lot of physical money to support that trust.”
Just as a run on the bank left Bear Stearns exposed, a run on the entire banking industry would have left the monetary system naked. That, says Colas, is why the US government opted to step in, however reluctantly, to prevent Wall Street’s vast institutions from collapsing: “The government made decisions, at at least two points during the crisis, that you couldn’t have a change in the financial system caused by an exogenous crisis almost overnight – in other words, that banks were too big to fail.”
Those are compelling words. But they are not much consolation to individual people who weren’t too big to fail. Since the beginning of 2007, 2.9 million Americans have lost their homes to repossession, according to the research firm RealtyTrac, and families have lost more than $6tn of housing wealth. Of the 14.9 million people looking for work in the US, more than a million are so-called “99ers”. That means they have been seeking jobs for more than the 99-week maximum tenure on unemployment benefit, leaving them without any government support.
At the height of the crunch, I visited the California city of Stockton , east of San Francisco, which has the ignominious honour of being the US’s foreclosure capital. With 260,000 people, the place was once known for its asparagus fields and cherry orchards. Now it has a vast over-supply of newly built homes.
In a Stockton suburb called Creekside, almost every other house was plastered with stark notices declaring “bank-owned – no trespassing”. Newly abandoned houses still had furniture and junk in their frontyards. Locals feared squatters, gangs and lawlessness. Abandoned homes were easy to spot – their lawns, unwatered, quickly turned brown in the California sun. “This is not a rich community – we don’t have a lot,” Bobby Bivens, a local activist for the NAACP civil rights group, told me. “A lot of people, because they were experiencing the hope and joy of buying their first home, really misread where they were going to be and because of that, they’ve suffered great loss.”
Things were worse, to the point of apocalyptic, in depressed Detroit , Michigan, hit by tens of thousands of job cuts at General Motors and Chrysler, both of which filed for bankruptcy last year. An estate agent showed me one three-bedroom home, with stripped wood floors and a garden on a tree-lined road called Stansbury Street, that was on the market for just $1,250 – compared with $88,000 when it changed hands in 2001. Local agents said speculators from developing countries including India were making inquiries about snapping up a few Michigan properties. Tracie Peltier, owner of Detroit-based 3 Tier Realty, told me: “It’s sad – it’s sad to see what’s happening here.”
So what got us into this mess? It would be easy simply to blame predatory bankers who got greedy, conning people into absurdly unaffordable loans that came disastrously unstuck. Back in 2008, the Wall Street Journal found a Brazilian babysitter who was approved for a $495,000 loan, and a housekeeper, married to a taxi driver, who secured a $713,000 subprime mortgage. A 2007 movie, Maxed Out, featured a severely mentally handicapped 44-year-old who had been pressurised into refinancing his mother’s home with an unpayable mortgage, even though he could barely write his own name.
But the picture is too nuanced simply to dump all the responsibility on financiers. Most Wall Street banks didn’t actually go around the US hawking dodgy mortgages; they bought and packaged loans from on-the-ground firms such as Countrywide Financial and New Century Financial, both of which hit a financial wall in the crisis. Foolishly and recklessly, the banks didn’t look at these loans adequately, relying on flawed credit-rating agencies such as Standard & Poor’s and Moody’s, which blithely certified toxic mortgage-backed securities as solid.
A few of those on Wall Street, including maverick hedge fund manager John Paulson and the top brass at Goldman Sachs, spotted what was going on and ruthlessly gambled on a crash. They made a fortune but turned into the crisis’s pantomime villains. Most, though, got burned – the banks are still gradually running down portfolios of non-core loans worth $800bn.
If the government hadn’t bailed out the financial system, most, if not all, of Wall Street’s top players would have failed. But there’s never been much penitence. On a media conference call last year, I asked Goldman’s chief financial officer, David Viniar, whether he felt guilty about his firm’s actions, particularly in pushing AIG towards bankruptcy by making billions of dollars of collateral calls on the troubled insurer. His response was that there was “no guilt whatsoever”, and I was roundly mocked for even asking the question. One blog widely read by Wall Street traders, Dealbreaker, sneered: “Guardian reporter would like to know if Goldman Sachs is racked with guilt.” A commenter on that site accused me of “insane anti-capitalist, commie witterings”.
While accepting that they made some horrendous calls, those in the financial industry now moan about being unduly demonised. At a town hall meeting this week, a hedge fund manager, Anthony Scaramucci, told Barack Obama that he felt like a piñata, “whacked with a stick”, by hostile politicians. Stephen Schwarzman, the billionaire boss of the private equity empire Blackstone, was obliged to apologise last month for a ludicrous tantrum in which he likened the White House’s attitude towards his industry to a war: “It’s like when Hitler invaded Poland in 1939.”
