GreenspanTremonti generated Great Depression

Finally a highly likely answer to the initial faq in this de(e)p-re(ce)ssion blog, since when it started 3 and 1\2 years ago: hard recession or long depression? The latter.

 

3 years after Lehman Bros. today

How it happened that we were thrown into the 2010s Great OECD Depression?

#GreatOECDepression

Chance and serendipity in history. Here is, in an Italian version, a brief about how the 3rd GD in the History of Capitalsms (the plural is MANDATORY!) was produced by a clever, furbo Alan Greenspan and such a beast as Giulio “Voltremont” 3monti.

From my yesterday’s  twitter hashtag, we’ll label the 2010s  as #GreatOECDepression, in order to focus upon its main novelty, the peculiar global duality.

DAL SUBPRIME AL CROLLO EST-EUROPEO ED AL DEBITO SOVRANO ATLANTICO. LE VIE DEL SIGNORE ALLA OECD GREAT DEPRESSION.

Il SUBCOMANDANTE subcrime mette sotto stress estremo, e talora  stravolge e rimette  in discussione DALLE LORO FONDAMENTA,  i Capitalismi post-Fordisti tarocchi di matrice Reagan – Greenspaniana (di striscio Clintoniana, se lui contava q.cosa).

Nonostante i sapienti trucchi di quest’ultimo, e la decisiva complementarietà col sotto-consumo BRICS,  sistemi insostenibili basicamente per erosione della figura e della esistenza bio-politica stessa de  ceti medi circa la maggioranza della popolazione, il borghese-massa (Mario TRONTI), e la sua capacità autonoma di C e S senza indebitarsi in modo perverso e\o progressivo.

Ciò avviene nella civilizzazione Nord Atlantica, diciamo per contesto sottoposta anche (ma assai più blandamente) ad una del tutto normale,  ENTROPICA e fisiologica erosione sociale secolare, dopo le onde di sviluppo lungo un 1\2 millennio, che trassero spunto anche dai rimescolamenti dell’ecologico Columbus Exchange (dal pomodoro alla Pizza Margherita)

Ma venamo a  noi ora:

Meccanismi di generaz. della #GreatOECDepression: 

1 0nda 1, subcrime 2007-10 (US UK Ic\reland Spain): da blocco inter-bancario luglio 2007 x demoltiplicatori-acc. e varie crisi simultanee, sino alla recessione globale differenziata 2009 e ripresa borse 2010 nell’aspettativa di un ciclo standard.

2 0nda est-europea 2, 2009-11  (CEE, Central East Eu.: crisi monet. e fin.) si riprende dopo decisivo IMF-bailout (altrimenti saltavano subito le esposte Austria, Italia ed Unicredit, Svezia con impatti successivi) e Hayekiane cure da cavallo (drastici tagli redditi, svalutazioni e strette fiscali).

3 0nda SovDebt 3, 2010-15? (contagio da PIIGS a €; il “compagno spread”) precipita riforma rimbalza. € al panettone, ma + difficile colomba 2012. 3 anni dopo l’0nda 1, funziona un po’ come 1931 su 1929: è Grande Depressione, ma stavolta NON GLOBALE. 0ECD.

4  #GreatOECDepression 2007 – 2020? Il riarmo tra i blocchi populisti contrapposti iniziò nel … (speriamo che ce la caviamo).


Black Monday: the day after

ENGLISH ABSTRACT

Understanding Black Monday. IT IS NO “NEGATIVE BUBBLE”, as silly bulls say.

a) It’s a low fundamentals issue, STUPID !!!

From yesterday on, global markets  are anticipating the real size of the  Main Street’s REAL RECESSION. The  shadow financial  – formal finance meltdown – credit crunch – deep recession chain is working from August 2007,  WITH NO COUNTERBALANCE in terms of policies and rules. Just post factum inadequate interventions on the consequences (even them, chaotic in Europe), and nothing upon the factors: neither Obama, nor McCain of course, are dealing prospectively with them (SEE OUR subcrime key document; in sum, long run deflation from a low global effective demand, hyper – concentration of income and wealth, imbalances and over-unemployment generated by: Reaganism, US private debts system and the post- communism “2nd Great Transformation”).

Prof. Roubini confirms today the title of our blog (which was inspired, last January, by our readings of Prof. Roubini himself):

The global economy is now already in a recession (as GDP is now contracting in all advanced economies and sharply slowing down in emerging market economies). We need now to take steps avoid a global depression.

And today’s rge papers aggregation “Are We Headed Towards a Global Recession?” specifies further:

IMF: The global financial crisis may have “extremely serious” consequences – including famines – in developing countries in Africa and Latin America.

◦ IMF: Signs of deceleration are most pronounced for several Emerging Asian economies that are tightly linked to the global manufacturing cycle: Philippines, Thailand, Malaysia, Taiwan PoC, Singapore, Hong Kong SAR, and—to a lesser extent—India.

b) In Europe, an institutional factor adds up. The ususal no-EU keynesian and structural policies issue. The one, that already made EU the only 0 growth world region (Aglietta and Berrebi).

WAKING UP FROM A DREAM: the gloom understanding that European finance is not free from the consequences of the $ 10 tr. global SHADOW FINANCE MELTDOWN. As Breakingnews said yesterday (see quotation in our Black Monday  post),

” It shouldn’t have come to this. A year ago, Europe looked well placed to fend off financial ills. True, the UK had US-style problems with a housing bubble and a big trade deficit, but the eurozone had few bubbles, balanced trade, reasonably prudent governments, a firm central bank and a strong tradition of government guidance and support in banking. 

It turned out, though, that some European banks had dabbled too much in overvalued and overly complex US assets. The authorities have also been slow.”

c) POLICY IMPLICATIONS.

After Reaganism, which blend of Socialism?

We quote from our ” AAA updates on subCrimes” static page, par. 2 on policies.

The Oct. 6 BLACK MONDAY, mainly but not only in  European stock markets (worst from 1987 Black Monday) confirms thet WE WERE RIGHT ON CONDEMNING THE PAULSON – BERNANKE  hurried up plan. Markets don’t care about it, and discount the recession is on and its size is much worst than they expected. Therefore the issue moves to the alternative between:

a) a financial (pseudo-) socialism: once failed again, the finance K party will move to nationalisations and direct State and SWF re-capitalisations … . It would eventually cure the financial meltdown, not the risk of the recession giving rise to a long depression in the 2010s.

b) a Keynesian socialism: redistribute drastically  income and wealth  (through policies, rules and Robin Hood fiscal policies) in order to gradually sort out of the 1990s longrun global deflation (Aglietta and Berrebi, Chesnais).

More in our .pdf –  subcrime key document.

SLATE

TODAY’S PAPERS

Drowned World Tour

By Daniel Politi
Posted Tuesday, Oct. 7, 2008, at 6:29 AM ETIt’s a new week, and the bad news keeps getting worse. “The global financial crisis has taken a perilous turn,” declares the Wall Street Journal. Hopes that the massive bailout package approved by Congress last week would give investors some breathing room were quickly dashed as soon as the markets opened. And pretty much the whole world is feeling the pain. Markets in Asia, Europe, and Latin America closed deep in the red yesterday, a pattern that was repeated in the United States. The Dow Jones industrial average plunged 800 points, or 7.7 percent, before rebounding late in the day to close down nearly 370 points, or 3.6 percent. It marked the first time the Dow fell below the 10,000 mark since 2004. USA Today helpfully puts it in perspective and points out that the Dow has lost nearly 30 percent since Oct. 9, 2007.

The New York Times and Washington Post highlight word that the Federal Reserve is considering a plan to buy large amounts of unsecured short-term debt–so-called commercial paper–in an effort to revive the financial system. This “radical new plan” (NYT) would essentially make the Fed “a major funder of a wide range of U.S. businesses facing imminent cash shortages,” explains thePost. While the growing financial crisis is putting pressure on government officials to act, the Los Angeles Times points out that if there’s a clear message from yesterday’s worldwide sell-off it’s that investors are increasingly concerned“that government intervention won’t be enough to stave off a potentially severe global recession.”

