When I returned last week to the small city in northwestern Indiana where I live, it struck me that most Americans do not share my feeling that the world fundamentally shifted. They see it as something happening out there. Partly it’s because a lot of my neighbors don’t have retirement funds invested — I live in a youngish, blue-collar section of town — I think it’s because of something I have only hinted at:
I was told a year ago that the meltdown of the US financial system was inevitable.
I happened to be meeting with a partner in London during Sept. 2007. If you are British, you may recall that something happened during that time: Northern Rock went under. The panic was enough to discomfort me, and I even told my wife to get extra cash out so that, should our own bank go under back in the States, we would be able to weather things until the FDIC kicked in. It was extremely worrying.
My partner and I met with a couple investor types. One was an Australian who had successfully started and sold a few startups and now had an web-based business. The other was a Hong Kong couple who had made their money the old-fashioned way by actually building a successful enterprise, and were now worth tens of millions of dollars. These were not political activists or financiers. Simply people who made money.
During dinner, the talk turned to the collapse of Northern Rock. Our guests began to talk about how the sub-prime loans had been packaged and sold across the world. According to the Australian, a (retired?) head of the Ozzie bank had given a speech two years before in which he outlined the problem and warned that it would bring down the West’s financial system. Australia was not immune because, while they didn’t have as many bad loans, they had become enmeshed in the American loans by buying these giant mortgage instruments. They explained how deep this problem was, and how deep the consequences were going to be.
They further speculated that American hegemony in finance was coming to an end. The world’s financial markets would shift to China, they thought. They were pulling their investments out of certain markets and into other areas. These weren’t people panicking: this was an impassioned but rational discussion.
These investors warned that the financial collapse was impending and inevitable. Everyone knew it. We then looked into it and my partner was convinced enough to move his funds into safer places. As did I.
I’ve had a year to let all of this sink in. Most Americans haven’t. American politicians have been preaching that “everything will be fine!” The Bush administration adamantly believed that there was no problem and took no earlier steps. The Congress refused to believe that there was a problem, and the leaders of the financial committees adamantly believed that there was no problem and took no earlier steps. The leaders of the finance world adamantly believed that there was no problem and took no real steps. Regular Joes were caught unawares.
So, explain to me how I, a guy who is frankly not that well connected, found out about this? It wasn’t a secret: the American national public radio was researching a piece on it. One of their producers just couldn’t believe that it made sense to be giving loans to people who were never under any realistic scenarios going to be able to pay them back. Yeah, sure: I’ve consulted to the finance and insurance industry since 1998, including what used to be the world’s largest investment bank. But I worked with IT projects, not investing. And, yeah, I do have VC pals and used to pal with traders in Chicago. But they didn’t give me this information.
It’s clear that everyone who could have done something knew, which is why US Treasury Secretary Paulson had the plan for months before giving it to Congress. Everyone knew that this was going to explode in some way. The question is how bad.
Well, bad.
In the end, America will likely come out of this stronger than it was before but the next several years are going to be extremely painful. I leave it to the pundits to explain all of this.
This truly epochal. I don’t know how it will turn out. It’s an opportunity for those who preach work levels to make some real change. It’s an opportunity for those of you who are hidden high potentials to reach out and grab leadership from the incompetent boobs at the reigns today. And it’s a chance for all hell to break lose.
But I’m an optimist.
Better go refill my glass. It’s half-empty again.