Lehman Bros. had to fall to help return financial markets to the basics of honest market value.
Physicists and financiers have much in common these days – they're both hunting basic reality in their realms. Last week, physicists at a giant particle-collider in Europe began to search for a subatomic entity so fundamental, they claim it creates mass. On Wall Street, a credit crisis has financiers seeking the fundamentals of what creates market value.
Many on Wall Street lost the fundamentals of doing business during an era of loose credit, complex deals that few understand, and blind hope in rising home prices. They also lost sight of three T's that undergird markets: trust, transparency, and truthfulness.
Now, with the collapse of several financial institutions and a dramatic fall in stock prices, Americans need to relearn the prudent use of credit in order to avoid taking on too much debt and putting too much faith in single markets, such as housing.
A two-year fall in house prices, caused by buyers who bought homes they couldn't afford with risky types of mortgages that should never have been offered, needs to fall further until the market locates the rock-bottom worth of a home to Americans.
A new government attempt to prop up that market, either with easy credit or forestalling foreclosures for months, will only re-create the same inflating conditions. It's time for home sellers to accept lower prices and for financial institutions to fess up about their assets.
One likely reason Treasury Secretary Henry Paulson didn't rescue Lehman Brothers last week was that the investment bank had six months since the collapse of rival Bear Stearns to fix its mistake of overborrowing to buy risky mortgage-related securities. It didn't know the worth of its assets.