CRONACA DI OGGI

TENGONO LE BORSE EUROPEE, ma non recuperano il crollo storico di ieri, mentre a NY il Dow Jones scende di oltre  il 5%, S&P del 5.7%, a conferma della bocciatura del, e sfiducia nell’ affrettato ed elettorale Piano Paulson. I titoli finanziari di NY al loro minimo dal 1997 (solo oggi -25% Morgan Stanley e BoA). In caduta libera le grandi banche inglesi (-50% in 2 giorni  HBOS e RBS), forzando un Piano Straordinario di Gordon Brown tra i $60 e 90 bn. Paul Krugman commenta:

Britain leads the way?

 

According to the FT,Gordon Brown, the UK prime minister, on Tuesday night ordered a massive taxpayer-backed cash injection to rebuild the balance sheets of Britain’s high street banks, in effect part-nationalising the sector at a cost of tens of billions of pounds.

DA LEGGERE OGGI:

Marco Onado su Il Sole 24 ore.

– la autocritica del CEO UniCredit, Aless. Profumo, in una lunga intervista a La Repubblica: abbiamo fatto il passo più lungo della gamba e sottovalutato il financial meltdown. Il fatto: gli azionisti (le fondazioni bancarie) che ricapitalizzano la prima banca italiana, al momento si guardano bene (in piena crisi e tentativo di rilancio, risanamento) dal dimissionare Profumo (responsabile di una strategia di crescita del tutto azzardata e FUORI TEMPO rispetto al ciclo mondiale, come lui stesso e’ costretto ad ammettere POST FACTUM), ma lo mettono SOTTO TUTELA. Escludendo le liquidazioni, nel 2007 e’ il manager più pagato d’Italia.

– DA IERI, ripreso oggi in Italia su La Stampa, l’incredibile udienza parlamentare di Mr Fuld PADRE-PADRONE di Lehman Bros (che i nostri lettori conoscono MOLTO BENE).

– IERI SERA ottimo dibattito alla morente LA 7 (che la Telecom vuol chiudere), all’Infedele, con parterre de rois che includeva dei Grandi come Marcello DeCecco ed un lucido, mordace Tony Negri. Peccato che, dopo averla tenuta a bagnomaria con Tronchetti Provera, ora la chiudano di brutto. L’ultima voce libera, troppo ose’  per la thanato-politica cavalier-leghista.

ORA LEGALE 13: il punto.

MERCATI VOLATILI. Abortisce un primo tentativo di rimbalzo delle borse europee in mattinata, che dura appena un’ora. A mezzogiorno nuova spinta verso il positivo, MENO CHE  A  MILANO. Qui Piazz’affari appesantita specie da una  UniCredit senza pace. Le ammissioni a denti stretti di Profumo (intervista cit.) non rassicurano molto: costui ha sbagliato proprio tutto,  con una iper-crescita non proporzionale alla capitalizzazione, in tempi di deflazione mondiale strutturale e di evidente (ad ogni osservatore onesto) preparazione della catastrofe della shadow finance, con tutte le conseguenze che oggi si dipanano.

Alle 13: Milano sullo 0%, resto Europa + 1%. UniCredito -4.4%, Telecom – 5,5% e  sotto gli E 0,9, Impregilo – 7%, e sospesa per ribasso Tiscali (-15%).

Nel pomeriggio escono i 3 Nobel della Fisica: gli svedesi hanno fregato il Gabibbo, e dato il Nobel a 2 giapponesi che avevano sviluppato la sua scoperta. Che figura di merda ci fanno a stoccolma!

CHIUSURA BORSE

Come avevamo previsto, oggi nessun nuovo tonfo ne’ recupero dell’abbassamento fundamentals-driven di ieri, LUNEDI NERO. A Milano (-0 .6%) problemi specifici:

– LA POPOLARE continua a tonfare (qualcuno deve sapere perche’),

– UniCredit insensibile alle dotte auto-critiche EX POST, perde un altro 4% perche’, mentre ieri S&P aveva mantenuto il rating stabile, questo pomeriggio Moody l’ha abbassato.

– Pianto greco del CFO Telecom: a queste quotazioni frazionali sotto €0.9, improbabile si facciano vivi gli  investitori potenziali, come SWF libici, Q8 e russi.

The shrinking of US financial banks

Lehman death telenovela no.2

This w\e marked a milestone and turning point in the restructuring of the US finance capital, although far yet from a recovery of the world economy from the credit crunch.

Starting with Bear Stearns 6 months ago, now US financial independent banks have been CUT FROM 5 TO 2, as we knew and we had easily predicted already last March. But it is important to note that each one of the disappeared banks has followed a different path:

a) protected and public bail-out  for Bear Stearns (absorbed and disappeared within JP Morgan, a very big, top operator  in finance – but not a purely financial bank);

b) open market acquisition by a commercial bank: this w\e, the Californian, agrifood based colossus BoA has acquired for $ 50 bn Merrill Lynch, the less unprofitable of the two financial banks in irreversible crisis, due to exposition to subcrime polluted products;

c) after a refusal by Bernanke-Paulsson to save it, Lehman Brothers was sinking today  and leading to bankruptcy and default, unless a last minute cheap buyer appears (unlikely: everyone abandoned dealings, when realising the Fed Government was not putting money and\or a last resort guarantee, this time).

Such a concentration, and the disappearance of the US anomaly (an autonomous financial segment  of the credit industry), comes together with another IRREVERSIBLE CHANGE: indefinite, almost infinite derivatives, unlimited securitisation will never be back again. Financial innovation will explore other grounds: not these ones, that  weakened the financial system, leading it very close to a collapse and meltdown.

Now we are left with the credit crunch and the world recession 2008-09. But finance capital has been reorganised,  in order to take advantage from the recession, and prepare the next Minsky cycle of  financial speculation.

Published in: on September 15, 2008 at 6:01 pm  Leave a Comment  
Tags: , , ,

Lehman is dead: will Paulsson save the Queen? How?

LEHMAN DEATH TELENOVELA- 1.

As we already forecasted in March (on reading  Lehman Brothers budgets, Finch data and RGE analysis), and repeated meanwhile in many blog posts (search Lehman  in this blog), the 4th US financial bank is now a walking dead, and after the end of the prospective acquisition by Korea developent  bank, its shares lost 50% in 2 days (43% in a day), then another 40% on Sept. 11. In the last Q it lost another $4 bn.

Sept. 13 update. 

Slate summary: The New York Times and the Wall Street Journal lead with, and the Los Angeles Times fronts, an emergency meeting between major bank heads and the Federal Reserve. Sick of underwriting bailouts, the government is hoping to broker an “industry solution” for the impending liquidation of Lehman Brothers Inc., the ailing investment bank.

 

Now it is to the couple Paulsson (former financial manager) – Bernanke to act.

We bet it will be another move toward  Financial Socialism (but WHICH move, this time?), although some contradictions might arise within and between the two, Paulsson:

– on the one hand more willing to invest the taxpayer money he doesn’t actually have – JUST STRONGER DEBTS REPLACING WEAKER DEBTS, financial entitlements’ circulation -,

– on the other hand with public relations problems in the “societe’ du spectacle” political scene. In fact, the Naked Capitalism blog (fully quoted below), as well as other observers, think that THIS TIME Paulsson needs to show he is not a Trojan Horse of Wall St. at Washington (WHAT HE ACTUALLY IS, of course: By definition), and therefore he will not play the full bail-out as with Bear Stearns.

WHICH ARE THE ALTERNATIVES?

deal journal, wsj: http://blogs.wsj.com/deals/2008/09/09/should-the-fed-step-in-to-help-lehman-can-it/

When it comes to banks and thrifts, the Federal Reserve and Treasury have a wealth of legally approved options, including taking over and liquidating assets or creating a “bridge bank.” When it comes to broker-dealers like Lehman, federal regulators have only a hammer, a plumb line and a wrench. They can force a shotgun marriage, arrange a line of credit or put their authority–often referred to as “moral suasion”–behind an industry-led bailout of Lehman.

the deal jo. suggests these potential buyers, BUT (opposite to such optimism) TIME SEEM OVER  for such a market-lead bailout (see again Naked Capitalism, among other observers): 

rge monitor, sept. 10

 

How Would Authorities Deal With Another Run On A Broker Dealer?           

