NationStates Jolt Archive

http://www.businessspectator.com.au/bs.nsf/Article/Lehman-end-game-JGSNJ?OpenDocument&src=sph
[...]

Paulson, Geithner and Bernanke, meanwhile, are holding out. They were trying to play Bank of America and Barclays off against each other but that strategy has now failed, and now they are just jawboning the others – telling them that if they do not put their capital on the line and continue to trade with Lehman this week, they would also suffer devastating counterparty runs this week and would lose more capital if they did not do it. In other words they all are playing chicken.

If someone does not blink tonight New York time, which is our daytime, then it looks like Lehman will crash before dinner tonight.

[...]

The article is worth reading whole. It basically looks as though nobody wants to buy what is left of Lehman Brothers without the government taking all the risk from these bad securities Lehman still owns. That's obviously the result of the government giving such a guarantee to JPMorgan when it bought the remains of Bear Stearns.

But given that, the government is now refusing to give guarantees, counting instead on the fact that the major banks left standing will suffer horribly if Lehman dies, so buying it will actually save them. They're not buying it though.

So who do you think will blink first? What will Lehman Brothers be by the end of the day?

A tool.

A tool.
I'd appreciate it if you could elaborate. A tool for what, who and how?

Bankers aren't known for compassion, just as they aren't known for foresight. I might be just prejudiced and pessimistic, but my bet is that Lehman Bros is doomed.

I see them going under by the end of trading tomorrow, with AIG or Washington soon to follow. I'm not sure that both AIG and Washington will go under, but it will be a major shock to already faltering credit markets regardless.

Also, let's look at this rationally. I sincerely doubt CEOs of banks are really that scared about this whole mess. I mean after all, wouldn't you prefer to be given $5million and go on holiday while shrugging your shoulders dumbly, over earning $2million and having to continue to work in this messy environment? Also consider that these people won't get blamed for their banks going belly-up and will therefore have no problem finding employment in the future.

Also, let's look at this rationally...
Believe it or not, but these people actually do like their work. They actually take a personal stake (these pay packages you hear about, by the way, aren't cash, they're shares and options in shares) both financially and emotionally. Given what it takes to become a CEO of a bank like Lehman Brothers, being the one in charge when it ended is just about the worst and most existential slap in the face these people can get.

You can call them fools or worse, but you can't possibly imagine that they don't care.

Believe it or not, but these people actually do like their work. They actually take a personal stake (these pay packages you hear about, by the way, aren't cash, they're shares and options in shares) both financially and emotionally. Given what it takes to become a CEO of a bank like Lehman Brothers, being the one in charge when it ended is just about the worst and most existential slap in the face these people can get.

You can call them fools or worse, but you can't possibly imagine that they don't care.

I wouldn't be so sure, but again, that might be just me. However I wasn't talking about Lehman Bros, but rather of the other banks who will refuse to prop them up, because even if they themselves fail, the result is still a fat pay-check.

Oh and I'd imagine bonuses get paid in stocks or whatever, but contract terminations = cash.

I wouldn't be so sure, but again, that might be just me. However I wasn't talking about Lehman Bros, but rather of the other banks who will refuse to prop them up, because even if they themselves fail, the result is still a fat pay-check.

Oh and I'd imagine bonuses get paid in stocks or whatever, but contract terminations = cash.

The very reason why other banks aren't coming in is because, as CEO, their responsibility is to protect their company. Few are willing to blatantly take on such a huge risk with little to no protection as it risks their employment, their future employability, and their net worth.

CEO's of corporations that go bankrupt don't profit from said bankruptcy. It can actually cost them very dearly

I wouldn't be so sure, but again, that might be just me. However I wasn't talking about Lehman Bros, but rather of the other banks who will refuse to prop them up, because even if they themselves fail, the result is still a fat pay-check.
Not really. If a company actually goes bankrupt, the debtholders have first dibs on any money left over (and in Lehman's case, the debts are already greater than any equity and assets it still has). Then come the owners, ie shareholders, which will include most employees.

Employees themselves have little rights to any money, since the counterparty to their employment contract ceases to exist and doesn't have to honour it anymore. And the people least likely to get anything out of it are the people who have no legal protection in terms of employment standards, as you would find for low-skilled employees in every corner store: CEOs.

When people get golden parachutes, they sometimes get them even though the company didn't perform well - but it still exists.

Oh and I'd imagine bonuses get paid in stocks or whatever, but contract terminations = cash.
They generally are paid as combinations. And if we're talking extremely large severance packages, pure cash would be so much that most companies would have to worry about their balance sheet as a result. Share options have less direct an effect, so that'll be the majority of it most of the time.

Of course, that doesn't apply if your employer goes bankrupt.

It's BK. Que sera sera.

And it is mostly Dick Fuld's fault for being greedy. And Merril has been sold to BAC.

Told you there'd be a big change in the way IBs operated. Coming soon, more regulation, less leverage. I expect Morgan stanley will be put onto JPM/WFC/C. Maybe Goldman will remain independent, because it's the best of breed (not that means anything).

Fucking clowns the lot of them TBH.

It's been a wild ride tho', amirite?

I see them going under by the end of trading tomorrow, with AIG or Washington soon to follow. I'm not sure that both AIG and Washington will go under, but it will be a major shock to already faltering credit markets regardless.

WM realistically cannot make it. But it is super big and will cost a fortune to the FDIC so I see a bailout there. This is why it was important to make an example of Lehman. Common and Pref stock is a zero tho'.

