The falling of giants...

As of yesterday in New York, two more giant financial houses just came falling down. Lehman Brothers, who was founded 158 years ago with assets around $690B and Merrill Lynch, founded 94 years ago with assets over $1 Trillion are no more. With the credit crisis in full swing, these two companies were dissolved over the weekend terminating their long, storied histories.

Merrill Lynch was sold to Bank of America, who will now be one of the world's largest companies in finance and Lehman Bros. who filled for Chapter 11 Bankruptcy Protection. With a few signatures, they were gone.

I really don't care too much about either company personally. I don't have any investments with either one (and no one should worry if they're bank deposits, they'll be protected by the FDIC - it sucks if you've owned stock in either one). At one time on Wall Street, there were five large banking institutions, now there are only two (with the fall of Bear Sterns earlier). What's amazing to me was that a select group in the company leadership (both active and boards appointed) allowed this to happen. That making money today without pause to think of future consequences is what allowed these companies to find their way to this point.

The credit crunch is blamed. Mainly because banks don't have the same liquidity (available money) as they did even 12 months ago. The thing is that the credit crunch was brought on themselves by being greedy.

By law, incorporated companies (and especially those that are publicly traded) HAVE to make as much money as possible for their shareholders. That means that they are LIABLE to take those risks that produce the best available returns in the fiscal quarter in which they're operating. When banks started expanding out into (at first) marginal borrowers for money (both for home purchases and for businesses) then taking bigger risks by diluting their investment pools by taking on sub-prime borrowers.

For those who haven't put one-and-one together yet, "sub-prime" are people that had no reason to be borrowing money from anyone. Most children know that you don't lend money to people who can't pay you back, yet these huge institutions did that very thing. And now, after the fall out of those choices, those same companies are gone.

I believe we need to reward companies for LONG TERM performance and not focus so much on the short term quarterly reports. These companies sold out their investors by basically setting them up for failure. These are skilled professionals, so I'm not going to accept excuses for non-performance on projection models - what I think really did them in was that they, deep down, believed that the government would step in and not let them fail.

It was a hard decision by our lawmakers to not provide bailout assistance and basically stand back to see what happens with this mess that we've just been handed. They tried to infuse Bear Sterns with taxpayer cash (the Federal Reserve was called into shore it up this spring) to no avail and to considerable backlash from taxpayers. The bailout of Freddie Mac and Fannie Mae was required due to the pseudo government backing of those companies - Lehman and Merrill didn't have that ace up their sleeve.

People want to believe that the worst is over - I don't think it is. We've got a who mess of hard choices to make in the next 2-4 years to recover from this. The next get-rich-quick-scheme may help with a boom in speculative investments, but the reality of it is that we (we as in the taxpayers) will have to pony up for these things. A costly war overseas and indigestion from failed companies that we now own (we're not quite to nationalization of companies, but getting close with each bailout). The revenue has to come from somewhere - you and I.

Just like a household that is upside down in debt, sacrifices and hard choices are in order. Marginal government programs will need to be eliminated, mainstream government programs thinned down (which means loss of jobs for government employees), contracts to upgrade put on hold.

The other side of this is that the government really needs to be pushing for parody in trade imbalances with other nations. Countries like China and Saudi Arabia that send us 10 times the deficit in products and oil for every one that we send back to them. We have to embargo/trade restrict these financial transactions.

Cutting our addiction to oil (especially foreign provided oil) would help quite a bit - the key to that is to keep the price of oil very high (even by placing very tariffs from foreign produced oil). Because the very nature of oil is based as a commodity (prices set on supply and demand), the more we focus away from using oil, the cheaper it actually becomes. Eventually, the oil is cheap again and we lose focus and revert back to using it (i.e. the rise of the SUV from the crisis we had 20 years earlier with OPEC). This would prove to be especially painful with a real long term focus of being domestically solvent.

I don't know if our society is actually prepared to make such a long term investment and stick with it. We're barely 7 years out of 9/11 and it's a distant memory and the causes for being in Afghanistan and Iraq (that one is dubious) are nearly forgotten.

To me, all of this economic strain is really stemmed from our lack to see past the skin on our nose. That is what is most truly frightening for the future outlook of American society as we currently know it.