  • Naked capitalism: Would Paulson let Lehman fail? “The short answer is yes: Unlike Bear, Lehman is not a big credit default swaps protection writer
  • Paulson Chatham House speech, July 2: “We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm” –> For the long term, Hank Paulson envisages separate resolution processes for deposit institutions and investment banks. Bernanke and FDIC’s Sheila Bair also advocate separate resolution processes
  • Paulson at Committee Hearings, July 10: There are however systemically important institutions that need government intervention in case of a run.“Looking beyond immediate market challenges, the trigger for invoking government’s emergency authorities should be very high – such as filing for bankruptcy”

 

naked capitalism’s LEHMAN DEATH WATCH

today, sept. 11:

http://www.nakedcapitalism.com/2008/09/lehman-death-watch-are-fulds-days.html

The market’s reaction to Lehman’s way worse than expected earnings announcement of $3.9 billion in loses due to $5.6 billion in writedowns was ugly, but even uglier is the lack of much (any?) progress towards getting the firm out of its fix. Yes, dividends are being cut, but the other two key elements, spinning off much of the troubled commercial real estate portfolio to shareholders and selling (well, sort of, as we will discuss) its asset management business.

But what would be left? A firm shorn of its best asset, now even more heavily skewed toward fixed income, which by all appearances is suffering not only a cyclical but also a secular decline. The private securitization market is much smaller than it used to be and does not appear likely to return to its former size for a very long time. if ever.

The new (or rather, more openly discussed theme) was can and should Fuld survive? Both the Wall Street Journal and the New York Times have reports on that topic, never a good sign. However, who would take his job? 

(…)

The Journal story has some good reporting on how Fuld’s pushing for the best deal and impatience undid some possible deals.

Bloomberg tells us Lehman’s fate hinges on the sale of a stake its asset management unit, But the story contends Fuld is overplaying his hand:

“Fuld doesn’t want to let it go,” said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. “He went out of his way to buy it and he knows it’s a good asset.”…

Even a successful sale may not be enough to satisfy credit- rating companies.

sept. 10

Lehman Death Watch: Will Paulson Let Lehman Fail?

The short answer is yes, but we need to define fail. (…)

Even though Bear and Lehman are similar in size, their business mix differs in ways that make Lehman dispensable. In fact, Paulson almost needs to let a financial player fail to prove that he is not a toady of the industry.

Reuters labels it “an insolvent firm”.

sept. 9

Merrill. Lehman Trading Operations Valued at Zero by Market

We had noted earlier that the price discussions around the possible sale by Lehman of a stake in its asset management operations valued the rest of the firm at close to zero. A story at Bloomberg has taken this line of thinking one step further.

 

From Bloomberg:

 

    Lehman’s market capitalization of $11.2 billion is almost equal to the value of its asset-management arm, which includes Neuberger Berman Inc. That leaves its main business of trading stocks and bonds as having little worth. The numbers are similar for Merrill Lynch & Co.: Take out its retail-brokerage and asset- management businesses, and the investors’ valuation of the rest of the third-biggest U.S. securities firm is zero.

    After being the most profitable business on Wall Street, generating more than $65 billion in pretax profits for the four largest U.S. securities firms between 2002 and 2006, trading has become a black hole. It still accounts for about half of the revenue at the Wall Street firms. Yet Lehman Chief Executive Officer Richard Fuld and Merrill CEO John Thain have been unable to convince shareholders to attach a value to the businesses.

Sept. 7

http://www.nakedcapitalism.com/2008/09/lehman-fundraising-talks-stall-firm.html

We were willing to be proven wrong in our skepticism of Korea Development Bank’s pursuit acquiring a stake in Lehman. We had no doubts about the interest; the KDB CEO was the former Seoul branch manager for Lehman and full bore behind a deal. But the reception of the Korean government, which had to approve the deal, was lukewarm at best. It’s rare for an individual to overcome official indifference and inertia. We had noted that the Korean bureaucrats could simply study the deal to death, that would put an end to it with every having to official turn the KDB or Lehman down.

And the rumors about other possible suitors have been simply bizarre.

 (…) so the firm is on to Plan B, discussed earlier in the week, to spin off problematic mortgages into a separate entity. From Times on line: (…)

 

If the Korean deal falls through, Lehman will press ahead with a sale of its Neuberger Berman investment-management business, estimated to be worth up to $10 billion – roughly equivalent to the entire company’s current market capitalisation.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4692625.ece

 

Lehman failure likely: Bear Stearns no.2 story

THIS IS A SHORT REMINDER >>> sending to the June 3 post on the same issue.

Please go to our – DAILY UPDATED – June 3 post, timely dealing with the current Lehman Brother involution and its next catastrophe.

A major step was June 12 revolution in LB top managemet, CEO & CFO: too late and ineffective, since it confirms that Lehman stands only on the tyranny of his benefactor, Mr. Fuld; but he can’t cope with THIS crisis and – as Breaking Views has  pointed out – there is no plan for his succession.

In the short run, the left purely financial US banks will be only 3 (not necessarily the LR final equilibrium): Morgan Stanley, Goldman Sachs and Merrill Lynch.

Published in: on June 15, 2008 at 2:00 pm  Leave a Comment  
Tags: , , , ,

A run on Lehman Brothers might come at any time

In the dawn of the subcrime meltdown, Dick Fuld said

“Do we have some stuff on the books that would be tough to get rid of? Yes,” he said, referring to commercial and residential mortgage assets. “Am I worried about it? No. If you have some repricing of these things will we lose some money? Yes. Is it going to kill us? Of course not.”

Lehman has taken $17 billion in write-downs since last year: not so many as Citi (41 bn) or UBS (38), but on much smaller shoulders. Under Bear Stearns death by ritual sacrifice  pressure, it sold $130 billion of assets during the second quarter, but that doesn’t mean at all it won’t have more write-downs in progress. Wrong, rotten subcrime assets still in their hands are est. another $65 billion. They made 2/3 of the road, but at the end there is a sale.

In June,  a tug-of-war has exploded between David Einhorn (leading short sellers) and the beautiful, celebrated Lehman CFO  Eric Callan. She lost, since she was wrong; or, she was wrong since she lost (in financial herding, you know, prophecies are self-fulling beyond a critical mass; as testified the Bear Stearns boss to the Senate, on April 3). She was right, in her last CFO words:

Ms Callan admitted that the issue of the firm’s long-term business model had been vexing top management.

Yet she added that Lehman had concluded it would be able to boost returns with lower leverage by charging more for other services, particularly in markets where few banks are able to provide credit to companies. (FT, June 9)

In a few weeks or months, LEH will be sold to the best buyer: after a Korean deal did not take off at the moment, believed to be possibly Barclays (not immediately, since the UK group is now raising $4 billion new stock).

Fuld and 14 years of Lehman sharesJune 16 update.

Lehman chief accepts blame for $2.8bn loss

By Ben White in New York

June 14.

Breaking Views intervenes, with its usual independence, on the WSJ.

Up in the Heir at Lehman

In a Crisis of Confidence, Investment Bank Must Have A Plan for Life After Fuld

What is Lehman Brothers Holdings Inc.’s plan for life after Richard Fuld? (…) confidence in the company’s ability to remain an independent concern is shrinking fast. And the demotions Thursday of Lehman’s president and chief financial officer merely highlighted its apparent lack of a succession plan. (…)  Lehman’s share price decline is now worse than those of UBS AG, Wachovia Corp., Merrill and Citigroup Inc. — all of which showed their bosses the door.

June 13

LEH shares up today 13.7%, to $25.8 (it was $37 at end of May).

MORAL HAZARD AT WORK IN BOND & CREDIT MARKETS

Fed unofficially warns, but Fed critics already foresaw this bias

HEARD ON THE STREET, by David Reilly and Peter Eavis
from The Wall Street Journal.