AIG will probably get a loan from the fed to help it sell off assets. Probably survives in some shape or form, though a bit of a shadow of its former self.

There is a lesson to be learned here: namely, the more foolish your actions the more likely you are to be the recipient of government aid. See Bear Stearns.

Well fucking done Paulson.

I doubt the economy will get back on a decent footing until there have been some heads on pikes &c. so the idea of 'accountability' comes back.

It's official. HLDG company Chapter 11. Broker/dealer to continue in operation. Probably will get sold off as a unit. Same for Neuberger, I suppose.

I thought this was all taken care of in march? I nominate Ben Bernanke as stupidest man alive. I wonder if he ever forgets to breathe?

It's official. HLDG company Chapter 11. Broker/dealer to continue in operation. Probably will get sold off as a unit. Same for Neuberger, I suppose.

I thought this was all taken care of in march? I nominate Ben Bernanke as stupidest man alive. I wonder if he ever forgets to breathe?

It's going to be an interesting couple of months. I think we've hit the point now that the bank closings will really hit home (particularly if both WM and AIG go under)

It has been morbidly interesting to see some of the most respected names in finance, and really, business in general, go under. It doesn't leave me with tons of confidence in several other corporations.

I even saw one article claiming that this was hysteria and calling it the worst financial situation in a century was only fueling the problem...I don't see calling something as it is as being an issue, but I'm curious as to what you think, seeing as you seem to be very well versed in this.

And it is mostly Dick Fuld's fault for being greedy.
The sad thing being that Fuld back in the day had been the one against Lehman taking on risky deals with debt on its own balance sheet. His opposition at the time left the firm and founded Blackstone, and maybe that story convinced him.

Told you there'd be a big change in the way IBs operated. Coming soon, more regulation, less leverage.
Hmmm, maybe a chance. The one I'm going to spend the summer with has a particular expertise in infrastructure investments. You buy a toll road, or some other thing with a reasonably stable cash flow, and you borrow against that. No threat from mark-to-market accounting, only from real factors. The model seems to have stood this crisis quite well, and the US needs infrastructure investment anyways.

Let's see whether that works out.

I thought this was all taken care of in march? I nominate Ben Bernanke as stupidest man alive. I wonder if he ever forgets to breathe?
I still think you're being harsh.

I even saw one article claiming that this was hysteria and calling it the worst financial situation in a century was only fueling the problem...I don't see calling something as it is as being an issue...
It's not an issue on Wall Street itself, since the people who make these decisions know enough about themselves and can extrapolate enough about the others to ignore any spin coming from the media (at least if it's that obvious).

But the average consumer is going to be worried by comments like this. And while they may be right (though I think 1929 was worse than this is), if it leads to people slowing their spending even more, then the comments aren't helpful.

I still think you're being harsh.


It's not an issue on Wall Street itself, since the people who make these decisions know enough about themselves and can extrapolate enough about the others to ignore any spin coming from the media (at least if it's that obvious).

But the average consumer is going to be worried by comments like this. And while they may be right (though I think 1929 was worse than this is), if it leads to people slowing their spending even more, then the comments aren't helpful.

Definatly agree that it isn't Wall St. to be concerned about...but I don't think it is a bad thing that people slow their spending. The US has been in a 20-odd year shopping spree. Spending needs to slow as the credit markets change and restart.
Case in point: I have a friend who just got his first credit card and is doing the stereotypical buying spree (the kid called me to tell me that he got us a free 36 of bud...only to later tell me that he got it on his new card.) A bit of fear and hesitation may stop others from making these purchases.
I agree that 1929 was worse than what we have right now, and I honestly don't see it hitting that same level (having personal savings insured will do a bit to protect the average person, though, at high cost to the government.

Hmmm, maybe a chance. The one I'm going to spend the summer with has a particular expertise in infrastructure investments. You buy a toll road, or some other thing with a reasonably stable cash flow, and you borrow against that. No threat from mark-to-market accounting, only from real factors. The model seems to have stood this crisis quite well, and the US needs infrastructure investment anyways.


There'll be a lot less borrowing from now on. :p

Seriously though, the IBs acted stupidly. Leverage (35x:rolleyes:) + illiquid assets will kill you everytime. U can't unwind fast enough to get out whole. Also, sell the losers ride the winners. This whole episode has been a comic disaster of epic proportions.

The sad thing is that the whole Bear debacle actually gave these clowns a window to start unwinding, and they didn't. They jammed everything into level III and hoped that housing would come back, then used the PDCF to raise money to speculate in commodities. Well... anyone could have told them that the commodities play was doomed to failure, 'cos just look at Red Kite.

Really, paulson and bernanke should have strongarmed them into unwinding anyway, it would have caused a lot less problems. (In fact, had baldy not done his surprise disco rate cut last august to 'burn the shorts' probably a lot of those assets would have been sold to hedge funds when they were still somewhat marketable. But I digress.)

I suspect when all is said and done, the IBs will not be independent entities - which actually brings stability to funding so not a bad thing. And that means that they will fall under FDIC &c. so will not be able to leverage like they do now, and will be subject to far greater scrutiny in respect of their assets.

Also, the whole CDO business is probably dead, if for no other reason than nobody wants to deal with it anymore. (And covered bonds look to be the future for res mortgages anyway). I also think the CDS marketplace - and CDS are not a bad thing in of themselves - will be reformed to resemble the options market somewhat so the counterparty risk element is contained.

