October 7, 2008
How Lehman Brothers is Like a Codfish
BY: Andy Sharpless
The financial collapse of the past few weeks offers striking parallels to the collapse of ocean wildlife. How is what’s happening on Wall Street and in financial capitals around the world like what’s happening in our seas?Lehman Brothers and Canadian cod aren’t coming back.The word “collapse” appears in nearly every thoughtful report on the financial crisis, and it’s also a common metaphor in the scientific reports on fishery depletion. It’s accurate in both cases because thelly notion that you can borrow more than you can afford, or spend more than you earn, inevitably produces a sudden and abrupt change when the money runs out. In the fishery context, the notion that you can catch and kill very high levels of wild fish each year naturally leads to an empty ocean. For example, bluefin tuna fishing companies in the USA have not been able to catch their quota in the Atlantic. There just aren’t enough tuna to be found out there. By contrast, in personal financial terms, if you live off the interest and dividends on your investments, you can sustain that forever. But if you spend down your principal, you are on a path to going broke. The cod fishery off the eastern coast of Canada has never come back. Lehman Brothers isn’t coming back either.The SEC is like NOAA Fisheries.Part of the reason the investment banks failed is because they had taken on very high levels of risk. Much of this risk was due to their high levels of borrowing, also known as leverage. This meant that they had too small a cushion when some of their bets didn’t pay off. For many years, this high level of leverage was forbidden by the Securities and Exchange Commission (SEC). However, several years ago, the SEC caved to pressure from the banks and permitted them to leverage to the maximum. In the fishery context, the catch quotas for commercial fishing are set by the government fishery managers. They are pressured hard by the commercial fishing companies to set quotas in excess of those recommended by independent scientists. Far too often, just like the SEC, the government fishery managers weakly submit, and allow the quotas to be set at levels that are very risky for the long-term health of our oceans. Nearly 30 percent of all commercial fisheries in the world have now gone the way of Lehman Brothers. What happens on Fulton Street or Wall Street affects Main Street.For decades, the commercial fish market in Manhattan was located on Fulton Street near the East River, not too far from Wall Street. And just as the crisis of confidence that started on Wall Street has created problems for businesses and homeowners all over the world, the actions of irresponsible commercial fishing companies will hurt people who never come near a wholesale fish market. A billion people around the world turn to seafood as their primary source of animal protein. Probably 200 million livelihoods are dependent on an abundant ocean. And there are countless coastal towns, large and small, which will become ghost towns if the seas are mined out. ITQs are like CDOs.As profoundly surprising as it is to free market idealogues, we have witnessed a whole set of extremely smart and unimaginably wealthy people lose a lot of their own money by taking on excessive levels of risk in the purchase of collateralized debt obligations (CDOs). This is a cautionary tale to people who would place all their faith for ocean management in privatizing the right to fish through mechanisms like granting individual transferable fishing quotas (ITQs). Sub-prime loans are like jellyfish. As the boom in refinancing of mortgages played out over the past few years, the quality of the loans declined. Lenders, having financed all the people with solid credit scores, went looking for business in places they would not previously have visited. Voila — the sub-prime loan. Suddenly there were mortgage terms – including no income verification propositions – which no self-respecting bank manager would have even considered a few decades ago. In the fishing context, this is called “fishing down the food web.” Scientific reports show that now that as the big predator fish at the top of the food chain have been virtually eliminated, fishing companies are catching and selling creatures no one would have considered appetizing a few years ago. For example, in colonial America, lobsters were so undesirable that masters were forbidden from feeding their servants lobster MORE than three times a week. And today there are commercial fisheries focused on jellyfish.One hopes that the bailout of the sinking Wall Street ship works to keep the world’s economy above water. The cost of the collapse is clearly going to run into the billions. At this very moment, another multi-billion dollar asset is in desperate need of attention before it also utterly collapses – the once incredibly abundant and productive ocean.[Image via vallywag.com]
