Where did he go wrong? The question probably crossed his mind…perhaps even when he mounted the scaffold on January 21, 1793. The Bourbons had been the most successful family in Europe. They had ruled Europe’s biggest and richest country since Henry IV. And now they were on thrones all over Europe. But in the language of the City, Louis 16th blew himself up. He was supposed to be an absolute monarch. Ah…there was the dynamite! He believed it. He had surrounded the Parliament with troops and turned the country against him. And now, he had absolutely no control over anything. Not even the power to save his own skin.
“Sire, you have committed something worse than a crime; you have committed an error…” Talleyrand might have told him. Poor Louis! He already had the bag over his head. And the blade at his neck. He must have felt like the dumbest man in France.
Dick Fuld must have felt pretty dumb too. His firm had survived the Civil War, the Railroad Bankruptcies of the late 19th century, the Bankers’ Panic of 1907, the Crash of ’29, the Great Depression, WWII, the Cold War; Lehman Bros. had outlasted spats, prohibition and disco music. But it couldn’t keep its head through the biggest financial boom in history.
John Edwards, recently claimed the title of the “dumbest man in America,” when the press got wind that he was two-timing his wife and running for president at the same time. But Edwards has more competition every day. By Monday of this week, Fuld had completely destroyed Lehman Bros. In January of 2007, the financial industry put a value on the firm – a company it knew well – of $48 billion. This week, the bid went to zero. And then, on Wednesday, came more disquieting news: the world’s largest insurance company, AIG, was failing. Martin Sullivan had run it into the ground, said the analysts. Now, it needed an $85 billion bailout.
There was no one there to bail out Louis when he needed it. France was not too big to fail; it was too big to bail out. And everything had been going so well! When Jacques Turgot was Controller-General, he was getting rid of the internal customs barriers, lifting price controls, abolishing the trade guilds and the corvee (the system of forced labor used to build roads). The political system was being reformed too – evolving towards a parliamentary democracy.
But along came those plucky Americans to stir up trouble. They sucked France into war with Britain. France supplied money, materiel and troops – landing 5,000 soldiers in Rhode Island and ultimately winning the war by blockading Lord Cornwallis at Yorktown.
“The first shot will drive the state to bankruptcy,” Turgot warned the king. He was right. By 1786, the French were in desperate straits, with half the population of Paris unemployed and a national debt equal to 80% of GDP. The French were counting on the Americans to begin repaying their $7 million in loans, but the United States was broke too. And soon, French credit was so bad, the king could no longer borrow from the moneylenders in Amsterdam nor even from his own creditors in Paris. Having borrowed too much, Louis no longer had any room to maneuver. All he could do was to march up the scaffold steps like a real monarch…
And now the heads roll on Wall Street. James Cayne at Bear Stearns. Stanley O’Neal at Merrill Lynch. Charles Prince of Citigroup. But who’s the dumbest? Surely Dan Mudd and Dick Syron at Fannie and Freddie are still in the running. Even with the deck stacked in their favour, they couldn’t stay in the game. And let’s not forget the rescuers – Ben Bernanke and Hank Paulson. They’ve practically nationalized not only America’s mortgage industry…but, taking an 80% stake in AIG, the insurance industry too! Where does the money come from? It’s borrowed too – hundreds of billions worth. Surely, there’s a guillotine waiting for them somewhere.
The last 15 years have been too kind to finance. Wall Street and the City are essentially debt mongers; and in the boom, nobody didn’t want to borrow. Financial profits soared. Since 1980 the profits of the U.S. financial sector as a portion of GDP have gone up 200%. Industry owners and managers could have taken their money off the table and retired to Greenwich. But on the back of this outsize success grew a monstrous hump of self-delusion; the masters of the universe began to believe their own grotesque guff. The financial markets were perfect, said the academics. All-knowing and all-seeing, they wouldn’t make a mistake. And the chiefs at the big financial firm must have thought they supped with the gods themselves; they had the paychecks to prove it.
Of course, some Wall Street bosses were more cunning than others. In selling itself to Bank of America, for example, Merrill Lynch dodges the scaffold; but it becomes a ward of the state, almost like Fannie and Freddie before they were kidnapped outright. Bank of America has easy access to Fed funds; Merrill figures it might need more money too.
The old regime on Wall Street was dominated by just five large investment companies. But the more they talked their own books, they more they came to think it was true – they were all too big, too smart and too rich to fail. Not only did they package and sell explosive packages of debt; they put the stuff in their own vaults too. Now, Lehman, Bear, and Merrill have blown themselves up. Only two more to go.
for Markets and Money