This week is particularly bad on Wall Street. After the recent bailout of Bear Sterns, Fennie Mae and Freddie Mac, this week we saw the bankruptcy of Lehman Brothers and Fed’s unprecedented move to save AIG by offering loans up to 85 billion dollars in exchange the Fed will receive warrants for 79.9% equity stake. Lehman Brothers, once the mighty investment banking powerhouse, is being chopped up and sold at pennies on the dollar; whereas AIG will soon be broken up and sold piece by piece until there’s nothing left. Very soon, the two icons of Wall Street will be mentioned only on the history channel and in classrooms. It is very sad…a sad week indeed.
I have a couple of take-aways from these few weeks of chaotic financial drama.
1. Don’t just blame each other, blame yourself
Bankers, politicians, mortage brokers, insurance companies, real estate agents, speculators, the blame is on everyone. There isn’t anyone that is innocent. Everyone is guilty of contributing to this giagantic mess. Some “home owners” may say, I am not a speculator! I am just a home owner! Suuuure….unless you are planning on keeping your house for 10 years, I don’t see why you are not a speculator. There were people out there who were buying houses in their 20′s. And since they couldn’t afford the houses, they took on adjustable rate mortage with a low teaser rate and were planning on selling them in 2-3 years. Sure it works great when the marketing is great, but when the market goes down….uhmmm…. This is purely greed. And what is worse? This is collective greed. The whole society is greedy. We all know what happened to Enron…this time it is not so much different. Except, this time around, it’s not limited to a bunch of executives anymore, everyone is in it for the money. So don’t blame everyone else, look into the mirror!
2. Government oversight is crucial
After the Enron Scandal, the congress passed the Sarbanes-Oxley Act (SOX), which greatly increased government oversight on publicly traded companies and their accounting practices. With SOX, executives are personally liable when things go wrong. It surely increased accountability, but at the costs of millions of dollars in compliance expenses (which benefits me since IT is in integral part of SOX compliance and it created tens of thousands of jobs in IT SOX Auditing). I wonder this time around, what kind of government oversight will be enforced. It surely has to be something punitive if we want it to be successful, and researches have shown that punishment works best in restoring order (http://www.ted.com/index.php/talks/jonathan_haidt_on_the_moral_mind.html). Now the question is…at what degree of punishment when the whole society is greedy?
3. Speculation does not deliver real value, real value is tangible
Real value resides in delivering goods and services that people can touch, smell, see, and hear. Speculation is nothing more than inflating an already overpriced perception. Nothing beats manufacturing and innovation. The US economy should focus on emerging technologies such as biotech, healthcare, alternative energy and green technologies. Let’s go back to our roots of innovation where Bill Hewlett and Dave Packard started HP, one of the most innovated companies on the planet from a garage. What America is good at is innovation and entrepreneurship, let’s leverage that.
