Lehman's Collapse, Revisited 27 comments
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As we pass the one year anniversary of the fall of Lehman Brothers (LEHMQ.PK), journalists, politicians and market analysts have seized on the occasion to offer seemingly sober assessments of what went wrong and what went right in the lead up and aftermath of the biggest financial event since Black Tuesday.
The most popular storyline offered by these Monday morning quarterbacks is that the mistaken decision to allow Lehman to fail resulted from the Bush Administration's misplaced faith in the free markets. In this telling, the real crises began in the days following the Lehman bankruptcy, which unleashed a financial panic that would have caused complete economic collapse – if not for the subsequent federal intervention.
In reality, Lehman's demise was simply the result of an unfolding crisis that began years before. Popular belief aside, allowing the institution to succumb to the overwhelming debts on its balance sheet was perhaps the only correct decision made by government since this crisis began. The propagandists' complete reversal of cause and effect now threatens to spur the government to compound prior mistakes and bring on the next phase of the financial crisis. Unfortunately, this chapter will likely be much more dangerous than what we saw last fall.
In March of 2008, in the aftermath of the Bear Sterns "bailout" (which itself was a major mistake), equity shareholders walked away with a generous ten dollars per share, all creditors were made whole, and most employees got jobs and bonuses from JP Morgan (JPM). As a result of this largess, the Fed created a very serious problem for itself.
After Bear, the perception took hold that investment banks were too "interconnected" to fail. The resulting moral hazard decreased the financial stability of the banking system and exposed taxpayers to open-ended risks. The Bush administration rightly determined that a message needed to be sent that Bear was an isolated case, and that capitalism still held sway on Wall Street. The fall of Lehman, which was helped along by the unrealistic recalcitrance of its chairman Richard Fuld, would be that clear signal.
However, politics quickly trumped economics, and the Lehman trial balloon soon turned into the Hindenburg. Washington had no stomach for the ensuing financial carnage, and when other institutions began to topple, Bush, Paulson and Bernanke abandoned their prior convictions and threw all they had into the ensuing bailout bonanza. As a result, the moral hazard that they had sought to avoid now exists on a scale unprecedented in our history. Capitalism has been extinguished on Wall Street, and our financial institutions now exist as public utilities. The presidents of our biggest banks are now the highest paid civil servants in the world!
Since market forces are no longer allowed to allocate capital and control risk, these decisions are now made by government regulators and are then passed through to their subordinates on Wall Street. This perverse organizational structure constitutes a new form of American fascism.
The pain of allowing Lehman to fail will be dwarfed by the agony of bailing out the rest of Wall Street, which is now a foregone conclusion. Just because the Lehman bankruptcy created unpleasant consequences does not mean it was a mistake. On the contrary, sometimes doing the right thing hurts – especially if it is done to avoid even greater pain down the road. It just seems that our representatives are incapable of asking for short-term sacrifice. There is no price they are not willing to force the rest of us to pay to assure their own reelection.
In reward for its gross culpability in creating the financial crisis, the Federal Reserve has been rewarded with extensive new powers. Given the damage it was able to inflict in the past, I can only imagine the havoc that will be wrought by the new "Super Fed."
If the current policies continue, the America we know – for which our forebears risked so much – will cease to exist. The constitution originally established by our Founding Fathers has been under attack almost since inception. Up until now, the greatest damage occurred during Roosevelt's New Deal. However, the current assault on our birthright could be a knockout blow. The last vestige of republican government now hangs in the balance.
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This article has 27 comments:
Can you explain how letting AIG, Bank of America and Citibank fall over have been good for the crisis?
Creative destruction of Capitalism requires something to have survived the wealth destruction.
What is your plan to solve this crisis?
The constitution under attack and Roosevelt New Deal linked together, that's a flight of ideas! The constitution allowed slavery, do you want to bring that back to? If the British Constitution had not been attacked by the founding fathers there would be no USA. Constitutions require revision infrequently to keep them relevant.
American fascism?-I thought that was the Klu Klux Klan.
Your thoughts and warnings on Economics, Hyperinflation and Bubbles are well founded.
It is just since you decided you wanted to be a senator, the statements are sounding like rhetoric rather than considered words of a statesman.
The common denominator of the changes have been to empower nonproductive sectors which now seem completely in control of decisionmaking. How much more public debt do we add, how many agencies do we add or grow, now, what "private" interest is connected and powerful enough to be entitled to a bailout.
We've wandered into a twilight zone of unintended consequences where all the choices are for more of the same. For expensive figleaves on unending failure. For ludicrous assaults on private enterprise. Where seemingly all power and wealth is controlled by interests who have advocated and benefited by the decisions that have squandered the wealth and true wealth-making capacity we once unquestionably led the world in.
Since Lehman, these interests have been on a fast track to pilfer the rest of the wealth of future generations so as not to let a good crisis go to waste. They have discovered that wealth comes from taking it and putting it on our tab. Their wealth and power is our serfdom. That is our future unless enough of us refuse to settle for another and yet another exorbitant, phony short-term non-solution.
Here is the video about naked short selling and the demise of Lehman and Merrill Lynch: www.deepcapture.com/he.../
Your political ambitions are showing.
Imagine? I'm counting (investing heavily) on a havoc-causing Fed.
As for the "Relic" (the Constitution), socialism won with FDR. The event horizon for that battle was passed decades ago and we are just experiencing the acceleration at an accelerating rate.
Galt's Gulch will never be densely populated with Americans.
Worth saying again. It is also why Americans are bone dry when it comes to principled leadership.