(BTW. Very deflationary all this. Mr Benanke had better start monetizing debt soon if he wants to avoid a deflationary collapse. Even then that may not work)

I still think you're being harsh.


I'm sure he's very smart when it comes to actual economics. But that's not the reality of wall street. He's too naive and too easily manipulated.

Now the fed is going to accept equities as collateral. I mean WTF? It's a fucking margin account now.

This cannot end well. Srsy.

Definatly agree that it isn't Wall St. to be concerned about...but I don't think it is a bad thing that people slow their spending. The US has been in a 20-odd year shopping spree. Spending needs to slow as the credit markets change and restart.
The problem is that they won't restart if some sort of severe recession starts knocking the air out of non-financials too. Some adjustment is necessary and has been for some time, but if it happens right now it's gonna suck quite a bit.

The banks won't really get back on their feet until there is some bottom in sight for house prices. Once that is announced, share markets might also stabilise, and then people can start cleaning up their balance sheets without having to fear a big run at any moment. But if the recession comes harder or longer than expected, then the current situation is going to continue and gradually you'll have one victim after the other. And every case will further restrict lending into the real economy.

I agree that 1929 was worse than what we have right now, and I honestly don't see it hitting that same level (having personal savings insured will do a bit to protect the average person, though, at high cost to the government.
If nothing else, we know a lot more about macroeconomics now than we did then, so ideally you wouldn't think the government would make it much worse. In 1929, it did.

It's not an issue on Wall Street itself, since the people who make these decisions know enough about themselves and can extrapolate enough about the others to ignore any spin coming from the media (at least if it's that obvious).


O rly? Pull up a UAUA chart for last week.

Hypothesis: the likelihood that an investment firm will get a government bailout is proportional to the number of Congresscritters invested in them.

I suspect when all is said and done, the IBs will not be independent entities - which actually brings stability to funding so not a bad thing. And that means that they will fall under FDIC &c. so will not be able to leverage like they do now, and will be subject to far greater scrutiny in respect of their assets.
Well, the regulatory reform they announced a while back is likely going to end up with restrictions on leverage anyways. I don't think putting IBs under the umbrella of bigger retail banks is going to solve anything. It's an eternally repeating cycle, some other vehicle is going to pop up and be able to take on more debt and make more money as a result, so shareholders in these combined banks will yell at CEOs until they find some way to do the same. And besides, it's not like Citi did particularly well out of this. They just happen to have the size to absorb the hits, it doesn't make them any less stupid.

O rly? Pull up a UAUA chart for last week.
The occasional hick-up not withstanding. :tongue:

Some more stuff worth having a look at:

http://economistsview.typepad.com/economistsview/2008/09/bankruptcy-for.html
http://www.informationarbitrage.com/
http://www.businessspectator.com.au/bs.nsf/Article/UPDATE-1-Ten-banks-commit-to-70-bln-borrowing-faci-JH8HM?OpenDocument

This stuff basically sails over my head. You guys are going to have to break it down for me.

Cerean;14012318']This stuff basically sails over my head. You guys are going to have to break it down for me.
I'll try to keep it short:

