The Lehman Brothers Impact

We heard Friday that Lehman Bros (LEH), a U.S. institution of great standing, is possibly to be sold to the Korea Development Bank, a move that signals that the affects of sub-prime lending are still an unknown, and may offer many more surprises going forward. What is certain from this news is that the current economic phase is still in the credit-crisis cycle, a situation that has already been called the biggest financial crises since the great depression.

We do not know if we have hit a bottom, where the bottom is, or how long it will be before we can see notable improvements, but this business cycle already has a claim to fame in forcing the U.S. to look abroad for more financial help, outside of the constant refreshing of Federal Reserve treasury debt from abroad, to enable the 4th largest security firm on Wall Street to put right its wrongs.

Recovery. The initial target for recovery was the summer of 2008, now it has been moved somewhere into 2009.  As we approach 2009, where will the bottom/recovery phase will be moved to? Hopefully, for economic stability purposes, it will be somewhere in 2009. One of the fears going forward is that Wall Street will create another ‘great financial innovation’ to take us out of this crisis, something that may also send us careering straight to the next one. It was their pioneering minds in the first place that created all sorts of abbreviated products, packaged differently, but meaning the same thing; the over-leveraging of Average Joe. Only Wall Street's complex risk models could explain how Joe, a hard-working person that didn't have any income or registered job in the last 5 years could afford a $2,000 a month mortgage. Or how Joe's cousin, Mediocre Joe, who had an income of $3000, could afford a mortgage of $2500 a month whilst being the only one working in his family. Sounds silly? It is unfortunately true.

Balance Sheets. Will the same models now explain that when housing prices went up at unheard levels, how people like Joe could have been expected to take loans without defaulting, how those loans were packaged and rated as AAA+, and the how originators thought they could eliminate risk by selling those mortgages, and buying others? The price is being paid in the amount of debt that is getting stripped out of Wall Street institutional balance sheets right now, and until that process is completed the overall commodity markets will work through higher than average day-to-day instability as sentiment, and not momentum, runs the roost. This will be twelve months of absorbing data that will define where the dollar is capable of going over the next five year boom and bust cycle. The benefit of the last year of trade is that for the first time, clarity has been achieved in understanding how bad the situation had been allowed to get.

Reality. “Now is the time to get our heads out of the sand, clear out our ears, and listen to economic business sense it would seem” said Jason Pilling, currency strategist at TheLFB-Forex.com. “Printing dollars and issuing Treasury notes with inadequate reserves will only shorten the next boom and bust cycle. We are all feeling this pain right now, we need to see it through, get past the threshold, and really test our own resolves to put things right ourselves” He added, “We all need to make a decision to save the next time that we get some spare cash, clear off the Credit Cards before we spend the $600 Stimulus check, and make a choice for the children that they should not have to start their working lives at the beck and call of Federal Government debt, as FOMC members decide on where the economic cycle goes. The economy may need consumers spending, but right now that really is not in the consumers best interests, and as the lack of available credit shows, that is not in the institutional interests either”. 

Major Player. There are many areas of the global economy being affected by loses from a range of markets including stocks, bonds and currencies. The conundrum is that Average and Mediocre Joe are crucial to the next upswing in the U.S. business cycle, and as such they will be tempted once more into ever increasing debt levels; as a serviced based economy that is the only way that the Fed has of stimulating things. The Lehman Bros. news today confirms that the liquidity to re-set the books and re-start the lending process so that reduced price housing stock can actually be bought, has to be relied upon to come from abroad. The global community just got a little bit smaller, and signals that the U.S. may come out of the credit crisis as a major global player, but maybe not the major global player that it went into it as. As such, the dollar may come under long-term pressure to perform, and may now sit around 76.00 on the dollar index for much longer than initially expected when the sub-prime headlines sprung last year. The overseas investors in Usd debt have shown that they step in and buy at 71.50, the real question may be whether the dollar economics are in place for them to step in and buy at 76.00. Disclosure: No position.

Comments

[pokernut:]

Lehman is insolvent and bankrupt! They are facing $70 billion in future writedowns - and have a market cap of $10 billion! This buyout rumor was likely planted by those desperate to unload Lehman stock (using Dick Bove as a conduit). Of course, it will NOT be investigated by the SEC or any other US regulatory agency. When will the crooks go to jail? Hasn't the Street ripped the clueless investor for enough money already?

2008 Aug 24 08:59 AM