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Meltdown shows what happens when trust disappears

By   /   Saturday, January 31st, 2009  /   Comments Off on Meltdown shows what happens when trust disappears

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It’s becoming clearer that the events of September 2008 will go down as some of the worst in Wall Street history.

Consider, if you will, recent comments by a couple of people who represent some of the best thinking on this subject.

Writing in a note to investors, David Decker, portfolio manager for Janus Contrarian mutual fund, described the domino effect of the Lehman Brothers bankruptcy filing on Sept. 15.

Its failure, he wrote, demonstrates “what can happen to a global financial system built on trust when trust disappears” adding that “the immediate effect was a global freeze on the extension of credit as banks didn’t even trust other banks to make overnight loans.”

Amid a massive flight to safety came a soaring dollar and Treasury bond yields that were “roughly the equivalent of cash under one’s mattress,” Decker said.

Speaking at the Andre Morris & Buttery Business Symposium on Jan. 26, Gerry Frigon of Taylor Frigon Capital Management said the nine days of panic between Sept. 15 and 24 brought an era of free-wheeling and risk taking to an abrupt end.

“The old Wall Street is gone,” he said. Washed down the drain, he added, is the heavily quantitative approach, what he called “an era of financial engineering” that enabled banks and mortgage firms to lend money to people who could not repay debts.


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