.com collapse, then 9/11, everybody panics, the economy looks like it'll tank
Greenspan cuts interest rates to virtually nothing, so everyone can borrow cheaply and use the money to spend it on stuff, thus helping the economy
People use the cheap money to buy houses
Banks who offer home loans have the grand idea that if they issue a bond (ie an IOU that has to be paid back at the end of its term and pays an interest every period) to the same value as the home loan they just issued, they can get rid of the risk of default and get the money they just lent right back. In effect, the person who just borrowed for a house pays the bank, but the bank uses that interest straight away to pay the interest on the bond it issued. When necessary, the bank can then borrow again to pay back the face value of the bond when it runs out. Even better, if bonds can be issued made up of many home loans, the risk to the whole bond due to any one of the mortgages being defaulted on is much reduced. These bonds were called "mortgage-backed securities" or MBS.
Everyone thought MBS were an awesome idea, because they were liquid (ie there was always someone willing to buy them) and had little risk. That little risk was further reduced (or so they thought) by coming up with all sorts of complicated financial operations. As a result, banks that issued MBS were making huge money of it, not least in brokerage and dealing fees as they facilitated the trading in these things.
As a result, new mortgages were needed to make more MBS to make more money with. So people with low credit ratings and no deposits were approached. They figured it was okay: even if these people defaulted, their house would have risen in value since, so the foreclosure would bring enough money to make sure the bank didn't lose. So that was the birth of the "subprime" MBS.
Some banks held huge amounts of MBS on their own balance sheets, ie they owned them, rather than selling them on or simply taking care of them for other people. Bear Stearns was one, Lehman Brothers another.
Then interest rates were increased, and at the same time many of the sweet (occasionally sweet to the point of being fraudulent) deals offered to subprime borrowers were reset from an introductory to a proper interest rate. As a result, foreclosures became more and more frequent. The quantity of houses for sale rose faster than the quantity of houses demanded, and prices started to fall. Alarmingly, this wasn't just true in particular parts of the US, but in the entire country.
Suddenly people got worried. The banks tried to figure out what effect all this had on the value of their MBS, and found that they couldn't do it properly: all the fancy financial operations had made it near impossible to track who owned what ultimate housing mortgage in the end. Terrified, nobody wanted to buy MBS anymore, while the banks frantically tried to sell the things. Prices tanked.
Since MBS had been so liquid, many banks had used them as part of their liquidity management, ie making sure they always have enough cash on hand to deal with any short-term issues, such as counterparties asking for their money back. As you can imagine, liquidity management is what a bank is all about in the end. The situation was made worse by "mark-to-market" accounting, which required balance sheets to reflect the value of the assets written on them as market prices. As a result, the value of debts the banks had didn't change, but the value of the collateral they had used to acquire these debts shrank rapidly.
Due to all this, Wall Street banks cut their lending to each other. They all needed all the cash they could get to stay liquid, and had no idea how badly the others were infected with MBS. The Fed tried to alleviate the situation by cutting interest rates again, and allowing banks to borrow cheaply, using worse and worse collateral. Anything to make sure they still had cash, in effect.
Bear Stearns then suffered a bank run, ie a panic in which everyone tries to pull its money out of it and any deals with it. Fearing that a collapse would trigger a chain reaction and wipe out Wall Street, the Fed organised a sale of Bear to JPMorgan, in the process guaranteeing to pay for most losses that might still occur due to the MBS that Bear owned, and which JPMorgan was now acquiring.
That didn't really help much, and things continued to flounder. As MBS didn't recover in value and house prices continued to fall, banks came up with a new business idea: use the cheap money the Fed was providing and using it to bet on commodity prices going up.
Meanwhile, Freddie and Fannie (two semi-government institutions responsible for a lot of home loans and creating MBS) were in all sorts of strife. They owed more than they were worth, and in the end the government stepped in to sort out the situation. We haven't heard the end of it, but for the time being the taxpayer is now in charge.
Commodity prices then started to come down, losing several banks a lot of money. Lehman and Merril took big hits and had to announce massive losses. The financial crisis and threat of a recession had also cut into their other businesses (investment banking for example, meaning the facilitation of share issuances, mergers and so on). In an attempt to raise money and keep going, they had to start selling the few parts of their business that still earned money, leaving not much at all behind.
Last week Lehman's share price fell and fell. Nobody could be found to buy the firm, and it's now gone bankrupt, with as of yet unknowable consequences for the system as a whole. Merril Lynch announced that it would sell itself to Bank of America for a fraction of what it had been worth a year ago, but given that it would have been the next in line to receive a drubbing on the share market and a bank run, probably a good idea. Not so good for Bank of America in the long run though, because the two businesses may not actually fit together very well.
to be continued...

That's the short of it. Ask any questions, there are a few people here who know enough to answer most of them.

Thanks. Any guesses on how bad this is going to get? Next dominoe?

The 00s has been a shitty decade. Where's my 90s playlist? Dollar gas, x-files and STP.

Well, the regulatory reform they announced a while back is likely going to end up with restrictions on leverage anyways. I don't think putting IBs under the umbrella of bigger retail banks is going to solve anything. It's an eternally repeating cycle, some other vehicle is going to pop up and be able to take on more debt and make more money as a result, so shareholders in these combined banks will yell at CEOs until they find some way to do the same. And besides, it's not like Citi did particularly well out of this. They just happen to have the size to absorb the hits, it doesn't make them any less stupid.

Granted. But the regulatory reform will be beefed up as this spreads to the wider economy. (Most likely congress will go to far). And I do think that the pairing is a good idea in the sense that it adds to the ability to take the hits which is a good thing because is reduces counterparty risk, which is a major concern. I mean, things would look a lot different this morning if lehman had just lost a lot of money, but was still solvent.

And in theory, it would be easier for regulators to step in earlier. (Provided they recognized what was going in, which I will admit is not altogether certain).

Cerean;14012333']Thanks. Any guesses on how bad this is going to get? Next dominoe?

The 00s has been a shitty decade. Where's my 90s playlist? Dollar gas, x-files and STP.

Just hope the 00's don't get stuck in repeat.

Just hope the 00's don't get stuck in repeat.
The '80s sucked too. Remember the 14%+ you had to pay on mortgages?

This will pass, there will be new opportunities. The key is to recognize them early enough.

This will pass, there will be new opportunities. The key is to recognize them early enough.

Jay Gould always believed in selling a little early and buying a little late.

Jay Gould always believed in selling a little early and buying a little late.
I'm thinking about _being_ the next Cisco or Mindspring, rather than investing in them. One needs to get on that bandwagon early.

*snip*

You forgot how the Federal Reserve delayed the raising of interest rates from 2002 which according to the Taylor rule should have happened, however, the Fed didn't begin raising rates till 2004 this allowed further loans to be taken out as housing loans remained more affordable to more people for longer than what should normally being allowed. Greenspan took the rates down to 1%originally to offset the expectation of deflation, however, long after these fears had vanished it took longer for the interest rate to begin to rise and only matched the Taylor rule late 2006 after a maximum 3% gap had emerged.

To everybody: In my sig I do have an amusing cartoon slide show that amusingly explains part of the problem and how the sub prime crisis happened.

To everybody: In my sig I do have an amusing cartoon slide show that amusingly explains part of the problem and how the sub prime crisis happened.
Yeah, I thought I was doing a good deed and bought some shares in a fund. My new financial view is that I will never again do financial favors for poor people. They have no business in complex undertakings -- defined as they have to return money, as well as just take it.

I'll try to keep it short:

You rock.

Yeah, I thought I was doing a good deed and bought some shares in a fund. My new financial view is that I will never again do financial favors for poor people. They have no business in complex undertakings -- defined as they have to return money, as well as just take it.