The good news about Lehman Brothers is that it’s no Bear Stearns. The firm won’t disappear overnight. The bad news is that its survival will still be pretty painful for shareholders. (…)

So Lehman may have some breathing room, perhaps even enough to allow Chief Executive Richard Fuld to continue fighting against a sale of the firm. But, with the credit crunch continuing to bite, it is tough to see how Lehman can earn its way out of its current predicament.

dealbreaker.com

Government Officials Worry About Bond Market’s Muted Reaction To Lehman News

Investors bid up Lehman Brothers’ bonds yesterday after news broke that the company was replacing two top executives. The price of protection on Lehman bonds also declined. This reaction–which starkly contrasts to the decline in Lehman’s share price yesterday–has government officials concerned.

Government officials who spoke to DealBreaker on the condition of anonymity said they are worried that the market is convinced the Federal Reserve won’t let a major US securities firm collapse. This is a cause for alarm because it indicates that investors are not taking into account full range of risks faced by investment banks, which could in turn remove an important market check on risky behavior. Although Lehman and its rivals have been pushing down debt levels recently, cheap debt that is unlinked to institutional risk could encourage a new round of re-levering, one official warned.

“What we saw yesterday was moral hazard in action,” the official said.

The price of credit default swaps for Lehman is now half of what it was in March, the Wall Street Journal pointed out this morning. That can be looked at as a dramatic demonstration of the value of having the Federal Reserve’s implicit guarantee of Lehman’s credit worthiness. In recent weeks, officials from the Federal Reserve have publicly remarked on the dangers created by this guarantee. On Wednesday, Treasury department undersecretary Robert Steel went out of his way to stress that the window was not a permanent guarantee for securities firms.

Are Lehman Investors Confident In Fuld Or In A Sale?

When Lehman announced it was firing chief financial officer Erin Callan and president Joseph Gregory yesterday, there was a lot of speculation about whether investors in its recent $6 billion sale of common stock and preferred shares might try to pull out. Couldn’t these top level changes trigger some sort of material adverse change that would let investors back away?

Several big investors have now indicated that they are staying on a Lehman. BlackRock, former American International Group CEO Hank’ Greenberg and New Jersey’s pension fund have all indicated, either publicly or privately, that they are sticking with their investment commitments despite the fact that the share price has fallen well below the levels at which they agreed to buy. Blackrock has gone on record with comments supporting Lehman’s “leadership,” which these days basically means chief executive Dick Fuld.

But are these investors really backing Fuld and his newly announced team?

Our comment: Good question. Neither of the 2. They bet on a sale of LB to a big buyer: JP Morgan again, not likely, rather: 1) Bank of America (alhough Karl Lewis might prefer to eat Merrill Lynch); 2) a big overseas bank like Barclays (rumours)  or HSBC  (the FT suggested 1 month ago): this would be OK for a bank like Lehman, still too reliant on domestic fixed-income revenues, even after wide efforts lead by Fuld to diversify in late years. Becoming the US financial arm of a big European, or Asiatic universal bank.

Betting on a sale backed-up by the Fed, otherwise there would be no buyer, or the price would soon be close to zero: perhaps a little less cheap and dramatic than Bear’s bailout (during the Presidentials, it’ll be a POLITICAL FIGHT). Problems aggravating MORAL HAZARD  into a potential FINANCIAL SCANDAL (that might explode when something will leak out).

SOMEONE in the FED  and\or the US GOVT. is apparently protecting and guaranteeing SUBCRIME VULTURES.

Ask the Lehman new investors:

Cummings illustration

How can they guess  NOT TO LOSE A LOT OF MONEY in the deal?

Who told them the Fed is gonna backing up a Lehman sale?

Would they throw away a few billion USD, without an INSIDER INFO about a Fed bailout?

This is the REAL mistery! Of course: in the LR Lehman didn’t perform differently from rivals, but it is just precipitating now (see the graphic above – June 14 post update – from the WSJ).

 

FT

Man in the News: Dick Fuld

By Ben White

Lehman is a dead bank walking, say its critics who argue the reason it has not yet suffered the same fate as Bear Stearns is the emergency facility that allows it to borrow from the US Federal Reserve. “Lehman is propped up now by the US taxpayer and nothing else,” said one financial services industry chief executive. “When the Fed window goes away, so does Lehman.”

Mr Fuld .. may come under private pressure from regulators, eager to take away the temporary borrowing facility, to get Lehman’s house in order and pursue a sale to a larger institution as soon as he can, either to a big US bank or a foreign buyer. The problem is it goes against every fibre of his being, especially as he would be selling from a point of weakness.

 

June 12

DRAMATIC SHAKE IN LEHMAN GOVERNANCE, TWO  MORE SACRIFICIAL LAMBS AT THE ALTAR: NO WAY.

THE MARKET KEEPS BETTING FOR A BANK RUN, ACQUISITION OR BAIL OUT. IN 10 CRISIS DAYS, SHARES FELL FROM $36 TO 22.70 (today’s closure). 1 year ago the highest value, before subcrime, was $82.05.  Now Lehman’s capitalization is below  $13 billion, a tiny fraction of rivals’. Goldman Sachs Group has a value of about $65.8 billion, Morgan Stanley of $43.4 billion and Merrill Lynch of $36.2 billion.

FORBES

Can Lehman Last?
Liz Moyer06.12.08, 12:30 PM ET

Maybe it just buys time. Foreign banks, particularly Barclays (nyse: BCS– news – people ) in the United Kingdom, have been rumored to be interested in buying a chunk or all of Lehman.

FT

Lehman short-sellers consider ending run

By Aline van Duyn, Michael Mackenzie and Anuj Gangahar in New York

Published: June 12 2008 22:16 | Last updated: June 12 2008 22:16

Investors with short positions in Lehman Brothers shares, who have profited from the sharp decline in the Wall Street companies’ share price, are considering ending the bet that share prices will drop further.

This week’s revelation by Lehman of a $2.8bn quarterly loss gave further clout to the views of short-sellers such as David Einhorn, founder of Greenlight Capital, who has made the case since last July that the assets on Lehman Brothers’ balance sheet are vastly overvalued.

“We, like others in the market, have been following the tug-of-war between David Einhorn and Lehman over the past few weeks,” said Steven Gross, principal at Penso Capital Markets, a hedge fund. “It now looks the shorts have been right and we have seen a capitulation by Lehman this week.” (…) 

“We now know the playbook after March 17, and a forced sale of the bank could occur. If there is a buy-out, credit spreads and volatility could collapse. The risk reward of shorting Lehman is much less clear at this stage,” Mr Gross said.

LEX

The shake-up indicates the level of pressure Mr Fuld is under to restore credibility. However, coming after so many defiant messages against Lehman’s naysayers, it sends a mixed message. On the one hand, heads have rolled, so something is being done. On the other, sudden moves like this raise the question: is there worse news that we do not know?

That uncertainty is Lehman’s central problem. Having raised new money and with the Federal Reserve’s credit facility to hand, a Bear-like meltdown looks unlikely. However, there are still too many unanswered questions regarding the estimated $65bn of troublesome assets still sitting on Lehman’s books, such as the marks taken on various property investments.

WSJ:

Callan, Gregory Out at Lehman

By JED HOROWITZ
June 12, 2008 6:18 p.m.

NEW YORK — Lehman Brothers Holdings Inc., hustling to rebuild confidence about its financial credibility, replaced its president and its chief financial officer Thursday.

Chief Executive Richard Fuld, 62 years old, the longest-serving head of a big investment bank, named 48-year-old Herbert “Bart” McDade to replace longtime colleague Joseph Gregory as president and chief operating officer.

He also removed Chief Financial Officer Erin Callan, 42, who he named to the post just seven months ago, replacing her with Ian Lowitt, a low-profile administrative and finance executive. (..)

In spite of her assertions about its capital strength, Lehman raised $12 billion of new capital between February and the end of May, and this week issued a stunning denouement by saying it is raising $6 billion of new equity and will likely report a second-quarter loss of about $2.8 billion — the first loss since it went public in 1994.

