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Denial Exacerbated Meltdown

Banks, like homeowners, refused to believe how bad things really are

By Clay Dillow, Newser Staff

Posted Sep 16, 2008 1:04 PM CDT

(Newser) – The collapse of Lehman Brothers and the fire sale of Merrill Lynch are stunning developments, Joe Nocera writes in the New York Times, as is the fact Goldman Sachs and Morgan Stanley are the only big investment banks standing. But the turmoil isn’t simply the result of complex trading instruments gone awry, Nocera writes; “what’s going on is something we are all familiar with: denial.”

Last summer, Lehman increased its holdings of toxic mortgage-backed securities, betting on big rewards for adding more risk. As it did so, Lehman and other banks priced their securities too high—like starry-eyed homeowners—leading to repeated billion-dollar write-downs. Hopefully, the lessons will help banks see through their own smoke and mirrors, Nocera writes, and “maybe now mortgage-backed derivatives will find their natural bottom.”

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A billboard on a Hong Kong street today tells the story of the US meltdown. (AP Photo)

Hong Kong stocks plunged early today amid growing fears over the global financial system. (AP Photo)

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As painful as it is to see Lehman employees lose their jobs, that is probably a good thing. That is the final parallel that exists between the housing market and Wall Street: the issue of moral hazard. - Joe Nocera, the New York Times

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Denial Exacerbated Meltdown