Well, there always has been subprime. The trouble really wasn't lending to poor people per se, but rather the way the loans were underwritten. And, in fact, as the resets continue to come, it appears that alt-a (mostly middle/upper middle class) are actually defaulting at a higher rate than subprime loans.

Highest default rate, California and florida alt-a.

Granted people shouldn't have taken the mortgages in the first place. But it was super dumb to give it to them.

Well, there always has been subprime. The trouble really wasn't lending to poor people per se, but rather the way the loans were underwritten. And, in fact, as the resets continue to come, it appears that alt-a (mostly middle/upper middle class) are actually defaulting at a higher rate than subprime loans.

Highest default rate, California and florida alt-a.

Granted people shouldn't have taken the mortgages in the first place. But it was super dumb to give it to them.

Agreed, there's plenty of blame to spread around in this mess.

On the flip side, many of the smaller community banks that avoided getting caught up in the subprime trap, like mine (yes, I am a banker), have reamined in pretty solid shape.

An interesting article about "Creative destruction (http://www.thenation.com/doc/20080929/greider)"

Essentially, what it says is that this will ultimatly be good. The "old guard" of finance will be collapsed thanks to their abuses and misleadings, leaving room for new players to come forward. There will be bloodshed along the way (high unemployment, recession, etc), but it is unavoidable. The finance sector got too large and too powerful, and now must return to the real valuations rather than inflated.

It would have been far better if the federal government and national politics had recognized the great deceptions of Wall Street and put a stop to them before catastrophe unfolded. Since that didn't happen, we are all now doomed to take a perilous ride--the economy, the country, the world--and hope for the best.

However, we can look forward to the new order that emerges from the wreckage. The financial wizards who have dominated politics and economic orthodoxy for a generation are unmasked, their delusions failed. We have an opportunity to think anew, at least to hope that governing elites in both political parties will finally come to their senses or, better yet, get out of the way.

So, what will be the change? Who will be the new "big boys"? What will the outcome of this crisis be?

Ouch. More than 500 points lower than their last close.

Who will be the new "big boys"?

Building societies, for not throwing money around and generally keeping plenty of liquidity on hand.

I think this is the house-cleaning and wake up call we need to finally shore up the financial system. The problem is that this market's regulation system is too archaic in some places and too loose in others, creating a rickety patchwork that has ultimately fostered the kind of reckless greed and excess liquidity that has produced bubble after bubble in the financial system.

Who will be the new "big boys"?
Gov backed investment funds. Dubai etc. But it's not going to be a revolution, HSBC etc will still be huge.

Gov backed investment funds. Dubai etc. But it's not going to be a revolution, HSBC etc will still be huge.

Now that scares me. If you think Lehman or Bear Stearns were bad, imagine what happens when the same people that own the companies also manage their accounting standards and make political policies. The collapse of sovereign wealth funds is going to make this look like a trifle if they're not properly overseen and managed.

So, what will be the change? Who will be the new "big boys"? What will the outcome of this crisis be?
The ones that are good at infrastructure. Paulson actually had to come out and assure people their deposits with regular banks are safe, which gives you some idea of how bad this is for the real economy. The people at businessspectator.com.au reckon we're looking at a few years of pretty bad recession now.

The Chinese government can't afford that and will then spend with both hands on development, and the Americans will do the same. Infrastructure in the US needs investing anyways, and it's one of the most obvious options for some good old Keynesianism.

The ones that are good at infrastructure. Paulson actually had to come out and assure people their deposits with regular banks are safe, which gives you some idea of how bad this is for the real economy. The people at businessspectator.com.au reckon we're looking at a few years of pretty bad recession now.
Wow...that is really bad, considering deposits have been federally insured for over fifty years. That's like Robert Gates having to assure people the military is strong enough to protect them from invasion.
*snip*
I was just thinking about this earlier today, not the article but the concept of creative destruction. It made me realize how dumbed down political rhetoric about the economy is: somehow, with all of their praise of innovation and progress, speakers never consider what happens to the industries and people who aren't innovative or progressive enough.

It made me realize how dumbed down political rhetoric about the economy is: somehow, with all of their praise of innovation and progress, speakers never consider what happens to the industries and people who aren't innovative or progressive enough.
There are people who talk about them. It's just that in the grand scheme of things, saving the workers of the horse-drawn carriage industry is a waste of money. In the end there is no substitute for them finding a new job - you can tide them over until then (though I'd much prefer you don't take other people's money to do it), but that's it.

I have a feeling though the popular mandate for support packages to unemployed Wall Street bankers isn't quite there at this point...

There are people who talk about them. It's just that in the grand scheme of things, saving the workers of the horse-drawn carriage industry is a waste of money. In the end there is no substitute for them finding a new job - you can tide them over until then (though I'd much prefer you don't take other people's money to do it), but that's it.

That's what I mean, they are not willing to admit sacrifices will have to be made if they really want creativity. To use another analogy, it's like when the doctor tells you a shot won't hurt. Of course it will hurt; he's sticking a needle in your arm. But a patient also knows it will prevent further, worse pain, getting sick. Politicians seem to think more people will avoid the shot if they're told it will hurt, and maybe they're right. I don't think so. I certainly hope not.

EDIT: I've just been reading the phobias thread, about all the vacciphobes that are on this thread alone.
Man, we're screwed.