Ms. Callan blamed the loss on hedges that went awry on Lehman’s real-estate portfolios and additional write-downs in the value of its real estate, loan and securities holdings.

Lehman’s shares fell 26.4% from Monday through Wednesday in the wake of the plan to dilute stock holders by about 30%. Thursday’s shakeup appears to have done little to reassure investors. Lehman shares fell as much as 7% after the announcement, and have careered back and forth since, recently trading down 1% to $23.66. (…)

Mr. Fuld, a tenacious executive who has been heralded for his ability to overcome firm-threatening crises and keep a loyal coterie of lieutenants around him for decades, may have made sacrificial lambs of Ms. Callan and Mr. Gregory, some observers said. (…)

Lehman also on Thursday said it has closed its $6 billion new stock offering, which includes $4 billion of common shares that analysts say dilute current shareholders by about 30%, and $2 billion of mandatorily convertible preferred stocks. Insurance executive Maurice Greenberg, the former CEO of American International Group, has publicly said that he invested in the offering because of his confidence in the company’s leadership.

 

June 9

LEHMAN ABOUT TO ANNOUNCE A 08Q2 $2.8b LOSS, AND RAISING $6b TO POSTPONE A RUN

Sources: AP, WSJ.

One week ago the Lehman crisis started, since its expected $0.3 bn loss in 08Q2 were about to come much bigger: they are now est. $2.8 bn! As a consequence of its unsustainble exposure to the subcrime financial meltdown (asset write-downs and hedges used to offset losses in real estate and other securities). Lehman shares are down again at March crisis level: they fell under $30 in premarket trading today ($82 one year ago).

Lehman is actually trying hard to raise $6 bn in ordinary shares (a sum equal to all the fresh capital raised in one year to now, mostly in the last quarter). The WSJ and FT name South K. sources (public Korea development bank, and a commercial bank: likely Kookmink Bank, Korea First Bank or  Woori financial group; plus less strategic capital from Korean Pension Service and Korean Investment Corp, the government-controlled fund that invested in Merrill Lynch), and today the WSJ is referring to:

“the New Jersey Division of Investment, which manages the state’s $80 billion of pension funds and recently invested in Merrill Lynch & Co., and from C.V. Starr, the investment vehicle of Maurice R. “Hank” Greenberg, former chairman and chief executive officer of American International Group Inc. A significant foreign investment remained a possibility.”

As quoted above, American Internationa Group also joined the investors league.

Original June 3 POST.

A LEHMAN CRISIS IMPLODES,

FOR HIGH 08Q2 LOSSES

As we had analysed in depth in mid-March (Bear Steans bail out, END OF FREE MARKETS days), on Fitch original data and a precious help by rge-monitor (always the best site on macroeconomics and finance), Lehman Brothers is the weak point, the first one to be under attack, among the 4 left purely financial US banks.

Therefore we read with no surprise this: its shares are now falling every day, from Monday June the 2nd.

WSJ

Lehman Is Seeking Overseas Capital

As Its Stock Declines, Wall Street Firm Expands Search for Cash, May Tap Korea
By SUSANNE CRAIG
June 4, 2008; Page C1

Lehman Brothers Holdings Inc., facing a sharp decline in its stock that will make it more difficult to raise fresh capital, may look to a foreign land for a strategic partner.

Still, the stock has fallen 18% in the past three sessions.

It was unclear how much stock Lehman Brothers bought back, but with shares trading at roughly 22% below its book value at the end of the first quarter, the buying could be seen as a vote of confidence by management.

WSJ, HEARD ON THE STREET

Decision Time for Lehman

Balance-Sheet Woes
Most Likely to Force
Big Strategic Shift
By PETER EAVIS and DAVID REILLY
June 4, 2008; Page C18

It is time to sort out the Lehman problem.

With its stock falling two days in a row, investors see Lehman Brothers Holdings Inc. as the latest firm weighing on financial stocks.

The problems in Lehman’s balance sheet could force the firm to issue a large amount of equity — or to sell part, or all, of itself to a larger financial firm. (…)

Lehman’s first option is to raise a large amount of capital. The Wall Street Journal reported Tuesday that Lehman was weighing whether to issue as much as $4 billion in new stock. But Tuesday’s drop in Lehman’s share price — the stock was down about 15% at one point during the day — makes it harder to sell new stock. (…)

There is another important reason why Lehman may need new capital: It likely needs extra cash to forestall another downgrade by ratings agencies.

(…)  Lehman’s other option is to sell a stake to another firm or to sell out completely. The problem here is that the credit crisis has left few prospective buyers.

WSJ, PAGE ONE

Losses Push Lehman
To Weigh Raising New Capital

By SUSANNE CRAIG
June 3, 2008; Page A1
June 3, 2008 — 7:04 a.m. EDT
      

Banks and Wall Street
Aren’t Out of the Woods

By JOSEPH SCHUMAN
THE WALL STREET JOURNAL ONLINE

It was a sobering day for anyone optimistic enough to think the shake-out for Wall Street and big banks was over, and today isn’t starting out any better.

The Wall Street Journal is reporting that Lehman Brothers, the smallest independent Wall Street firm still around after the Bear Stearns collapse, will soon report its first quarterly loss since the firm went public and is looking at ways to raise perhaps $3 billion to $4 billion in new capital to strengthen its balance sheet. Lehman was the subject of apparently unfounded credibility doubts right after Bear Stearns was bailed out and essentially sold, and Lehman executives continue to say the firm’s in good shape to handle the credit-market uncertainty. It has also already raised $6 billion in the past year, and has access to the Federal Reserve’s new borrowing facilities for investment banks, as the Journal notes. “Nonetheless, some investors remain concerned that relative to its size,Lehman is holding more securities tied to both residential and commercial real estate than any other big Wall Street broker,” the Journal says, citing Bernstein Research.

Bear Stearns, Bear markets domino effects

080319 

posted by efa 080319, 10.00 am GMT.  Breakfast time letter, 6.00 am GMT by info@rgemonitor.com Good morning! What a difference a few days make.  Starting with the rescue of Bear Stearns over the weekend to the creation of a new discount window-like lending facility for primary dealers, the Federal Reserve has been engaged in a historical effort to fend off every real fear of a financial system meltdown.  Better than expected Q1 earnings reports by peer banks, Lehman Brothers and Goldman Sachs on Tuesday took a lot of the pressure off the markets for the day, while the 75bps Fed fund rate cut to 2.25% (2.50% discount rate) was fully priced in.  See our related coverage: “JPMorgan Agrees To Buy Bear Stearns: The Beginning of a Japan-Style ‘Convoy’ System?” and “Overview of Fed’s New Lending Facilities: Needs More to Be Done?” (…) At this point, the distinction between liquidity and solvency is important.  While nearly unlimited access to central bank liquidity helps roll over existing liabilities and pay off existing debt, it does nothing to prevent house prices from declining further, borrowers from defaulting on their mortgages and leveraged loans, and it cannot prevent the asset quality deterioration within the collateral pools of CDOs, CLOs, and credit card debt.  Eventually, looming writedowns will have to be marked against equity capital.  If the equity cushion is insufficient then the financial institution is insolvent. In order to get a sense of the magnitudes: in Q3 the top 5 broker dealers combined equity capital was $144bn, whereas the ratio of illiquid Level 3 financial assets over equity ranged 0.7x – 2.5x. Roudini & C site keeps the lead across the decades, and challenges the Schumpeterian hypothesis on innovation as a temporary window of opportunity.  If economics on the web is a Tour de France, Prof. Roudini is Lance Armstrong. When this longrun crisis, more or less the same as today (you know by now we have an Aglietta- Chesnais- Marx- Perez paradigm here at deeprecession), was located in Asia, Paul Krugman recommended rgemonitor.com father site at stern.nyu.edu,  with this nice wording:  Nouriel Roubini maintains this amazing site. Follow not just the events but the big intellectual debates more or less in real time.  Opposite to Roudini  and  to yesterday, today’s sentiment in the media and Wall Street (a messy coupling), not in Main Street,  is that we had luck and escaped the much feared Bear Stearns domino effect. With no evident candidate to play JP Morgan Chase role next time. Although the latter has won a super deal, even bought separately and unconditionally the nicer HQs, Madison Avenue building for $1.1 bn (see March 15 here). We cannot imagine anything more fragile than today’s sentiment.

