Where Do We Go from Here?

No one can doubt that excesses like too much leverage, poor risk controls, and a firm belief that housing prices could grow to the sky were the immediate cause of the financial crisis. But unless we are to believe in mass hypnosis—or perhaps that simply walking down Wall Street caused people to inhale stupid germs—the real question is why an entire industry collapsed at once, virtually every firm destroyed or badly crippled, the very face of the American financial sector changed unrecognizably in just a few months.

My suggestionhere is that the common root cause of such destructive activity was the collapse of ethical behavior across the financial industry, and in particular the disappearance of any sense of fiduciary responsibility to the industry's customers.

Given the execrable conduct of the industry and its executives, one solution to the problem might be to tear the industry down and rebuild it according to very different principles and with very different people at the top. Few would put forth such a radical idea, of course. But I don't have to—it happened before our eyes. Almost as though an avenging Old Testament God had stormed down to wreak havoc on the unjust, the worst offenders in the industry—James Cayne/Bear Stearns, Dick Fuld/Lehman, Angelo Mozilo/Countrywide—were struck down, their firms gone from the face of the earth.

And vengeance has been wreaked on others in the industry as well, from Goldman and Morgan Stanley to WaMu, AIG, and Wachovia. Almost no one stood up for these firms and their now-beleaguered executives, because almost no one saw them as innocent victims of a financial crisis not of their making. Everyone saw the firms and their top people for what they were: greedy, hopelessly compromised, and getting pretty much what they richly deserved. To the extent that anyone advocated a bailout, it was solely to protect innocent bystanders, to minimize the externalities.

But of course there were many innocent victims of the crisis, and there will be more: hardworking employees who contributed nothing to the demise of their firms, but who lost their life savings and have dim prospects for similar employment elsewhere; innocent investors who had the simple misfortune to believe the CEOs and CFOs who assured them that recovery was just around the corner; homeowners who swallowed the industry's insistence that they could afford the houses they were buying; and all the rest of us, mired in a deep bear market and looking forward anxiously to the coming recession.