Lehman exposes Wall Street’s moral bankruptcy
Philip Delves Broughton asks who will pay for the incompetence that led to the financial collapse
The enduring image of Wall Street's last systemic scandal, the insider-trading crimes of the mid-1980s, was that of a young trader sobbing as he was led off the trading floor in handcuffs. As the tears dribbled down onto his red braces, his peers gazed on in both pity and terror that they might be next.
These were the Gordon Gecko years when punishment followed crime and even the mightiest financiers found themselves donning the striped pyjamas.
The sums involved in those scandals, however, look trivial compared to the colossal heist committed against ordinary investors and taxpayers these past few years by some of the world's biggest financial institutions.
The bankruptcy of Lehman Brothers and fire sale of Merrill Lynch are cataclysmic events for Wall Street. Many thousands of employees and investors have seen savings evaporate,
not to mention lost their jobs.
At Lehman as at many banks, every employee, from the most senior executive to the humblest secretary, received roughly half of their compensation (salary plus bonus) in stock, which they were not allowed to convert to cash. They could borrow against that stock to buy homes, which many did, but suddenly their collateral is worthless.
In New York, the carnage on Wall Street is an intimate, local story. Thousands are suddenly scrambling for work, struggling to pay for homes they bought when they thought they were rich. Investment banks are huge employers and the demise of three in a year - including Bear Stearns - has left the city angry and considerably poorer.
Those at the very pinnacle of these banks, however, walk away exceedingly rich despite what they leave behind. Execs at Fannie Mae and Freddie Mac, the mortgage firms bailed out by the US Treasury last week, continued to receive multi-million dollar pay packages even as they plunged towards disaster.
For all the immediate pain of these past 24 hours, bankers have gorged for years on 
the very system which has now collapsed. They built a pyramid scheme of debt, charging fees for every misguided layer they added until they lost sight of what was going on at the foundation: bad loans being issued to people who should never have been borrowing to buy assets they could not realistically afford.
And so where are the handcuffs? The trials? The plea bargains for just a few months in a country club jail? Nowhere.
How can it not be a crime to mismanage a business to the point where the US Treasury has to step in with more than £100bn in taxpayer funded credit lines, as it did with Freddie Mac and Fannie Mae? Or to tell investors that your business was robust, even as it was disappearing down the plughole, as Lehman's executives did? At what point does incompetence become so disastrous it turns criminal?
One has to assume either that the only offence in this financial meltdown was mismanagement or that the regulatory system has no teeth. From 2000 to 2004, the SEC spent much of its time trying to right the
wrongs which led to Enron - notably by tightening up accounting standards. Meanwhile, the banking sector was pressing ahead with the massive lending frenzy which has just ended in disaster. It was a classic case of regulators looking in the rear-view mirror while the opportunists were forging ahead into new, un-policed territory.
To a certain extent, the market has inflicted its punishment, driving down the value of assets and forcing even the mightiest institutions to their knees. But there must be a further reckoning to come. For an ordinary citizen who defaults on his taxes, the punishment can be awful. For a financier who sets the banking system on fire and costs the taxpayer billions, it seems you can walk away merely chastened and marginally poorer.
And yet, their greedy behaviour has recklessly endangered both their employees and the millions of people who have been duped into trusting their banks and lenders to behave responsibly. This cycle won't be complete until this fiasco's perpetrators face a more severe judge than the markets. 
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