There are two ways to make debt overload even riskier. One is to make it short-term (thereby allowing the lender to demand abrupt repayment). The other is to use risky, hard-to-sell assets as collateral (which may leave you no way to pay if the lender starts to worry about the value of the collateral and demands cash payment). Wall Street, in its wisdom, did both. The commission notes that Bear Stearns, by the end of 2007, had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing between $50 billion and $70 billion overnight in what's known as the repo market, where a firm uses securities it owns as collateral for a loan. Does it surprise you that Bear had no clue about the risk it was taking? According to the commission, Robert Upton, who was Bear's treasurer, said that until the week Bear was sold to JPMorgan he never worried about the disappearance of repo lending.
As for Lehman, the commission reports that by the end of 2007 Lehman had amassed $111 billion in commercial and residential real estate holdings—almost twice what it held just two years before and more than four times its total equity. Lehman used debt to acquire this pile of assets, and these real estate holdings were illiquid, meaning that unlike, say, a share of IBM, Lehman couldn't sell them at a moment's notice. This real estate turned out to be worth far less than it was valued at on Lehman's books, which is one of the reasons the government gives for not bailing out Lehman.
In 1978, financial companies borrowed $13 in the credit markets for every $100 borrowed by nonfinancial companies, the commission says. By 2007, financial companies were borrowing $51 for every $100. "We have a lot more debt than we used to have, which means we have a much bigger financial sector,' John Snow, the former railroad executive who served as treasury secretary from 2003 to 2006, told the commission. "I think we overdid finance versus the real economy and got it a little lopsided as a result." That's the understatement of the year.
For homeowners, the orgy of debt ended with an epidemic of bankruptcies and foreclosures. According to the report, nearly $11 trillion in household wealth has vanished, and as many as 13 million households in the United States may lose their homes to foreclosure. But for Wall Street—Lehman aside—everything worked out just fine, thanks to the government bailout. Within a year, average taxable bonuses were up 17 percent, to $123,850, and Wall Street profits reached a record $61 billion. When we talk about the importance of personal responsibility, it turns out we literally mean personal responsibility, because Wall Street banks don't seem to bear any.