Current Conditions have that 1929 Feel

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  • Thu, Nov 13, 2008 - 03:03pm



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    Current Conditions have that 1929 Feel

A week of historic desperation on Wall Street

Commentary: Current conditions have that 1929 feel

By David Weidner, MarketWatch
Last update: 12:01 a.m. EST Nov. 13, 2008
NEW YORK (MarketWatch) — John Kenneth Galbraith called it the "nature of mass illusion."
The late economist, interviewed in a revival of the PBS documentary on the 1929 crash, was talking about the speculation in the markets in the 1920s, but he could as easily have been talking about the last three to four years on Wall Street — an era people will look back on, observe our naiveté and chuckle.
After all, isn’t that how we viewed those suckers of the 1920s?
Back then, the great investors of the day were people like General Motors Corp. (GM
General Motors Corporation GM) founder William Durant, National City Bank’s Charles Mitchell and Michael Meehan. They were revered in the same way Wall Street idolizes Berkshire Hathaway’s (BRKA

Like the investing elite of 1929, today’s celebrity investors are taking a beating. It’s no wonder some of them, such as Buffett, have been urging investors to buy U.S. stocks because they look cheap. Stocks looked cheap on Oct. 25, 1929, as well, after banks led by J.P. Morgan & Co. (JPM )
is down 10% since Buffett’s recommendation.

If people weren’t losing their shirts, the desperation and mistakes being made in the markets today might be funny. We’ve become immune to shocking events, now that the government is buying up retail banks, two investment banks have failed, the stock market is down 40% from its high and companies in virtually every U.S. industry are openly asking the government to lend them money.
We’ve just had a week that must compare to what those investors went through back in the weeks following — or leading up to — the crash of 1929. It’s not just that the $700 billion bailout is running out of money, or that American International Group Inc. (AIG


are burning through government cash; it’s the upheaval on Wall Street that continues unabated. The financial-services industry is being wiped clean of executives, watching its business shrink and making critical mistakes.

Forgetting Fuld
Just as Durant and Meehan represented unbridled speculation, people such as Lehman Brothers (LEHMQ Chief Executive Dick Fuld represented the excess that led to our current crisis. Fuld was effectively fired Nov. 5, when the lawyer representing the bankrupt Lehman said the CEO would step down at year’s end.
Fuld was paid more than $400 million during the decade, a remarkable sum considering the fact that Fuld thrust Lehman headlong into mortgage derivatives and reportedly turned down an investment from Warren Buffett earlier this year because he didn’t like the terms.
Bonus bonuses
At least Fuld doesn’t appear to be attempting one last cash grab. The same can’t be said of the broader Wall Street, where accumulated bonus pools triggered a backlash from taxpayers and lawmakers, the parties who paid for and authorized billions in bailout funds.
Though bonuses are a traditional part of compensation for bankers and brokers, and bonus compensation was expected to fall as much as 70% for some executives, most people who’ve lost a bundle of their retirement funds in the market don’t see it that way. See related commentary.
State and federal officials are now poring over the banks’ bonus plans, looking for fat that can be trimmed. In response, the industry is considering different ways to dole out its cash, including spreading payments out over years.
Goldman Sachs
Chart of GS
As bad as Fuld’s week was, it doesn’t compare to Lloyd Blankfein’s at Goldman Sachs Group Inc. (GS  Goldman is almost certainly facing the first quarterly loss since it went public when it reports results next month. Shares fell 21.1%, after trading at $86.39 on Nov. 6.
The firm may have suffered even more damage by revelations that it counseled clients away from the California bonds it underwrote. The move, if true, may cost California tens of millions in extra interest payments, according to the Los Angeles Times and Pro Publica, which broke the story. For Goldman, it could cost not only the state business but its reputation
Goldman’s troubled state prompted Blankfein to address the firm’s prospects at a financial-services conference Tuesday. It was a pretty rousing speech, but skeptics are waiting for results.
"In normal times, the CEO’s discussion would be powerful and persuasive, but amidst the current state of unbridled skepticism … [Goldman] will likely continue to battle to maintain confidence in the story and stock," wrote David Trone, an analyst with Fox-Pitt Kelton.
Goldman also just announced more job cuts. Among them reportedly was its highly respected brokerage analyst William Tanona. Now, we may have the answer to one of the universe’s great questions: if a brokerage declares its own industry dead, does it still exist?
1987, 1998, 2001 …
It’s all here: defrocked chief executives, a public backlash, once-proud institutions humiliated, overreaching greed. John Thain, the former New York Stock Exchange chief executive and now head of Merrill Lynch & Co. (MER  acknowledged it this week: This is not like ’87, it’s not like ’98, and it’s not like 2001.
"The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow-down we are seeing now," Thain said, according to the Financial Times.
Yes, John, that’s true, but we’re not just talking about the markets.
It took Wall Street 18 years to achieve its pre-crash levels, but the industry itself was forever changed. Depression-era lawmaking separated banking from investment banking. The Securities and Exchange Commission was formed.
And, forgive me, but remember what happened to the Durants and the Meehans and the Mitchells of those days? Durant emerged from the cash almost penniless and was forced to live on a small pension from GM. Mitchell was forced to resign from National City and was prosecuted throughout the 1930s for his actions in the market during the 1920s. Meehan was barred from the business.
It just takes a week of news from Wall Street to realize how much is history is repeating itself. Of course, some will argue that it’s changing forever. Galbraith would probably write the idea off as the nature of mass illusion, too. 

  • Thu, Nov 13, 2008 - 04:27pm


    joe bender

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    Re: Current Conditions have that 1929 Feel

fuld is selling part of his art collection. the sale is thru christie’s. it was arranged in july and he is guaranteed 20 million no matter what they sell for. the auction house will have to make up the difference in any bid lower than 20 mil.

there are apparently only about 30 or so folks in that rarified air of art buyers. some of whom are russians who are not likely to show up.

lesson: fuld is a good negotiator ………………..when it comes to his own deals.           so what else is new.

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