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Wall Street Leaders Missing In Action

Government must take the lead to get economy back on track

By Fred Yager
ConsumerAffairs.com

October 13, 2008

Personal Finance • Consumer Prices Edge Up In October • Dodd Bill Addresses 'Too Big To Fail' • Study: Four Types Of Consumers Emerging From Recession • States Worry About Federal Preemption In Consumer Bill • Job Cuts Continue To Fall In October • Consumer Confidence Dips in October, But Rises for Holiday Season • Is The Recession Over? • Economy to Affect Two-Thirds of Families This Holiday • Fed Sees Improvement In US Economy • Consumer Prices Rise Slightly In September • Attorneys General Back Consumer Financial Protection Agency • Gold And Stocks: Are Both Dangerously High? • Study: Americans Crave Better Financial Knowledge • Hiring Begins To Emerge Even As Companies Shed Jobs • Economists Say Worst Of Recession Over • Economy May Force Early Retirements • White-Collar Workers Hit Hard By Recession • Fed Sees Recovering Economy • Six-In-Ten Workers Live Paycheck To Paycheck, Survey Finds • Seven Steps To Saving Money • Survey Suggests Improvement In Jobs Outlook • Stocks Still Outperform, Researchers Claim • Employment Prospects Brighten For Jobless Americans • Job Cuts Rise Following 15-Month Low • Little Sign of Inflation on the Horizon • CFA Applauds Plan to Strengthen Key Investor Protections • Consumers Fall Further Behind On Loans --- • More Personal Finance News

In 1987, the last time the stock market crashed, Wall Street leaders like Merrill Lynch’s CEO Bill Schreyer and the New York Stock Exchange’s Chairman John Phelan stepped up and took action to bring calm to America. A group of Wall Street brokerage firms got together and began buying back stocks that not only slowed the market’s slide but helped the market stabilize; eventually it got back on track in just a matter of months.

In the current crisis, today’s Wall Street leaders seem to be hiding, some behind the restrictiveness of the Sarbanes Oxley Act and others because they played a role in problem and are ashamed to be seen in public.

There’s a lot of talk about the need to restore confidence in the market, but how do you do that when no one who is a part of that market takes a leadership role and does what needs to be done? The leaders seem to be waiting for the government to take action for them.

It’s interesting that it was former Goldman Sachs CEO and now Treasury Secretary Henry Paulson who proposed taking the same kind of action that Wall Street CEOs took in 1987. On Friday, Paulson said, “We can use the taxpayer’s money more effectively and efficiently, get more for the taxpayer’s dollar, if we develop a standardized program to buy equity in financial institutions.”

His words came after Wall Street had experienced its wildest day ever, when the Dow dropped below 8,000 for the first time in five years, then climbed up 900 points only to end the day down 128 points. Treasury officials said they could make the first capital investments within the next two weeks.

The question among experts and traders on the street is: Do we have two weeks? And what about the concern critics have stated that such a move could, in effect, amount to nationalizing the nation’s financial services industry?

Trillions lost

Since Congress passed its $700 billion “Troubled Asset Relief Program” two weeks ago, credit is as tight as ever and financial companies are still writing down billions of dollars in toxic debt. If the stock market continues to fall at the rate it fell last week -- 18% -- there won’t be any money left by the time the bailout package kicks in. Trillions of dollars in investor wealth has disappeared and that includes more than $2 trillion in retirement savings.

As President Bush met with world leaders to deal with the financial crisis on a global scale, members of his administration shifted the focus on the rescue package to highlight direct investment into financial services companies by purchasing non-voting equity.

Another solution to this mess is for the CEOs of the last five major financial services firms still standing to stop hiding and take CNBC’s Jim Cramer’s advice. In his last broadcast of the week, Cramer called on the heads of CitiGroup, Wells Fargo, JP Morgan-Chase, Morgan Stanley, Goldman Sachs and Bank of America to get together in secret with government officials and cut a deal so they could start making loans again.

Cramer’s plan would have the Federal Reserve guarantee their debts as well as their brokerage and savings accounts, allow them to pay off their bonds with federal money, allow them to sell those nasty credit default swaps, and provide each with $100 billion with the stipulation that the banks use the money to start lending again.

Meanwhile, the global credit crisis worsened as finance ministers from industrialized nations met with President Bush over the weekend to come up with coordinated ways of easing the lending freeze. In Paris, European leaders met to figure out new ways to combat the problem after their region saw the worst sell-off in stocks in two decades.

It should also be noted that one thing Wall Street leaders did following the 1987 crash was to put in limits on how low the Dow could go during any one trading day. The New York Stock Exchange halts trading if the Dow loses 10%, 20% or 30% in a single day. Trading is halted for 30 minutes, an hour or two hours, depending on the time of day that the drop occurs. Trading is stopped completely for the day if the Dow loses 30%.

Lack of trust

Experts agree the overriding issue driving this pervasive crisis of confidence among investors is lack of trust. Investors don’t trust Wall Street to act in their best interest and they don’t trust the government to act fast enough.

As economists chatter on about creating comprehensive packages to unfreeze the credit markets, someone has to realize it’s time to stop talking and start doing something -- just as they did in 1987. It worked then. It just might work now.

--- Fred Yager, a veteran AP and CBS News journalist, was formerly president of Merrill-Lynch Broadcasting.

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