I would completely agree with this statement. The US authorities are talking about more regulation for the financial sector. I think the best regulation for the financial sector is to let the free markets work.
A legislator cannot create value with a stroke of a pen. Houses, cars, food, oil, etc does not magically appear. When all those creditors were made whole, that money had to come from someone else's pocket.
I'm not worried (too much) if my neighbor allows himself to weight 100 or even 200 pounds over his ideal weight if he tells me, "carpe dium, I'm going to live until I die and you skinny people can feel superior to me if you want to but I'm going to eat two or three times as much as you do and be that much happier. Plan to be a happy old man if you want to be. It's your right. But stay out of my affairs."
After all, when his personal crisis inevitably hits, the cost of a crane to lift him out of his bed and transport him to the hospital is not that much for the rest of us to bear.
But when large groups of brokers and traders say essentially the same, there are huge consequences for the rest of us. "I'm going to have my private airplane, my yacht and my winter and summer homes and when the inevitable crash comes, well, at least I can say I lived. You moralists can have your suburban homes, wives and two and a half children. Screw your safe, middle class lives. Carpe Diem."
The trouble is, the rest of us are going to pay a huge price for their folly. It may be painful for us tolerant Americans to interfere, and play the part of moral vigilantes but the only alternative is to let their house of cards fall around our ears.
Group ethics is, after all, just another definition of politics and we're not talking about about the private ethical decisions of a few millionaires who don't care what happens five years from now. We're talking about what's going to happen to all of us.
"Since market forces are no longer allowed to allocate capital and control risk, these decisions are now made by government regulators and are then passed through to their subordinates on Wall Street. This perverse organizational structure constitutes a new form of American fascism."
Do you mean that, or are you exaggerating?
www.rollingstone.com/p...
the bear bailout created moral hazard that we will be forced to live with for a long time.
zombie banks kept alive by federal $ transfusions - C, JPM, WFC, how many more to come?
> jack
seekingalpha.com/insta...
So....... letting them "fail" means that the bad little boys and girls who did wrong would have been fired instead of being told by "mommy and daddy"," My child does no wrong, its the other kids who are bad"
AND MORE IMPORTANTLY, the recovery would be quicker
I am NOT stating that we would be out of the recession by now, but instead of having dug a hole deeper and deeper, we would at least have maintained a higher stature
Its ok to have booms and busts
same way childbirth and natural deaths are accepted part of life
But Octomom type births and suicides we frown on
You're all sucked into this new cultural myth that the Lehman failure was some sort of important turning point. But if you didn't have your head up your asses the year earlier you would have known that the smart money was freaking out about the uncertainty regarding the Bear Sterns positions. The Fed created a "how to game the system" roadmap in the Bear Sterns case that played out for everyone but Lehman in the next year.
By the time lehman came around - since they were bigger they did not prepare for bankruptcy - why should they Bear got bailed out.
The bankruptcy of Lehman could of been better managed but it was a result of not preparing due to the anticipation of a bailout per Bear.
So if Bear did not get bailed out - can you let lehman collapse to - and my answer would be yes. You would do something similiar to S&L it would be orderly and backed by US govt. temporarily - it would not be a bailout but would be an orderly bankruptcy. All players would of prepared well in-advance. All said that was another dimension.
Another hindsight would be Lehman was GS biggest competitor - GS rules our govt. how convenient Paulson didnt save Lehman. Funny I was watching Star Wars Episode 2 with my kids how interesting the Chancellor reminded me of Paulson - played both sides in the end to ultimately put him on top.
On Sep 21 09:56 AM Faisal Humayun wrote:
> "Popular belief aside, allowing the institution to succumb to the
> overwhelming debts on its balance sheet was perhaps the only correct
> decision made by government since this crisis began."
>
> I would completely agree with this statement. The US authorities
> are talking about more regulation for the financial sector. I think
> the best regulation for the financial sector is to let the free markets
> work.
It's just another useless article from Schiff that offers no numbers, no insight, and no analysis, but filled instead with pompous rhetoric and name-calling.
Source: peterschiffchannel.blo...
“...I'm at the annual Wall Street head traders conference -- I can report they have learned NOTHING from the demise of Lehman. Like rats that eat each other when no other food is around, as long as they can see their own tail intact they are happy...”
Amen.
How well intentioned and naïve can one allowed to be before it becomes suspicious behavior, a convenient camouflage of, in fact, being in cahoots with the perpetrators? This includes a – these days - very sheepish A. Greenspan, who invokes, as explanation and excuse for his failings, the force majeur of the “imperfect nature of human beings” that suddenly descended upon the delicate financial construct that was his Wall Street*, full of honorable gentlemen and ethical ladies ... what a fool!
Working out of offices on lower Broadway (non financial sector) for more than a decade and spending the odd happy hour at the old Harry s Bar at Hanover Square, Delmonico s on Beaver Street and some other dives, confirmed to me that Frank Partnoy s book Fiasco was not a tale of a failed trader but plain fact. It also helped me, later, as your average gullible investor, to recognize and avoid some of these financial pit bulls on Wall Street* who have only one thing in mind: Rip off your face.
If there would be a will by the regulators, the politicians, the central bankers, to really clean up the Street* and make it safer, there are a few very effective and easy to execute solutions how to get on top, control and, if no other remedy works, decimate that wilding gang. Just starve them of Government feed and they ll fall on each other, rip themselves apart, cannibalize their own specie to oblivion (metaphorically speaking, of course). IF there would be a will...
Have a good day
*reps for City of London, Frankfurt, Zurich, Spore, Paris, HK, etc to be fair