Remember 1929 – what seemed to be the end was only the beginning

Dick Fuld, former Lehman Brothers’ chief executive Photo: AP

The dismemberment of Dick Fuld, Lehman Brothers’ former chief executive, before a Congressional committee on Monday was a compelling, albeit brutal, event.

His televised humiliation was orchestrated by a veteran Democrat, Henry Waxman, whose simple question about Fuld’s alleged $480m of earnings – Is that fair? – hit the banker like a haymaker, rendering him speechless.

As the cameras focused on Fuld’s haunted stare, there was a sense of action replay. Hadn’t we seen this freak show, or at least something remarkably like it, long before Lehman went under – a display of furious inquisitors wiping the floor with Wall Street’s loftiest reputations?

Yes, history was repeating itself: “As the ghosts of numerous tyrants, from Julius Caesar to Benito Mussolini will testify, people are very hard on those who, having had power, lose it or are destroyed. Then anger at past arrogance is joined with contempt for present weakness.

“The victim or his corpse is made to suffer all available indignities. Such was the fate of the bankers. They were fair game for Congressional committees, courts, the press and comedians.”

These are the observations of economist J K Galbraith in The Great Crash, 1929. First published in 1954, his analysis of the greed and self-delusion that led to the unravelling of America’s stock market and the subsequent Depression is undimmed by time.

Replace 1929 with 2008 and the story, I’m afraid, is eerily familiar: a speculative orgy, crescendo, climax and crash. As this plays out, important people – business and political leaders – rely on “the power of incantation” to keep the rest of us calm. Their efforts are doomed to fail.

“Cause and effect run from the economy to the stock market, never the reverse. In 1929, the economy was headed for trouble,” wrote Galbraith.

As now, too few understood this. Many who foresaw disaster kept quiet. There was a conspiracy of silence. “The foolish thus [had] the field to themselves.”

In the 1920s, says Galbraith, America’s economy had been weakened by “bad distribution of income… bad corporate structure… bad banking structure… dubious state of the foreign balance… and poor state of economic intelligence”. Who can say with certainty that today it is different? Who now wants to defend the promoters of a one-way bet on property? Any takers?

For those hoping that the stock market’s recent “correction” will be followed by a swift recovery, Galbraith puts a wealth warning on suckers’ rallies. “The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximise the suffering.”

It’s worth remembering that a full recovery in the stock market took more than 20 years. During that time, in July 1932 the Dow Jones index was 89pc below its top. In Britain, the reaction was less severe: the market merely halved.

Amid the carnage, there were buy-backs of stock by investment trusts, desperate to shore up their share prices. This resulted in a massive outflow of cash, just when liquidity was at its most precious. “They bought their own worthless stock,” wrote Galbraith. “Men have been swindled by other men on many occasions. The autumn of 1929 was, perhaps, the first occasion when men succeeded on a large scale in swindling themselves.”

Sadly, it was not the last. In 2006, Royal Bank of Scotland spent £1bn buying 54.3m of its own shares at an average price of £18.37. As late as December that year, it paid £141m for 7.1m shares (average price: £19.79). Yesterday, RBS shares fell by 39pc to just 90p.

RBS was not alone. Even after the credit crunch hit the headlines in September last year, when Northern Rock crumbled, Halifax-Bank of Scotland was busy buying its own shares at fancy prices. In 2006-07, HBOS spent £1.5bn (average share price: £10.01). Yesterday, it joined the infamous “Ninety Per Cent Club” of losers, after the bank’s shares dropped 37pc to 94p.

What drove HBOS to carry on with its madcap scheme? Galbraith’s musing on the short journey from hubris to nemesis helps provide an answer: “If one has been a financial genius, faith in one’s genius does not dissolve at once… The cash went out and the stock came in, and prices were not perceptibly affected or not for long. What six months before had been a brilliant financial manoeuvre was now a form of fiscal self-immolation.”

That was certainly true for Lehman’s Dick Fuld. In the end, he was sucking up his own exhaust. He took his last year-end bonus, about $40m, entirely in shares. They went down the drain with the rest of his bank. Before this mayhem subsides, much treasure and many more egos will follow. The comedians await.

By Jeff Randall
Last Updated: 11:33AM BST 08 Oct 2008

Source: Telegraph

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