An Insider's View on the Crisis

With Wall Street jittery and politicians in both parties scrambling to craft a massive bailout, a Yale SOM graduate with nearly 20 years in finance returned to campus to break down the crisis and explain what is needed to get beyond it. To illuminate how bad the situation on Wall Street has become, Boon Sim '92, who heads Credit Suisse's Americas Mergers and Acquisitions Group, told of a friend, a partner at major Wall Street firm, who couldn't get a credit line to renovate his home because of dropping home prices. Sim told the audience that the fact banks wouldn't lend to someone so credit-worthy shows just how bad things have become. "Now think of the hundreds of thousands of small and medium businesses," he said. "They're the growth engine of the economy, the ones that create jobs. We can't have an economy where banks hoard cash. People are worried something is going very wrong. The Fed had to step in."

Sim's lecture on September 23 was sponsored by the SOM Career Development Office and the Finance Club. To understand how this crisis came about, he said, requires one to look back to the beginning of the decade, when firms on Wall Street began seriously underestimating risk while doing deals that were dangerously leveraged. By the time things started to go wrong last year, Sim said banks borrowing $33 for every dollar they put into a deal had become common. "People created instruments they really didn't understand and couldn't figure out how to get unwound," he said. "And if you lever a deal twenty-to-one and the value goes down just 5%, your equity is wiped out."

Add to this the fact that banks were making mortgage loans to individuals without demanding income documentation or for an amount larger than the value of the house, plus the fact that oversight had essentially been forfeited and you've got what Sim calls a "toxic concoction." Actions by the government this year as the trouble deepened did little to stop the slide. "The Fed over the last six months has been dealing with symptoms," he said. "It's like you've got someone with pneumonia and because they have a fever you give then Tylenol. They've been infusing credit into the market but not fundamentally addressing the problem in the market, which has been excessive risk taking."

Finally, he said, the potential of not doing something major became too risky. Now, he said, a Wall Street crisis could become a Main Street crisis, as credit dries up, requiring quick action by the Treasury. "I don't think there's any company isolated from the fallout," he said.

If things are handled correctly, he said, the economy should hit bottom sometime during the second half of next year, with a housing recovery beginning in 2010. While he said a bailout is necessary to prevent things from getting worse, he's not convinced it alone will make things better. "I don't believe it will fundamentally fix the problems," he said. "It's just putting out fires. We need to get ourselves economically independent again. We need to run balanced budgets; we need to get rid of the trade deficit. We need to become competitive again. There are no easy answers. We're clearly living in a challenging time."