FT today: paper

p.1: Fed cuts rates to 2,25%. Goldman Sachs ad Lehman lift gloom.  “I think we feel better about our liquidity than we ever have” said Erin Callan, Lehman’s CFO. She added that the banks had not seen any erosion in confidence on the part of  lenders or trading counterparties. “The past two days gave us a great chance to test those relationships”, she said. Apple considers iTunes shake-up to deliver music access for free. Apple talks with record groups, for a radical change in the business model. p.9, Cracked foundations? A financial crisis spreads slowly into the real economy (Chris Giles).  The page focus (Gillian Tett, Krishna Guha) is academic Ben Bernanke’s financial accelerator notion. Two uncertainties: 1) fresh equity filling banks capital holes (Comment: it happened, M. Eastern and Asian SF came to rescue, but this just accelerates the US decline, geopolitical trends laying behind the crisis: it is part of the same over-accumulation → shifting unbalances → bubbles-and-crises  process; not a solution); 2) which borrowers will be hit harder: it will not end up only within the financial world, Main Street real-economy borrowers will pay too, as Bernanke’s accelerator takes off.  OUR FAQs: “If est. subprime losses of $200bn (Goldman Sachs minimalism) would give rise to a $2,300bn overall credit crunch, will then a still moderate est. of $1,000bn losses (Roudini’s realism) reduce lending by $11,500bn? Or even more, once a downward spiral is engendered (Ken Rogoff, Harvard: from credit crunch to credit collapse)?  The bottom line?” p.11, Martin Wolf  (reading too much Roudini, but even other Bearish academics): Why today’s hedge fund industry may not survive. OUR ABSTRACT and comments. Dean Foster (Wharton) and Peyton Young (Oxford)  model an unregulated financial system: Hedge Fund Wizard and  The Hedge Fund Game. Incentive systems fail to align managers and investors aims. The lemons theorem says that such markets with asymmetrical  information, attracting the unscrupulous and the unskilled, are likely to disappear (our academic comment – not exactly so; see among others: Kreps, Microeconomics, for a good introduction to lemons. But Wolf’s implicit conclusion holds: you need an agency, a certification, a third party: that is a regulated financial system). Managerial herds behaviour generates cumulative disequilibria, when a low prob. disaster occurs – such as Northern Rock and Bear Stearns (Comment. This argument is really good; it introduces and needs another brand of economic, Santa Fe or econophysics modeling, developed in Italy at Sant’Anna-Normale di Pisa by Giovanni Dosi & C: herd behaviour simulation in financial markets. Their most likely policy implications are again pro-regulation, but with a completely different set of arguments and suggested policies, compared to information asymmetry models. The focus shifts, here, from a simple market failure that can be easily repaired by an “agency”, to a complex financial systems dynamics, far away from both equilibrium and social optimum. With no straightaway agency solution: you have to change, redesign the entire system, together with contracts and incentive schemes. Until now we just spoke microeconomics. Add the macro: along Keynes- Kalecki – Minsky lines, e.g., you approach systematically the issue of the health of the financial system that greases the wheels of capitalism – a quote from NYT yesterday, reporting from Wall St.: even operators and rentiers know and feel it on their skin: the time is out of joint, to quote Shakespeare, and Derrida on Marx).

080318 

Ups and downs in financial global markets: Bernanke’s hyper-activism adds chaos to turmoil. Paul Krugman said a few days ago: Greenspan is the one teaching ex cathedra how to close the door, when stables are already empty, and the flock is gone. Bernanke makes the difference:  he got Speedy Gonzales and  succeeded – in a couple of months – to convince 75% Americans that Roudini as well as radical pessimists have sound bases. Lehman Brothers opened yesterday  at -15%, and closed only at -19%. See Slate‘s syntheses of US newspapers, and sing: “You just better start sniffin’ your own  rank subjugation jack ’cause it’s just you  against your tattered libido, the bank and the mortician, forever man and it wouldn’t be luck if you could get out of life alive”

 Knock-knock-knockin’ on heaven’s door (4 times)

TODAY’S PAPERS

Knocking on Lehman’s Door

 By Daniel Politi Posted Tuesday, March 18, 2008, at 6:12 AM ET  Financial news continues to get top billing as all the papers try to digest the latest news from the Federal Reserve and the markets to figure out how far the current crisis will spread. The New York Times‘ lead story notes that although the stock market didn’t plunge as was widely expected, there were several ups and downs as uncertainty ruled the day on Wall Street. By the end of the day, the Dow Jones Industrial Average closed the day with a 0.2 percent increase, largely due to the strength of J.P. Morgan, which rose due to the widely held belief that it was able to acquire Bear Stearns at a veritable bargain. The Washington Post leads locally, but off-leads news that shares of many of the largest banks and investment firms plummeted yesterday.The Los Angeles Times leads with a look at how many are wondering whether the Fed is taking on too much risk and for how long it can keep pumping money into the economy in its attempt to save the country from a deep recession without hurting the nation’s overall finances. Over the past few days, many economists have said that the key question now is not whether the country will enter into a recession, but rather how long it will last. Ordinary Americans seem to agree. USA Today leads with a poll that shows 76 percent of Americans think the country is in a recession. In addition, 79 percent said they’re worried about the possibility of a depression that could last several years.  [our red&bold]De(e)pre(ce)ssion  so popular, so soon? we didn’t  hope so much!

 

WASHINGTON — More than three in four Americans think the country is in a recession, a USA TODAY/Gallup Poll over the weekend shows, reflecting a crisis of confidence that economists say could make the economy worse.(…)

 Seventy-six percent of those polled said the economy is in recession, compared with 22% who said it’s not. Not since September 1992, two months before President George H.W. Bush lost re-election, have so many said the economy was in such bad shape. (…)

Asked whether the nation could slip into a depression lasting several years, 59% said it was likely, and 79% said they were worried about it. A recession is an economic downturn that usually lasts at least six months; a depression is longer, deeper and more broadly dispersed. (…)

Democratic presidential candidates Barack Obama and Hillary Rodham Clinton urged greater action. Obama, campaigning in Pennsylvania, said the economy “is heading toward recession. We probably already are in one.” He said, “We must focus on what we can do to restore the public’s confidence in the market.”

Clinton was more cautious. Calling it a time of “stress and uncertainty,” she said there was “urgency” to continue monetary policies like those taken Sunday. “We are in the soup, and we better get ourselves out of it before the consequences get drastic,” Clinton said in Washington.

Presumptive Republican presidential nominee John McCain was in Iraq Monday. His top economic adviser, Douglas Holtz-Eakin, said McCain has confidence in the Federal Reserve’s action to shore up the nation’s financial system. Although that action may have been necessary, he said, it’s imperative to “ensure that Main Street America does not bail out financial speculators.” 

The Fed Goes Deep

By Daniel Politi

Posted Monday, March 17, 2008, at 7:06 AM ET

The New York Times, Washington Post, Los Angeles Times, and USA Today all lead with, while the Wall Street Journal devotes much of its Page One to, the Federal Reserve announcing a series of moves to try to bring some stability to the increasingly shaky financial markets. Lest these be confused as just one more of the series of measures the Fed has taken in recent months, the papers make clear that this latest action is “dramatic” (WP), “extraordinary” (LAT), and “apparently unprecedented” (NYT). The Fed opened up its lending practices to make more money available to the biggest investment firms on Wall Street, and cut a key interest rate (the so-called discount window) for financial institutions by a quarter of a percentage point. The central bank also announced it would extend a $30 billion credit line to help J.P. Morgan Chase complete the purchase of Bear Stearns for what the WSJ calls “the fire-sale price” of $2 a share.

The NYT catches Wall Street sentiments:

Specialists say their biggest worry now is not whether the economy is already or will soon be in a recession. Far more fundamental and troubling is the health of the financial system that greases the wheels of capitalism.

