Wharton: Bear Sterns, Greed and the Failure of Leadership

crooked_house.JPG"Hardly a day goes by without yet another twist or turn in the credit crisis that has engulfed the U.S. financial system for more than a year," writes former Wharton dean, Russell Palmer in an insightful op-ed piece in Knowledge@ Wharton.
Bear Stearns, one of the country's largest underwriters of mortgage bonds, has been swallowed up. Venerable institutions such as AIG, Wachovia, Lehman Brothers, Merrill Lynch and Citigroup have brought new CEOs on board. Media reports suggest that the world's biggest financial institutions have absorbed more than $300 billion in asset write-downs and credit losses even as home foreclosures are at record high levels and Wall Street has laid off thousands of employees--

What caused the crisis? In my view, greed was the underlying factor. Wall Street hedge funds and others are looking for any financial machination that they can find to hype their financial returns. The whole mortgage fiasco is just the latest example. The dot-com bubble of the late 1990s was another instance. Anyone with any sense knew that during the dot-com mania, you couldn't sustain high prices for stocks on companies that had no current earnings, only losses. It was a bubble, just like the Tulip Mania that investors lived through during the 17th century. With the present subprime crisis, the people originating the mortgages had to know that the higher the risk on the mortgage terms, the greater exposure there was to the mortgage going to foreclosure. So did the people who bought the mortgages, securitized the mortgages, and so on.

It takes courage to state what, deep down, most everyone knows to be the truth when few are willing to utter it. "Speak the truth and shame the devil," as Rabelais said. Dean Palmer has dared uttered that truth, and put his finger squarely on the crux of the issue: simple human greed all around was the single most important factor in the sub-prime fiasco.

In short, the sharks selling the mortgages thought that they could get a lot out of the little people, while the little people closed their eyes, hoping that they would pay a little and get a lot.

Who's to blame?

(Crooked house image by alincolnt via Flickr, CC 2.0)