Let Lehman Fail

Sep.12.08 | About: Lehman Brothers (LEH)

Many people are convinced that it is OK for the government to bail out failing private companies like Bear Stearns, Fannie Mae (FNM), Freddie Mac (FRE), and, now, Lehman Brothers (LEH). Hank Paulson, our Treasury Secretary, argues that we should put these debts onto the backs of innocent taxpayers because if we don’t do it, we will have “systemic risk.”  

Let’s drill down to the reality. There is always systemic risk whenever a large company fails.   There were also systemic risks to the energy markets when Enron, a huge energy trader, went bankrupt, but we got through that. That is what Chapter 11 bankruptcy exists to do. There is nothing that differentiates Lehman Brothers from any other big company except the fact that its debt, including a lot of counter party debt arising out of various derivatives, is held, mostly, by other Wall Street players.

Those who have a selfish interest hide the truth behind double-speak. Former Wall Street bankers, like Hank Paulson, should have no place in the halls of government, but they are there, doing their best to help their friends, and past and future employers. They do not have the best interest of the nation at heart. There is no reason why a company, like Lehman, cannot unwind properly, using the bankruptcy tools available, rather than being placed upon the backs of innocent taxpayers. Hank Paulson’s company, Goldman Sachs (NYSE:GS), stands to lose billions on a Lehman collapse.  

But, the billions will be lost one way or the other. The question – who will pay the bill? Contractual counter parties, like Goldman, or U.S. taxpayers?   If the U.S. government socializes Lehman’s losses, by bailing out the company, in effect, the taxpayers’ pockets will be picked to fill the pockets of those in charge of Goldman Sachs, JP Morgan Chase (NYSE:JPM), Citigroup (NYSE:C) and so on. 

Seeking to abuse the public coffers, in support of private interest, is not unique. PIMCO, one of the biggest bondholding institutions in the world, stood to lose tens billions of dollars on Fannie/Freddie bonds if the two GSEs collapsed without a bailout.  So, Bill Gross, its Chairman, wrote, again and again, on the need to have those two institutions bailed out by the federal government, and lobbied to make it happen. In the end, as usual, he got his wish, and middle class folks, Mom & Pop – they got shafted. Many people on Wall Street would like to shift their own poor investment decisions onto the back of the U.S. taxpayer. The American people are very complacent, and, up until now, they have allowed their representatives in Congress to look the other way, and even grant extraordinary powers to men like Hank Paulson and his comrades are turning the USA into a copy of the centrally planned economy Soviet Union. It didn’t work for them, and it won’t work for us. Corporate welfare is exploding in America. 

Let’s face facts. All of us who play in the financial world seek profit from the exercise. But, some are less honest than others. Men like William Ackman are driven by profit, but, at least, they are not hypocrites. Short sellers think they can make money by selling companies on borrowed stock, and buying the shares back, later. They are not paragons of virtue. However, because of the nature of what they do, and the intense balance sheet research it requires, they serve as the “conscience” of Wall Street. When Wall Street firms ignore their warnings, they should be doing so at their own risk, not at the risk of the taxpayers. 

Lehman Brothers is a private company. It is not a charitable institution, or a government agency. Its purpose is to make money, like its counter parties. In its day, it earned huge profits, and a very large percentage was paid out to its top management, in the form of salary and yearly bonuses. That top management is still in power. They’ve made huge errors in judgment, both in getting themselves into an insolvency situation, and in failing to take steps to shore up their finances, on a timely basis, once they found themselves there. Lehman’s counterparties made equally bad business decisions, by continuing to do business with a failing company. 

The idea that Wall Street is a gentlemen’s club is fine and good. More power to them. But, if they want to be kind to their members, let them pay for it themselves! Wall Street wants to feed its members fillet mignon at the party, but wants the taxpayers to bear the expense. That is unacceptable. Wall Street firms need to pay their own club dues, and, if they don’t have the money to do so, then shut the Club! 

Many people actively and vocally criticized Lehman’s business model, investments, methods of accounting, and the honesty and veracity of their past balance sheets.   They’ve been very loud, particularly William Ackman, holding press conferences, writing letters, and, in short, doing everything possible to make people listen. Their energy came out of the fact that they would profit if people listened. But, the reason behind a message doesn’t make the message, incorrect. All complaints fell on deaf ears. Had Lehman listened, 6 or even 3 months ago, it could have raised capital in sufficient amounts to see through the end of the credit crunch, while its stock was still worth something. Had Goldman Sachs, JP Morgan Chase, Bank of America (NYSE:BAC), and all the other Lehman counterparties, listened, they could have pressured Lehman into taking action, on the threat of refusing to do business with the company. Instead, all the players turned to Orwellian double-speak. They didn’t want the Lehman share price to fall. Most of them had their analysts issuing “BUY” or “HOLD” recommendations on Lehman, even though anyone rational could see that Lehman Brothers was a strong “SELL.” 

Recently, with the company’s finances spiraling out of control, rumors began to fly. Everyone wanted to buy Lehman, it seemed...except, in the end, really, nobody wanted to buy it. At least one prominent analyst made a ridiculous suggestion, that there would be a hostile takeover, implying that the stock would soar, as a bevy of eager buyers swarmed around the company, trying desperately to get in on the multi-billion dollar losses. Amazingly enough, his absurd suggestion caused the share price to soar. People believed! Their imaginations ran wild, along with their greed, helped along by sequential false rumors of numerous “buyers” getting on line. What motivated these Orwellian lies and rumors? Was it the old fashioned pump & dump? Most amazing is that people are taken in by this nonsense, time and time again. And, the people that lie and/or come up with absolutely fanciful or ridiculous analysis, are quoted, time and time again, as if they are “experts”, in spite of their past misconduct. There is no shortage of suckers on Wall Street.

Now, that Lehman is failing, the counterparty companies, like Goldman Sachs, want the United States of America to treat speculative counter-party deals as Treasury Bills, having the “full faith and credit” of the nation. This is the same mistake done with Bear Stearns. Why should speculative derivatives be given equal rights to the U.S. Treasury as Treasury bills? The Lehman Brothers counter-parties were willing to take big risks to extract huge hoped-for investment returns. Now, they want the government to convert that risk into U.S. Savings Bonds, with the taxpayers paying the bill. This is very convenient for them, but very expensive for us.

If the counter parties didn’t want default risk, they shouldn't have played the game.  Honest people would put their money into treasury bills, and shut up. But, the Goldman Sachs, the PIMCOs, or the other players on Wall Street are not about to shut up. They are lobbying to get their money out of the U.S. Treasury, since Lehman, apparently, is too insolvent to pay them. Counterparties who dealt with insolvent entities, bought their debts, and hoped to earn big returns should not be bailed out. Let them be more careful. Let’s begin to carve the rottenness out of the system, rather than helping the rot spread. It is fundamentally wrong to allow private individuals and companies to soak up profits, while forcing innocent U.S. taxpayers to pay for losses.   It shouldn’t have been done in the past, and we shouldn’t do it again.

Poor old Senator Bunning is one of the last honest man in Congress. He needs your help. He cannot fight all these crooks all by himself, or with the help of nobody but Ron Paul. Write to your Senators and Congressmen, and express your outrage at what is happening in America. They need to hear from you.

Disclosure: none