“Recessions come and go — that is something investors can deal with,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “The bigger issue is, Can our financial system be restored to a sense of normalcy? In recent weeks we have been moving away from that, which is potentially very serious.” 

Lex: Queasy Street

(Investors’  calm)…  is unlikely to last long. After all, at a price of about $2 a share, the deal has wiped out Bear shareholders almost completely.

And the Federal Reserve, which initially supported Bear on Friday, is having to pledge $30bn to fund Bear’

s less liquid assets to allow the deal to happen at all.If another broker loses the confidence of investors and counterparties, the Fed will be on the hook again. But, if there is a next time, it is not obvious which of the big banks would ride to the rescue. Their balance sheets are already seriously constrained, and Bear was the smallest of the leading Wall Street firms. MY NOTE: “20bn of exposure are covered through (Fed’s) non-recourse, and only 13bn remained as net exposure to JP Morgan” (JP Morgan)posted by efa, 080818 at 11 pm GMT 

March 17, 2008

How the Fed avoided the Northern Rock trap

The case against the Fed doing so was put by Gretchen Morgenson in the Sunday New York Times:

Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s —

current problems, overseers like the Fed undermine a little bit more of that confidence.

Meanwhile, my fellow FT blogger Willem Buiter put it thus:

While the bail-out of Bear Stearns is still a very young, thus far at any rate I have heard not a single convincing argument for why this financial business should be assisted by the Fed, rather than the ball bearings company in Cleveland, Ohio.

The economists, including Prof Buiter and Nouriel Roubini, generally favour the view that the Fed ought not to have intervened to prop up a non-bank institution and, if it was not able to hold back, should have proceeded straight to nationalisation. Prof Roubini argued this last month and restated it on Friday:

First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out.

But I think the different outcomes in the cases of Northern Rock and Bear Stearns at least help to justify the Fed action.  

posted by efa, 080318, 11.00 pm GMT 

080316

Acting quickly to prevent a bank run on major global financial firms, the Federal Reserve cut its discount rate by a quarter percentage point to 3.25% and offered to lend money to a longer list of firms than ever before. 

The extraordinary weekend moves came as J.P. Morgan Chase (JPM) sealed a deal to buy Bear Stearns Cos. (BSCfor just $2 a share backed by up to $30 billion borrowed from the Fed. The Fed board gave its approval to that unique funding arrangement, which guarantees JP Morgan against losses from buying Bear.

Posted efa March 16, 11:30 pm GT

080315

 PAY ATTENTION! Very important “old news” here.

Not only  finance experts-managers subscribing to Finch: any RGE (no. 1 macroeconomics site) cautious reader already knew, by end of July 2007, that 2 of the big 5 US investment banks were virtually bankrupt: their toxical “residual balances” from securitisation equalled more than half their tangible equity. According to our analysis of Finch-through-RGE data (see  our “Banks go bankrupt” page and enclosed data pdf for details)  this abnormal ratio toxic interests = 1/2 tangible equity:a)  holds  for Bear Stearns at least as early as 2004;b) Lehman Brothers joined the risky league in 2006. Bearn Stearns is dead,  now is it Lehman Brothers’ turn?  Today’s breaking alert opening of rge-monitor main page (red bold added):

WSJ: Lehman’s liqudity position stronger than BS was but weaker than other peers. Lehman learned lesson from 1998 liquidity crunch: less reliance on short-term funding.

Cumberland: Main difference to BS: Lehman generated over 60% of their revenues outside the U.S. in Q4 2007.

Bloomberg: March 14: Lehman Brothers, largest mortgage underwriter in U.S., obtained a $2 billion, unsecured, three-year credit line from 40 banks. “The unsecured facility replaces an existing credit line”; JPMorgan and Citigroup led the effort.

Reuters: CDS spreads spiked to 465bp after Bear announcement, most among investment banks.

Fitch (via RGE): At the beginning of the turmoil Bear Stearns had the highest toxic waste (“residual balance”) exposure as percent of adjusted equity on balance sheet: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%.

Fahey (Fitch): Lehman Brothers reported Level 3 assets-to-equity of 1.68x in 3Q07 (BSC 1.56; GS 1.84; MER 0.70; MS 2.74: gross notional Level 3 asset value, not netted with derivatives hedges in Level 1 or 2 as reported by other banks)

Hedges on Level 3 assets (i.e. “short their own instruments”) produced book gains of $750m at Lehman (largest amount among 5 brokers) but Fitch decided that gains from credit spread widening will not be considered in evaluating operating performanceLehman Brothers Obtains $2 Billion Bank Credit Line (Update2)

By Andrew Frye

March 14 (Bloomberg) — Lehman Brothers Holdings Inc. obtained a $2 billion credit line as the investment bank tried to blunt the stock’s worst drop in almost eight years and assure investors the firm isn’t short on cash.

The unsecured, three-year facility from 40 banks replaces an existing credit line, New York-based Lehman said today in a statement. JPMorgan Chase & Co. and Citigroup Inc., also based in New York, led the effort, the firm said. (…)

Last Updated: March 14, 2008 16:50 EDT

Before the turmoil (RGE from Finch, July 31, 2007)

Finch on “residual balances”, i.e. toxical waste from securitization, on subprime crisis verge, in the magnificent 5: Bear Stearns (BSC), Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER), Morgan Stanley (MS).

The investment banks retain interests in select senior, subordinated, and/or residual tranches of securities issued by Variable Interest Entities (VIEs) which they have underwritten. All of the investment banks reported higher residual interests at 1H07 versus fiscal year end 2006 (see table)

As a percent of adjusted equity, these residual balances are as follows: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%. (…) Not surprisingly, the percentages are most significant for Bear Stearns and Lehman Brothers.

Bear Stearns Saturday Update

Charlie Gasparino at CNBC reports: Bear Stearns Weekend Talks Reveal 2 Key Contenders (hat tip risk capital)

 

… potential bidders for Bear have been narrowed to … J.C. Flowers and JPMorgan Chase

 

… bankers have now come to the conclusion that a deal must be done by Monday …

 

If there’s no deal Bear Stearns will have to file for bankruptcy, executives said.

 

Posted by CalculatedRisk at 6:13 PM

 

It’s fun for the weekend, a bit like looking at an ancient Rome, or Verona Arena show:

This is how CNBC continues, on CapitalisMafia Cannibalism

… it is not clear what JPMorgan CEO Jamie Dimon will do if his company JPMorgan Chase & Co buys Bear; he hates the bank and doesn’t need traders. The likely scenario, sources say, it that he gets rid of most everything except prime brokerage and clearing operations. He also apparently likes the Bear building which is around the corner from the less elegant Chase headquarters.

One big problem is that whoever buys Bear will want to retain some of the talent. However, they are already being offered jobs elsewhere.

In the meantime, the Bear debacle is a huge blow to New York City and its Metro-area economy where most of Bear’s workforce lives. Many will be out of work. Bankers and other execs have lost fortunes since many were paid in Bear stearns stock.

Voyeurist? Watch Wall Street through keyholes! U might find the two highest US and world economic policy authorities, where u wouldn’t have imagined …

Wall Street Journal’s spying eye, captured by Calculated Risk’s monitoring eye: The story discusses how Bear Stearns, JPMorgan and the Fed regulators worked around the clock Thursday night to put together the bailout.

At about 5 a.m. Friday, regulators including New York Fed Chief Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and the Treasury under secretary domestic finance, Robert Steel, convened by conference call. At the end of the call at 7 a.m., the Fed had decided it would offer the loan.

 

A fascinating story.

 

And a bitter, sharp comment by (competing? cooperating?) FT-Alphaville blog: at Calculated Risk they missed to anticipate the bankruptcy, so now they try hard to struggle against the irreversibility of the time arrow .., and give you any hints ex post.

Such a nasty, really nasty comment, suggests to me a Methodological Note on economic blogs webs.