I was just thinking about this earlier today, not the article but the concept of creative destruction. It made me realize how dumbed down political rhetoric about the economy is: somehow, with all of their praise of innovation and progress, speakers never consider what happens to the industries and people who aren't innovative or progressive enough.

The article made a great point about the rhetoric around losing manufacturing jobs, how people were told that it will be hard, but ultimatly, it is what is best. Now that it is the wealthy bankers, the words are being ignored by those who said them.

The person who comes forward and says "these institutions must be allowed to fail" is the one who is right. A corporation that fails to protect itself while taking huge risks is one that is inept. It has failed at the one objective of the corporation: to protect and increase the wealth of its shareholders.
Sadly, the one who comes forward and says that will, in all probability, be the loser. I'm still waiting for one candidate to come forward with a new "New Deal".

The fact of the matter is, we collectively set ourselves up for this...the last 20 years have been a shopping spree for all of the west, and the US in particular. We have been buying on credit and creating more debt. The first to react were the most vulnerable, but, as pointed out earlier, it is hitting middle and upper middle class families now. This credit crunch should shrink the money supply as well as create more fiscal responsibility.

What needs to happen following the crisis is encouragement to save rather than spend.

Now that it is the wealthy bankers, the words are being ignored by those who said them.
It's not like people wanted to save Bear Stearns. Indeed, they didn't, Bear's shareholders suffered a lot (though not as much as they should have), and untold numbers of its people lost their jobs.

Lehman now isn't being saved...maybe because the government is worried that it can't, maybe because they think they now understand enough about the system (http://www.businessspectator.com.au/bs.nsf/Article/Why-Lehman-was-allowed-to-fail-JJ45H?OpenDocument&src=sph) to take the risk.

The only ones who got saved (and again, not the shareholders) were Fannie and Freddie, which always were government institutions, even though they were owned privately.

The person who comes forward and says "these institutions must be allowed to fail" is the one who is right. A corporation that fails to protect itself while taking huge risks is one that is inept. It has failed at the one objective of the corporation: to protect and increase the wealth of its shareholders.
Sadly, the one who comes forward and says that will, in all probability, be the loser. I'm still waiting for one candidate to come forward with a new "New Deal".

Does that mean we should allow them to fail if it is going to do untold damage across the entire economy? This isn't just about a few 10,000 jobs been lost in a sector only impacting on small sections of local economies, this is impacting on the entire economy throughout the world.

The Fed has kept rates steady (http://www.bloomberg.com/apps/news?pid=20601087&sid=anYN2nKRb5G4&refer=home), probably figuring that not only would cuts never actually reach the consumer, but that it's already injected enough liquidity. In any case, real rates are already very low, and maybe they're just holding it for a while until they know what happens with AIG. They only have four potential cuts to go before they are in real trouble.

Also, a money-market mutual fund (http://www.bloomberg.com/apps/news?pid=20601087&sid=a5O2y1go1GRU&refer=home) is on the way out. Those were supposed to be safer, since they didn't get into the fancy stuff and just stuck to cash or things very close to it. Like Lehman debt...

It's not like people wanted to save Bear Stearns. Indeed, they didn't, Bear's shareholders suffered a lot (though not as much as they should have), and untold numbers of its people lost their jobs.

Lehman now isn't being saved...maybe because the government is worried that it can't, maybe because they think they now understand enough about the system (http://www.businessspectator.com.au/bs.nsf/Article/Why-Lehman-was-allowed-to-fail-JJ45H?OpenDocument&src=sph) to take the risk.

The only ones who got saved (and again, not the shareholders) were Fannie and Freddie, which always were government institutions, even though they were owned privately.
I don't mean to say that people wanted to save Bear Sterns. That comment was directed at those working for the system, not those bailing it (in part) out. Bear definatly needed to be saved as, at that point, no one knew what was going on, or how far the damage would reach.

Lehman had a bit of time to fix itself post-Bear Sterns. Shame they either couldn't or didn't.

Fannie and Freddie are special cases, given the factor that you mentioned.
Does that mean we should allow them to fail if it is going to do untold damage across the entire economy? This isn't just about a few 10,000 jobs been lost in a sector only impacting on small sections of local economies, this is impacting on the entire economy throughout the world.
Again, perhaps I wasn't clear enough with the original statement. If a corporation is thought to be so vital to the economy, or it is suspected that the failure of it could lead to a domino effect (a la Bear Sterns), they should be saved.

However, Lehman was not so intrigal. I would even argue that, with hind sight, Bear might not have been (I'm not prepared to defend that, but simply mention it for consideration). Corporations that cannot fulfill their mandate should collapse.

This is magnified in the current situation. The money supply has been steadily expanding, with the ammount of credit skyrocketing. As the credit marked comes back to reality, some of the corporations that inflated it must fail, for the simple fact that the market will no longer be able to support the weight of these massive companies without the credit market to support it.

Also, a money-market mutual fund (http://www.bloomberg.com/apps/news?pid=20601087&sid=a5O2y1go1GRU&refer=home) is on the way out. Those were supposed to be safer, since they didn't get into the fancy stuff and just stuck to cash or things very close to it. Like Lehman debt...

I'm surprised it's only one. I bet a lot of money markets are sweating right now, though it's difficult to tell how much. Citi recently (2007) greatly reduced the FDIC protection of its primary sweep fund -- from $1 million to $300,000. I imagine they're tempted to restructure the fund again to put that protection back in place, just for the competitive advantage. Most investors don't understand what a money-market fund does unless they're on the conservative end.

