Loss of Trust

Trust is the beginning of everything. And now, mistrust is the end of everything. This was illustrated dramatically by events on Wall Street on Monday. Trust in the stability of large American banks has evaporated, and mistrust now reigns on Wall Street as well as in financial districts in London, Frankfurt and Tokyo.

The banking crisis has now claimed Lehman Brothers, America's fourth-largest investment bank. The institute was founded 158 years ago by German immigrants and recently has posted billion-strong losses quarter after quarter. In the second quarter of this year, the institution registered a record loss of $4 million. The frantic search for a new cash injection turned out to be in vain.

On Sunday night, the bank's management had no choice but to file for Chapter 11 protection in the biggest bankruptcy filing ever. That has won the bank a little time to find fresh funds or perhaps to be taken under the wings of another large bank.

If that doesn't work out, liquidation of a once strong and proud bank is certain. America's third-largest investment bank, Merrill Lynch, has found a savior for now with the Bank of America taking over the stricken institution.

The shockwaves from reeling US financial markets has pushed global share markets into the red. There remains no doubt that the international banking crisis has reached a new danger level. The US government and the Federal Reserve are no longer prepared to take responsibility for the mistakes of private banks.

Six months ago, they facilitated the emergency sale of the comparatively small investment bank Bear Stearns to the financial institution J.P. Morgan Chase with a massive loan. They also bailed out mortgage banks Fannie Mae and Freddie Mac with the staggering sum of $5 trillion. But now apparently it's the end of state bailouts or maybe the American state has reached the limits of its financial largesse. After all, this is about a lot of money.

Lehman Brothers has debts worth $613 billion. Of course, the government and the Federal Reserve will try to avoid a domino effect. But first it's up to the private financial sector to step in -- not with words but with money. Ten leading international banks, including Germany's Deutsche Bank, are pooling in $70 billion in a fund to help each other with possible cash crunches.

Lehman Brothers, a renowned traditional bank, is in a tailspin. Without a large investor -- with really deep pockets -- the end of the bank is nigh. The bank first squandered away its billions and then fell victim to the raging mistrust in financial markets.

Lehman isn't the first bank to suffer this fate and probably won't be the last. The current banking crisis is the result of too much cheap Federal Reserve money, endless greed and overly generous banking supervision. That explains the mistakes and extremes rife in the current financial disaster.

Germany is also affected by it. German banks have irresponsibly speculated with bad American mortgages. But in America, the crisis has a whole new dimension. The result isn't just a financial disaster but also a political scandal.

After the profits have been privatized, the losses are now being nationalized. Even if governments and Federal Reserves don't stand by threatened banks, the banking crisis emanating from the US has squeezed the world economy.

Everybody is paying a price for the wrong acts of some. In this context, calls for a stronger regulation of the financial sector are understandable. Banks have simply squandered trust. But let's not forget that it's not money but rather the trust of investors and customers that is the most prized asset of banks. That asset has been severely abused.

Karl Zawadzky is DW-RADIO's business editor (sp)