Pimp Your Finances

There’s a lot of fingerpointing about the cause of the recession, but who’s really to blame?

Money Central recently counted down a list of the top ten usual suspects.  I don’t think they got it quite right, so I’m going to summarize their list, then share my thoughts on who is really to blame.

10. Angelo Mozilo

Angelo was the head of Countrywide – the largest sub-prime lender in the country – until July 2008.  During the glory years, he collected $470 million in compensation, and made another $141 million by selling stock before Countrywide collapsed.  It was recently bought by Bank of America, who is now petitioning the government for additional bailout funds.

9. Hank Greenberg

Greenberg was the head of AIG, an insurance company that was saved only by an $85 billion bailout.  Hank was in charge from 1967 to 2005, a period which saw AIG get heavily involved in credit default swaps.  Last September, he personally appealed to the US government to save AIG, saying:

It’s a healthy company financially, except for liquidity.

Except for liquidity?  Famous last words.

8. Kathleen Corbet

I had not heard of Kathleen before, but she was head of the biggest credit rating agency, Standard and Poors, before she resigned dishonorably in 2007.

The credit rating agencies have been much maligned for not assessing the risks in the securitization of sub-prime mortgages.  Most agencies gave toxic mortgages a high credit rating, which helped attract investors.

7. George W. Bush

No introduction needed here.

The former President is blamed because he was at the helm when the economic meltdown occurred, and also because he failed to admit wrong doing or accept any responsibility.

Last July, he famously remarked that:

Wall Street got drunk.  It got drunk and now it’s got a hangover.  The question is, how long will it take to sober up and not try to do all these fancy financial instruments?

6. Gordon Brown

The Prime Minister of England doesn’t get off any easier than Bush did.

Some U.K. economists blame Brown for encouraging housing inflation and the rapid expansion of credit during his tenure as Chancellor of the Exchequer (the British equivalent of the Secretary of Treasury).

5. Fred Goodwin

This is another name that I didn’t recognize.  He was the CEO of the Royal Bank of Scotland from 2001 to 2008.  He oversaw a period of expansion, acquiring 26 banks over the course of seven years.  In 2003, he was chosen as the European Banker of the Year.

However, the aggressive growth proved disastrous when the credit crisis hit, and the bank nearly collapsed.  In 2008, he again won a banking award, though it was not quite as prestigious.  He was voted the World’s Worst Banker by the readers of Financial Time’s Alphaville blog.

4. John Tiner and Hector Sants

This pair headed the Financial Services Industry, which is Britain’s financial industry watchdog.  They are on their list for failing to keep a close eye on Northern Rock, UK’s fastest growing mortgage bank. 

The bank’s business model depended heavily on sub-prime secruitization, and came dangerously close to collapse in September 2007.  Customers feared the worst, and rushed to withdraw all their money.  It led to the first bank run in Britain in more than 140 years.

3. Alan Greenspan

Alan Greenspan was Chairman of the Federal Reserve from 1987 to 2006, serving under four US Presidents.  Though widely praised while in office, his policies have recently come under scrutiny as the economy whithered.

Some claim that his decision to drop interest rates to near zero following the September 11th attacks flooded the world with too much money and credit.  The effect was to stave off one recession, but possibly at the expense of an even bigger one.

2. Hank Paulson

Paulson is the current Treasury Secretary, and appears on the list for allowing Lehman Brothers to collapse.  The authors claim that this shattered the belief that financial institutions were too big to fail.  The result?  A run on every major bank in the world, and the “implosion of consumer and business confidence.”

1. Dick Fuld

Fuld was CEO of Lehman Brothers when it collapsed last September.  He is blamed for the company’s heavy exposure to sub-prime mortgage and debt, and his ethic of rewarding loyalty is thought to have silenced whistle blowers.

According to the article, bankruptcy for Lehman Brothers was not inevitable.  In the last months before the implosion, several potential buyers approached Fuld, but he refused to sell or act.  As a result, Lehmans collapsed, and “triggered the second destructive phase in the credit crunch and laid the foundations for a full blown global recession.”

My addition

While the people above may not have done everything they could to prevent the crisis, I don’t think it’s fair to blame them alone.  They acted as servants – to either the public or shareholders.  As such, we could have stopped them.  In the words of Mick Jagger:

I shouted out, “Who killed the Kennedys?”
When after all, it was you and me.

 As long as everyone was making money, no one bothered to look at the details.  The public can’t be mad when they never questioned the actions (or inactions) of the people on the above list.  Our apathy enabled a reckless series of events that culminated in a global recession.  No one person is to blame, because everyone is.