There are a couple of other major investment firms that have pretty-well-respected FDIC-insured mmkt funds. Now that I think of it, one of them may have been Lehman Brothers.

Lehman now isn't being saved...maybe because the government is worried that it can't, maybe because they think they now understand enough about the system (http://www.businessspectator.com.au/bs.nsf/Article/Why-Lehman-was-allowed-to-fail-JJ45H?OpenDocument&src=sph) to take the risk.

And yet they apparently don't understand, because look at what happened with AIG. That clusterfuck was very close to actually bringing down the western banking system b/c the ratings agencies after fifteen years of rubber stamping suddenly grew a nutsack.

If it didn't have the potential of causing mammoth unrest it would be fucking comical, especially because a good 70% of this was caused by idiocy; both at the central banks and the institutions themselves.

The only ones who got saved (and again, not the shareholders) were Fannie and Freddie, which always were government institutions, even though they were owned privately.

Well, the bondholders were saved. In fact the bondholders sort of demanded this outcome. It's not really enough to just wipe out the common stock, preferred and bond holders should wiped out too. Especially because the fannie/freddie offerings explicitly said they weren't government backed - which was way they traded at a premium to ordinary government debt.

And yet they apparently don't understand, because look at what happened with AIG. That clusterfuck was very close to actually bringing down the western banking system b/c the ratings agencies after fifteen years of rubber stamping suddenly grew a nutsack.
You wouldn't say that the collapse of Lehman brought down AIG, would you?

Be that as it may, AIG is interesting because it also has a direct connection into the real economy, which would make the bail-out (and this seems the most bail-outy of the lot to me right now) more justifiable in the traditional sense.

Well, the bondholders were saved. In fact the bondholders sort of demanded this outcome. It's not really enough to just wipe out the common stock, preferred and bond holders should wiped out too.
Yeah, but those guys have nukes. :wink:

Especially because the fannie/freddie offerings explicitly said they weren't government backed - which was way they traded at a premium to ordinary government debt.
I don't think the Treasury was oblivious to the conditions under which Fannie and Freddie were trading. If they had wanted to, they could've done a lot more to clear up any misconceptions. But they didn't consider it all that important, I guess.

Barclays in $2bn Lehman Brothers deal (http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/17/cnbarclays117.xml)

Barclays last night struck a $2bn (£1.1bn) deal to buy a large part of Lehman Brothers in the US out of bankruptcy proceedings.

Bob Diamond, president of Barclays and head of its investment bank, was last night quoted as saying to Lehmans' employees: "You have a new partner."

The UK bank may also cherry pick parts of Lehmans in Europe, which was also put into administration on Monday.

Barclays struck a deal to buy the US business after it engaged in intensive talks with Lehmans over the weekend about a possible deal to buy the whole bank. The talks fell through at the eleventh hour when the US government refused to stand behind Lehmans' toxic assets, prompting Barclays to walk away and forcing Lehmans to file for Chapter 11 bankruptcy protection.

Barclays was again approached by Lehmans representatives in the US on Monday evening about buying some of its assets out of Chapter 11. Barclays will buy the broker dealer business, which performs securities underwriting tasks, provides merger advice to clients, and conducts trading. The move will mean taking on between 8,000 and 10,000 staff in the US.

Barclays has managed to avoid taking on any of Lehmans' troubled assets, such as sub-prime loans and impaired property investments.

The deal may require another capital raising by Barclays, which already raised £4.5bn earlier this year.

Barclays, along with other UK banks, came under fire from shareholders over the capital raising. But shareholders may support this deal because it would catapult Barclays into being a major player on Wall Street almost overnight. Yesterday City sources said the price tag of about $2bn was a bargain for Lehmans' investment banking assets.

However, the deal could be risky as it would mark a major expansion of Barclays Capital's strategy, which has until now focused on the debt markets. Barclays' shares fell 8p to 308p.

Mr Diamond, head of Barclays' investment bank, Barclays Capital, and his number two, Jerry del Missier, were in New York hammering out the deal. Mr Diamond has been keen to build up BarCap's presence on Wall Street for some time.

Banking sources said Barclays may also swallow some of Lehmans' European and Asian operations. Barclays may want to snap up some of Lehmans' highly valued investment bankers, including rainmakers such as Michael Tory, Nick Wiles and Adrian Mee. As with the US deal, both sides would want to conclude a deal quickly in the UK in order to keep talented bankers before they get other jobs and to retain clients.

The deal will mark a broad expansion of Mr Diamond's part of the Barclays empire. This could revive tensions within the bank over its strategy. Barclays' chief executive John Varley last year attempted to buy ABN Amro in a deal which would have substantially boosted Barclays' retail banking operations. The deal fell through when equity markets slumped, making Barclays' offer inferior to a rival bid from a consortium led by Royal Bank of Scotland. Mr Diamond was publicly supportive of the move on ABN, but is understood to have been far keener to boost Barclays' investment banking operations.

You wouldn't say that the collapse of Lehman brought down AIG, would you?

No. (It may have had a tiny effect in that it depressed stock prices, thus increasing the pressure to downgrade AIG, but nothing significant). After the unwind of LEH, which actually better hedged than most so it was possible to net a lot of the CDS, the fed/treasury found out that their understanding of the impact of LEHs bankruptcy was much greater than they thought on the financial system as it caused all kinds of credit events (and crazy stuff like money markets breaking the buck) anyway. And AIG would have been much worse, so they sort of realized that they don't really have a handle on this stuff yet so they better do something, because AIG filing bankruptcy could destroy the entire western banking system in the space of 72 hrs.

