Judgment Day is Still Coming

[Jacki Zehner]

By Jacki Zehner

(Former Partner Goldman Sachs, Consultant, and Co-Chair Women Moving Millions)

The world did not experience a Judgment Day on May 21, 2011 as religious leader Harold Camping predicted. There was no rapture, no lifting of Christians up to heaven, and no end of life as we know it. Though this is good news for non-believers, the reality is that faith or no faith many in our country are facing their own day of judgment of the financial kind. The recession has driven many into darkness, and there is no doubt that lots of prayers are being said for a robust economic recovery that leaves everyone better off. Yet our country’s financial institutions and our government may soon be facing their own judgment day.

At the individual level, the financial crisis, the recession, and plummeting housing prices have forced many into personal financial Armageddon. Few are as financially secure as they were prior to 2008. Even though stock prices have largely recovered, the asset that represents the majority of the average American’s net worth, their home, has not. Further, unemployment remains stubbornly high and personal income has failed to rebound. Judgment day occurs when individuals and families do an honest assessment of their current financial situation and make sound decisions based on realistic assumptions of the future. For some it may be no more private school for their children or more modest family vacations, but for many it means abandoning their home or declaring personal bankruptcy.

A Judgment Day may also befall the financial services sector, and specifically my former firm, Goldman Sachs. A scathing bipartisan report entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, seems likely to lead to further investigations regarding Goldman’s behavior. If the author of the much readRolling Stone articles on Goldman Sachs, Matt Taibbi had his way, a special purgatory would be created for anyone and everyone that ever set foot on Wall Street. Goldman will not be the only firm to face further judgment, nor should they be. Almost every major player seemed to be at the party. If you were making a list of entities to blame, it would most certainly have to include the rating agencies, mortgage bankers, Fannie Mae, Freddie Mac, Congress for enabling them, and the regulatory agencies who were supposed to provide oversight despite the trend towards deregulation. All should be held accountable.

So what does this systematic Judgment Day of the financial services sector look like? Public outrage? Already happening. Protests? Yes and likely more to come. Criminal investigations against certain people in decision making roles at these institutions? Likely. Increased and perhaps extreme regulation ( i.e. Dodd-Frank)? Happened. Plummeting stock prices? Yes and more likely to occur. Over the longer term, however, one hopes that these days of reckoning teach some important lessons to a broad array of financial institutions – most importantly, accountability for their actions and knowledge that no one is too big to fail.

A Financial Judgment Day is also at hand for many US cities, municipalities, states and the country as a whole. Financial guru Meredith Whitney, who accurately called the 2008 financial crisis, is predicting a calamity in municipal bonds. Though many disagree with her, she says “you could see 50 sizable defaults.. or more…which will amount to hundreds of billions of dollars worth of defaults.” Even if this does not occur, the fact remains that “a combination of lower tax revenues combined with unsustainable levels of spending are leaving many state and local governments in the lurch.” The issuers with the worst financials will face judgment from their lenders, be forced to endure higher borrowing rates, and thus increase their debt service costs. This will further limit their other expenditures.

At the Federal level, a form of Judgment Day should have occurred last week when the US hit the debt ceiling limit of $14.3 trillion. The House refused to increase the limit given there was no long term plan to address the deficit. Somehow Treasurer Geithner managed to push that day to August, but that day will still come. At stake here is an even bigger issue than what is the appropriate level of federal debt. We are quickly approaching a moment where there may be a “comprehensive loss of confidence in the U.S., its leadership and its money.” As an extreme example of what this might look like, take a look at what happened to the Weimar Republic of Germany in the 1920s, which resulted in a massively devalued currency and hyperinflation. A more likely course is what we have been witnessing, which is a gradually declining currency, rising inflation, and increased borrowing costs which would be undoubtedly occurring if it not for the massive buying program of the Federal Reserve.

What would you do differently if you believed you would face a judgment day? Christians would likely answer that because they would one day be held accountable for all their actions they would behave in a more honest and respectable way. Further, when they messed up they would ask for forgiveness and do their best to do better next time. At the individual level many people are facing financial judgment at no fault of their own, but there remains a responsibility to deal with it to the best of their ability. Grace may come for some in the form of some level of debt forgiveness, but large scale salvation has proven hard to implement. For financial institutions, the time has come for them to confess their sins and face the consequences. The search for truth came in the form of a recent 600 page report, but who has enough knowledge and wisdom to truly unravel the complexities of the legal, let alone moral, right from wrong? 

As for the biggest financial institution of all, the US Government, they must face their deficits with long term plans for responsible reduction, or face the wrath of angry bondholders. If not our country could go to Hell, where the US dollar, like the Weimar Mark, is used to stoke the fires.