Even economic blogs are economic agents, or (better) agencies, of a new sort; therefore they compose, make and unmake beautiful, complex, efficient, redundant and Pandora’s box social webs of cooperation-and-competition across them:

– not just a mere replica of social webs amongst the agents behind such agencies; this too, but even more. E.g., Prof. Roudini’s scenarios are diffusing in early 2008, not without resistance, counter-arguments and replies, across blogs.

– I would not be surprised if sometimes cannibalism had to re-emerge, by the law that if you keep watching Wall street tribal cannibalists at work, unwillingly you absorb something.

They’re so complex and multi-faced, the cross-blog flow components of Web2 social networking, that no econophysics’ web rough graph (so nice to look at) can capture their true, full-senses flavours, and crossed regards of the 2nd, 3rd .. Nth order. Much more sophisticated econometric and sociometrics tools, human and social in-depth analysis are required.

You are now watching me, watching C Risk, watching WSJ, watching Bernanke and Paulson (!!!) at unusual early morning job, watching Bear Stearns empty safe: it makes a 5th order – that is, a much longer chain, compared to what Experimental Economics evidence tells us about 2nd-3rd order expectations widely adopted as conventions in financial markets !!! Students and scholars know well that reinforced Nash equilibrium notions, often assume very high-order expectations on other people’s expectations, but in reality we rarely base our strategies going beyond the 4th or 5th order. As common in the current state-of-the-art, cognitivism, experimental economics and psychology come here to help, by correcting unrealistic assumptions emebedded into Games Theory maths.

But are perhaps social networking practices violating these “natural” limits of our social behaviour?

In just one step I cross the 6 or 12 steps separating me from another mind at work? Or do I just complicate simple systems: by reading WSJ in paper I would have avoided unnecessary, redundant steps?

And what about serendipity? it happens on Fondamenta della Misericordia, Cannaregio (today to me, Dario and François Chesnais), or in virtual Misericordiae as well. In such a case, random & redundant walks are creative & productive, namely if one meets Adamo and ends up at La Rivetta.

Posted efa. March 16, 12:00 GMT. 

080314

A lovely chart, from Alea, catches Bear shares in agony: it’s pure art, à la Kandinsky. Just two days: and Fed’s over   $200 bn injection in overnight evaporates. Now, at last!, all commentators agree: the underlying problem IS NOT ILLIQUIDITY – IT’S INSOLVENCY. The “cure”, if there is any, should follow from this dialectics.

Prof. Roudini has made this point clear the first, widely influencing macroeconomists’ views of the crisis. At the bullish extreme of the spectrum, WSJ keeps trying hard to put the head under the sand.

De(e)pre(ce)ssion view

There are many prospective insolvencies, that will shift and spread over 2008: Bear Sterns is no.1 of a series. A huge amount of losses are hidden on purpose and strategically, in the global finance system including banking, finance, and the “shadow financial system” (as defined in the Roudini’s quotation to follow).

And there is highly asymmetric uncertainty about how such a trillion $ loss is allocated, with unavoidable, necessary and systemic consequences on trust, inter-bank relations, and the M&C available to the whole economy.

This is how and why, due to their hedge fund clients, Bear’s liquidity evaporated all of a sudden, yesterday.

As financial global markets sink in a deflationary turmoil, instability is now spreading everywhere, from currencies to commodities first, with obvious inflationary effects making part of the recession-deepening process itself:

There are other significant shoes that are in the process of dropping on us, and that’s why I think you’re going to see further increases in the commodities across the board, because it’s the safe haven, it’s the inflation haven, the safe haven, the hard asset haven that investors are just running to right now just because they’re scared.”

John Kilduff, MF Global Energy Analyst

Finally, at the end of the money K chain, i.e., in the commodity K circulation and value creation domains: a M&C and financial impact is accelerating now (and presumably along all the year 2008, at least) the current global recession – which

(a) started in november-december 2007: as output, trade and bulk transport prices show (see updates in our static page: deep recession\depression data “telonio”

); and:

(b) is deeply rooted in the 1987-2007 “Minsky’s age” (versus the over-optimist, ever-forgetting theory of just a short run “Minsky’s momentum” or window) of over-accumulation and continuous financial turmoil – see Chesnais 2008, Fin d’un cycle. Carrè rouge- La brèche, no.1; and the recent Aglietta’s works commented and quoted there.

A deep “real economy” recession would in any case roll-on and spread by now, by tracing back I-O, cross-market and cross-country commercial relations and systemic links – even without this acute M&C crisis, but in that case much less deeply and more slowly.

(c) We will go deeper, as far as we can, in understanding the deep recession unravelling, by supplying all the best analytical references and tools we know, in an imminent new static page of this blog: perhaps to be called A DIARY OF THE 2007+ WORLD CRISIS.

Bear Sterns

Bear Stearns brokers (lenders to hedge funds and 5th largest Wall Street investment bank) shares go down today -53%, as soon as it is known that hedge funds and financial clients flew out, JP Morgan tried hard to save them last night until 7am, and the Fed is backing JP Morgan (more than this: Fed is outsourcing JP Morgan). Bear Stearns liquidation is imminent. Most share markets decline (particularly in the credit industry). See our static page “BBC Global 30” today: BBC Global 30 -1.26%, Dow Jones – 1.63, Nasdaq – 2.26, London FTSE – 1.05, Tokyo Nikkei -1.54, Hong Kong – 0.29, Johannesburg + 1.13, Bovespa-SP + 0.17.

BBC: “Bear Stearns has been severely affected by the loss of confidence in credit markets. The company had invested heavily in sub-prime mortgage instruments and other securities which are now seen as highly risky, and which have fallen sharply in value. And it had less capital than its rivals, such as Citigroup and Merrill Lynch, who were also heavily exposed, to plug the gap.”

Paul Murhpy provides a practical, useful overview of selected blogs on Bear’s crisis.

Roudini comments, with good reasons reported below: I told you 40 days ago (it is an answer to Bulls saying he is Bearish, e.g. Yves Smith, Naked Capitalism: Martin Wolf Reads Too Much Roubini).

 

Step 9 of the Financial Meltdown: “one or two large and systemically important broker dealers” will “go belly up”

Nouriel Roubini | Mar 14, 2008

In my February 5th piece on 12 Steps to a Financial Disaster I predicted – as Step 9 of the meltdown – that “one or two large and systemically important broker dealers” will “go belly up” and that other members of the “shadow financial system” – i.e. non-bank financial institutions that look like banks in terms of liquidity/rollover risk – will also go bankrupt. As I put it then:

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems – cannot be directly rescued by the central banks in the way that banks can. [bold added]

And today the first one of these large broker dealers – Bear Stearns – in on the verge of bankruptcy. Let us be clear: given its massive exposure to toxic MBS and ABS product Bear Stearns is insolvent; the decision by the NY Fed to try to bail out Bear Stearns would make sense if this firm was only illiquid; the trouble that it is insolvent and thus such attempted bailout is altogether inappropriate. It is true that Bear is a large broker dealer; but its systemic importance is much smaller than that of much larger institutions. The world and financial market can survive if Bear disappears.

NY Fed avoided the obstacle underlined by Prof. Roudini, by triangularizing on JP Morgan: it doesn’t change much, exc. that JP Morgan has now insiders info allowing them to make perhaps the best offer for Bear assets. On Prof. Roudini’s close, we at de(e)pre(ce)ssion are even a bit bearer than he is, if possible: on the liquidation of Bear Stearn’s assets, markets deflation will carry on, etc. We will see.

PS. Hedge funds themselves take their time to read Roudini; financiacapital.com, advisor and a California’s fund general partner, suggests to his clients:

Nouriel Roubini’s Blog – Nouriel Roubini is a professor of economics at the Stern School of Business (NY University), and though sometimes too bearish in our opinion, his views on the various economic data are always worth the time to read.

Empirical and theoretical consequence: the shadow financial system has by now become what is called a critical, self-representing complex system, in system theory: they observe us observing them observing us  observing them… .

We formulate expectations upon them, expecting that we … expect them to …  because they expect that we … by supposing they expect that … (a long, but finite chain). Suggested reading: Niklas Luhman.

 

Posted by enzo fabio arcangeli March 15, 7:45 am GMT