(Though, it's actually a really shitty deal for AIG. 11.5% LOC, with an 'origination fee' of 80% dilution. AIG won't exist in 24 months in all probability, and this is just an orderly unwind. (I mean it will be split up into bits and sold off to backstop the financial insurance bit which will then be run off)).


Be that as it may, AIG is interesting because it also has a direct connection into the real economy, which would make the bail-out (and this seems the most bail-outy of the lot to me right now) more justifiable in the traditional sense.

This is true, but I don't think that factored into the reasons for the 'bail out', because there are government guarantees for many of AIG's products at the state level. Also, a lot of the insurance policies are in subsidiaries which are separately regulated with the reserves walled off from creditors and such. Insurance companies have gone bankrupt before without causing massive pain. (Though it sucks if you have a large annuity or whole life policy I imagine).

But if this pans out the way I think it is going to I almost approve of this action. The Fed stands to make a handsome profit, and it will take a lot of derivatives out of circulation or set aside for them. Also, criminal probes are forthcoming.

I don't think the Treasury was oblivious to the conditions under which Fannie and Freddie were trading. If they had wanted to, they could've done a lot more to clear up any misconceptions. But they didn't consider it all that important, I guess.

Well, the warning was in bold extra big typeface right at the beginning of every single prospectus ever issued in the past thirty years. I'm not sure how it could have been made clearer to be honest. Really, the only misconception was in the media as far as I can see.

And several good things came out of it: It actually did cause some unwinding of leverage; also, management are going to lose their bonuses and face criminal charges in order to deal with the moral hazardy stuffs.

I do rate both of these efforts better than the Bear Stearns, as there is lots of pain to go around, and I don't believe that bear failing would have been that bad (not much worse than lehman at any rate, which was absolutely survivable, though worse than anticipated). Much of this could have been avoided if Mr. Bernanke had realized that people have to start taking their write downs *before* you start flooding the system with gambling moneys for oil, and that it is not the Fed Chairman's job to 'burn' the shorts.

Moreover, had bear been allowed to fail, Lehman et al might have actually started to really take risk down quickly enough to survive. (And remember the ABX was significantly higher even on the friday of bear's failure than it is now).

Morgan Stanley considers merger with Wachovia (http://dealbook.blogs.nytimes.com/2008/09/17/morgan-stanley-considers-merger-with-wachovia/)

This is happening quicker than I thought. I expected at least a month or so.

I wouldn't be surprised if the deal isn't all that good for shareholders though if it goes through with WB, 'cos WB has problems of its own.

So, goldman to WFC? Perhaps, though buffet doesn't like teh derivatives exposure so from that point of view it is an unlikely pairing. Still best of breed with best of breed makes sense.

This is of course contingent on the whole financial system not collapsing withing the next few days. Check the IRX action. It's like 1934.

Morgan Stanley considers merger with Wachovia (http://dealbook.blogs.nytimes.com/2008/09/17/morgan-stanley-considers-merger-with-wachovia/)

By the time this is done, AIG, Merril Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns will all be gone. It looks like Goldman Sachs is one of the only ones that has survived...

Perhaps this will ultimately prove to be a process of creative destruction that will repair the financial system. But then again, the Depression was the same thing; the prosperity of the 1950's and 1960's was almost certainly influenced by the reforms and creative destruction of the Depression. That being said, I don't think I want to suffer through another decade-plus of double digit unemployment to get there.

By the time this is done, AIG, Merril Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns will all be gone. It looks like Goldman Sachs is one of the only ones that has survived...

Perhaps this will ultimately prove to be a process of creative destruction that will repair the financial system. But then again, the Depression was the same thing; the prosperity of the 1950's and 1960's was almost certainly influenced by the reforms and creative destruction of the Depression. That being said, I don't think I want to suffer through another decade-plus of double digit unemployment to get there.

Goldman will be taken out too, unless it goes private. It'll just be too vulnerable compared to the others without being backed by a large commercial.

Yah, creative destruction is coming. I don't think that the unemployment will be as bad as the last one because the economy is different now. Bad times ahead though, because credit is drying up.

And Bernanke is going to 'expand' the feds balance sheet. So we might yet avoid deflation.

Awww fuck. I get up this morning, peacefully turn on my computer, and Goldman is down by a quarter.

Am I going to have to start preparing condelence letters to the guys in the Sydney office? Maybe it's not all bad that I stuffed up that interview afterall...I don't suppose housing interns would be at the top of the list for them right now.

Awww fuck. I get up this morning, peacefully turn on my computer, and Goldman is down by a quarter.

Am I going to have to start preparing condelence letters to the guys in the Sydney office? Maybe it's not all bad that I stuffed up that interview afterall...I don't suppose housing interns would be at the top of the list for them right now.

Not going bankrupt (yet!). Book value $99, so still well safe from downgrades that would cause a death spiral. (Though not by much). As I said last night, AIG painted a target on them for bear raids. But, lots of covering into bagholders at the close & heavily defended at $100. Wouldn't worry about it yet.

And you know what they say about Goldman... by hook or by crook.

In any event new rules are being put into place to prevent the action of the free market, so I expect GS to bounce. Specially with all the merger news.

Provided we don't crash......