19

Feb

2013

Into the Intro: Wall Street Values

 
wall-street-values

Go Into the Intro of Wall Street Values

This week on Into the Intro, we're giving you a sneak peek at Wall Street Values, the book that outlines Wall Street's changing business model and explains why it is a threat to the American economy.

 

Read or download the full excerpt here.

A Financial, Governmental, and Moral Crisis

On Monday, September 15, 2008, Lehman Brothers, a prominent investment bank that traces its roots to 1850, declared bankruptcy and thereupon triggered a global financial crisis. Literally overnight, borrowing came to a standstill, and widely held assets could not be converted into cash. The liquidity crunch immediately crippled banks owning substantial amounts of securities linked to subprime mortgages and spread very quickly to every sector of the global economy and all types of debt securities. Unable to sell even normally safe and highly liquid investments, on Tuesday, September 16, 2008, the Primary Reserve Fund, the oldest money market fund in the United States, in an action eerily reminiscent of Depression-era bank runs, shocked the financial community by freezing customer accounts and indefinitely halting withdrawals. Ordinary consumers were thus harshly reminded that there were no safe havens for their savings in this economic storm, adding another layer of uncertainty and instability to the financial markets. Within weeks of the Lehman bankruptcy, the resulting shock to the financial system inflicted severe and long-lasting damages on the economy, throwing tens of millions of people out of work and slowing economic growth. Half a decade later, the global economy still limps along in the aftermath of the financial crisis.

How did we arrive at this point in history where our most powerful financial institutions and the putative engine room of capitalism thwart rather than promote our free markets, our prosperity, and even our social cohesion?

The financial crisis sprang from a precipitous decline in the value of mortgage-related securities. The bursting of the mortgage bubble completely wiped out Lehman’s capital base. Other venerable Wall Street institutions including Merrill Lynch and Bear Stearns narrowly averted total collapse through hastily arranged mergers with Bank of America and JPMorgan Chase, respectively. Virtually every major financial institution had massive exposure to the mortgage market relative to its capital base, and even those banks not in danger of imminent collapse suffered staggering losses severely limiting their ability to engage in ordinary consumer lending activities and basic interbank transactions. Because of the financial sector’s centrality to capital and credit markets, the U.S. Congress authorized a $700 billion government bailout to prevent further failures and safeguard the financial system from total collapse.

The global financial crisis and the prolonged economic recession that ensued raise complex and vexing questions inextricably melding economics and morality. What are the economic and moral connections between Wall Street and the overall economy? How did we arrive at this point in history where our most powerful financial institutions and the putative engine room of capitalism thwart rather than promote our free markets, our prosperity, and even our social cohesion? What essential elements and systemic features of our financial system make it possible for a very few individuals to amass enormous personal wealth as they help plunge the rest of society into a deep and enduring economic recession, putting millions out of work? What can be done both within the financial community and by governments to repair the fractured relationship between Wall Street and Main Street? These are the economic, ethical, and public policy questions we address in this book.

Read or download the full excerpt here.

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About the Author: Michael A. Santoro

Michael A. Santoro is the co-author of Wall Street Values: Business Ethics and the Global Financial Crisis (2013). He is a professor of management and global business at Rutgers Business School in New Jersey, where he has taught since 1996. Professor Santoro's books...

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About the Author: Ronald J. Strauss

Ronald J. Strauss is the co-author of Wall Street Values: Business Ethics and the Global Financial Crisis (2012). He is an assistant professor at the School of Business, Montclair State University. His research and teaching focuses on business and accounting ethics ...

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