Beneath the hot air lies a genuine belief that people who messed up their personal finances aren’t accepting enough responsibility. Adam Sussman, director of research at the financial consultancy Tabb Group, says: “You don’t see people taking responsibility for the amount of credit they consumed. All the focus is on the marketing practices that fooled unsuspecting consumers to take on loans they couldn’t afford.”
He says the financial world has learned to be more cautious: “We’ve exited a period of naivety where everything goes up and you’d better be on board or you’ll miss out on an opportunity. We’ve become conditioned, now, to expect crisis and uncertainty.”
There’s evidence of a far more cautious attitude on the financial markets. Trading volumes in US stocks and shares were 24% lower in August than they were a year earlier. The typical valuation of a company on the US stockmarket is presently around 12 to 14 times its forecast annual profitability – compared to a ratio of 16 to 18, sometimes even 20, in the boom years. And investors are piling into ultra-safe government bonds despite record low rates of return, to the extent that analysts are beginning to worry about a “bond bubble”.
On the issue that most enrages the public, though, there has been barely any movement. The average Wall Street bonus last year was the fourth highest in history and even in 2008, when most banks lost money, financiers took home an average performance-linked pay cheque of $99,200. On taking office, Obama threatened to cap bonuses at $500,000, describing runaway pay packages as “the height of irresponsibility”. But he quickly stepped back.
Apart from some peripheral tinkering to demand more disclosure and consultation with shareholders, Obama and his treasury secretary, Timothy Geithner, have surrendered in the face of big banks’ perennial threat to up sticks and move to another country. With a straight face, Goldman Sachs’s boss Lloyd Blankfein portrayed his $9m bonus for 2009 as an example of “restraint”.
Bankers are fluently defensive about their pay. Most simply say that it wasn’t their individual office, work group, division or branch that caused the financial crisis – so why should they be penalised? Those who work in finance are hired for their skills in negotiation, and their hunger for money. Argumentative brinkmanship to secure themselves the biggest possible pay cheque plays to the core skills of their profession. Urging a banker to take a lower bonus is like politely asking a crack addict to go easy on the pipe.
When I arrived in the US in June 2006, I was anticipating a steady sinecure churning out tales for the back half of the Guardian’s broadsheet on the quirks, successes and resounding failures of America’s corporate world. There would be Coca-Cola, Google, McDonald’s and Gap to cover. An annual routine including the Detroit motor show, Wal-Mart’s media day in Arkansas and Warren Buffett’s shareholder meeting in Nebraska.
My first story from New York was about Bill Gates standing down from day-to-day management of Microsoft. The Natwest Three were dragged, kicking and screaming, to face Enron-related fraud charges in Texas. And Conrad Black kept us entertained with his courtroom shenanigans in Chicago. But then the sky began to fall.
On the day that Bear Stearns became the first Wall Street firm to implode, some wag stuck a $2 bill to the glass doors of the bank’s Madison Avenue headquarters, a reference to the paltry price of $2 per share paid in a distress sale of the firm’s assets to JP Morgan. The local coffee salesman could see the stress etched on the face of his customers, telling me: “Some of them, when you look at them this morning, you think they’re going to get heart attacks.”
A few weeks later, Bear’s head office was invaded by an angry crowd of hundreds of demonstrators who had lost their homes in the subprime mortgage crunch. Forcing their way past security guards, the protesters stormed the lobby in T-shirts depicting bankers as sharks, waving placards reading “Main street – not Wall Street”. It was a classic case of two worlds colliding in mutual incomprehension.
One of the demonstrators, a single mother of three called Stacey Stokes who was struggling to hang on to her Boston home, slammed the Federal Reserve’s use of taxpayers’ money to help JP Morgan rescue Bear: “The government should be bailing out homeowners, not the people who caused the crisis.” In the corner, a handful of young Bear Stearns employees, recent recruits out of university, were watching with a mixture of amusement and disdain. So what did they make of the protesters?
“Well, I don’t really accept their analysis,” one of the bankers, who refused to give his name, told me. “Bear is the victim here. We made it possible for many of these people to get homes in the first place.” US economy Financial crisis United States Goldman Sachs Lehman Brothers Bear Stearns JP Morgan AIG General Motors Merrill Lynch Chrysler Andrew Clark guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
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