What happened on Wall Street?

Hello, my name is Ron Blue.  Lots of people are asking the question – what’s gone on on Wall Street?  What happened? Why did Lehman Brothers fail? Why did Bear Sterns fail? Why did Wachovia have to be purchased? Why did Merrill Lynch have to be purchased?  Why did Goldman Sachs become a bank rather than an investment bank?  What really happened? 

There’s a lot of opinions as to what happened, and I’m not going to take an ideological position, but I’d like to explain a little bit from what I understand about what happened.  It goes back to the late 1990s when the administration that was in power at that point began really putting pressure on Fannie Mae and Freddie Mac to make what we now call sub prime loans – in other words loans to borrowers who would not necessarily qualify under some rigid borrowing standards.  And so, as those loans were made, and as economic times improved, lenders became more and more aggressive in lending money. 

The real estate market was going up and mortgage lenders – be they banks or mortgage lenders – began to lend money in very creative ways.  There was nobody that couldn’t afford NOT to buy a house because the lenders would lend them the money.  But, in reality, they were predicated upon a loan loss rate of less than one percent, which had been traditional.  So, all of the sudden, the real estate market began to come down because all real estate bubbles burst at some point. There was not the value there to support the mortgages so people began to vacate their homes and foreclosures went to a million.  All of the sudden, the assets that lenders had on their books became worth less. 

Also, another factor is that most banks or investment banks are built on an economic model that requires credit.  So companies like Goldman Sachs or Morgan Stanley or Wachovia Bank or whomever it may be needed to be borrowing on a daily basis in order to do what they did which was to lend money.  When lenders realized that the borrowers were not likely to repay, they cut off lending.  That is proven by Proverbs 22:7 which says, “The borrower becomes the lenders slave.” Over time, the borrowers, be they families, or banks, or businesses began to default.  We ran into what they call a credit crunch and that was really it.  There was no more credit available. 

Our government and other governments have stepped in to try to mitigate that by making cash available and credit available again.  But when a borrower can’t repay, they are a slave to the lender and that’s going to drive down values.  That’s really what I think happened on Wall Street.  We had a real estate bubble.  We had lending that was driven by greed both on the consumer part and on the lender’s part and we violated the Biblical principle.  There was a price to be paid for that violation, and we paid the price by a falling stock market. 

Is it a forever fallen market?  The answer to that, in my experience, is no.  What happens is that bubbles burst and it takes a while to rebuild. It’s happened many times in my career.  So, I am not a gloom and doom person.  I believe that God is in control and I don’t think that God is worried wondering how we’re going to make it all work out.  And I don’t think that you should be worried, either, because it will work out.


Click here for the October 23, 2008 Blog Entry