Market Casualties

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Every great financial boom ends in tears. With markets, what goes up unreasonably must come crashing down, and when that happens, we look for people to blame.

And so we have our first big-game catch of the 2007 housing slump and credit crunch. On Oct. 30, Stan O'Neal resigned his post as CEO of Merrill Lynch after reporting that his firm would suffer a $7.9 billion hit to the value of its assets because of bad bets on mortgage-related securities. O'Neal personally took blame for Merrill's forceful push into complex instruments designed to distribute the risk of a surging subprime-mortgage market--the ones now imploding as home prices flatline and defaults spike.

It is easy to snort at the fate of a very rich man being handed a $161.5 million parting gift, or to find satisfaction in his dramatic comeuppance. O'Neal's tendency to play golf by himself has been held up time and again as a sign of a disconnected and friendless manager who would eventually have been undone anyway.

But riffling through details obscures the larger force at work--capitalism's cold efficiency. What Wall Street does is raise money to throw at innovation. Creating liquidity in mortgage markets so that more people can buy houses is not so unlike funneling billions to Silicon Valley in the 1990s to secure U.S. technological dominance.

The problem, as epitomized by the tech boom, is that the Street never knows when to turn off the money spigot. A good idea once is a good idea a million times, to the point of excess. In the hunt for ever more profit, everyone gets carried away, ethics and laws are at times breached, and then, ultimately, the collapse comes.

On Wall Street right now, it is ugly all around. UBS took a $3.4 billion write-down. Citigroup copped to $3.3 billion, and rumors started circulating that CEO Chuck Prince was headed for the door. Less than a week before his ouster, O'Neal explained the genesis of the malaise: "We just got too big in this area," he said. They simply kept going. In a culture where bigger only means better, it's almost hard to imagine it any other way. At least until the market comes along and rights itself.