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| | Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers
| Mr. Berkut
User ID: 315479
9/14/2008 5:45 PM
Report abusive post | Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers
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Saturday, September 13, 2008
High Stakes Poker Game In Progress
The Wall Street Journal is reporting Lehman Deal Could Come Soon As High-Level Talks Continue.
Talks continued Saturday between federal officials and top Wall Street executives aimed at resolving the crisis swirling around Lehman Brothers Holdings Inc. and soothing jittery U.S. financial markets.
While the situation remains fluid, some sort of solution might be reached as soon as Saturday night, according to people familiar with the situation. But it isn't clear how much progress has been made toward clearing the biggest hurdle in the discussions, which is whether any government funding will be provided to help engineer a rescue for the battered investment bank.
Treasury Department and Federal Reserve officials have made it clear to participants that no government bailout should be expected. Potential bidders, worried about the risk of buying an ailing financial institution like Lehman, want the government to step in with a package similar to what was offered to J.P. Morgan when it bought Bear Stearns Cos. Then, the federal government agreed to absorb as much as $29 billion in losses.
At an emergency meeting Friday night called by the Federal Reserve Bank of New York, New York Fed President Timothy Geithner, described two potential scenarios: either a liquidation of Lehman or an industry-driven solution in which Wall Street firms would possibly providing financing to remove some of Lehman's real estate assets, one person briefed on the matter said.
Most of the Wall Street executives present at the meeting listened and asked questions, "but didn't show their hands" as to what they thought, this person said.
In addition to Mr. Geithner, government officials in attendance included Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. The Wall Street executives included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp.
Other industry leaders that attended were Credit Suisse CEO Brady Dougan, Morgan Stanley Chief Financial Officer Colm Kelleher, Citigroup Chief Financial Officer Gary Crittenden, UBS AG Chief Risk Officer Thomas Daula, J.P. Morgan investment bank co-head Steve Black and Goldman Sachs Co-president Gary Cohn, according to a person familiar with the matter.
In trying to hold firm to their no-bailout stance even while pressing for a deal, federal officials could try to pit Bank of America and Barclays against each other. But that leverage can work only if both banks stay in the discussions.
Now there's a joke: "trying to pit Bank of America and Barclays against each other". The fact is no one wants the Lehman turkey unless it comes with a government (taxpayer) guarantee.
Treasury Wants Wall Street Sponsorship
Bloomberg is reporting Treasury Said to Call on Wall Street to Back Lehman.
U.S. Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner urged the heads of Wall Street's biggest firms to find a solution to the plight of Lehman Brothers Holdings Inc., signaling their reluctance to use government funds to bail out the investment bank, people familiar with the talks said.
Geithner and Paulson presented two scenarios at last night's meeting, people briefed on the talks told Bloomberg News. The first was a forced liquidation of New York-based Lehman, which they said could spread turmoil in the markets and lead investors to flee other investment banks.
The scenario preferred by Geithner and Paulson was for other companies to contribute money to a so-called bad bank to assume Lehman's devalued real-estate assets. That approach is similar to one Lehman presented to investors this week, which the company said would cost $5 billion to $7 billion. By assuming the "bad" assets, firms would help ease a sale of the rest of Lehman to Barclays Plc or Bank of America Corp., the people said.
Lehman had $50 billion of mortgage-related assets at the end of August, marked down to between 29 cents and 85 cents on the dollar. Reducing valuations further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages would result in $21 billion of further writedowns. Shareholders' equity was $28 billion at the end of firm's fiscal quarter in August.
Banks and brokers called into the meeting may be asked to contribute money to back Lehman long enough to unwind its trades, the people said. The Wall Street firms were reluctant to do so unless Barclays, Bank of America or any other buyer also agrees to contribute significantly, which they may not be willing or able to do, one of the people said.
If the government's resistance to fund the purchase lowers the price offered for Lehman, Fuld could balk as well, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.
"We might have a Mexican standoff, with two guys holding guns to each others' heads but nobody firing," Hintz said.
No Government Sponsorship?
Inquiring minds are reviewing Paulson's claim of no government funds for Lehman. Please see Paulson's Claim Of "No Government Sponsorship" Reviewed for a rebuttal.
The Taxpayer Loses
Supposedly we see a "solution" tonight. If not tonight then some sort of deal will be forced down banks throats tomorrow.
Mike "Mish" Shedlock
[link to globaleconomicanalysis.blogspot.com]
Click Here To Scroll Thru My Recent Post List
High Stakes Poker Game In Progress
Posted by Michael Shedlock at 5:39 PM Print |
| Berkut
User ID: 315479 (OP)
9/14/2008 5:46 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Sunday, September 14, 2008
High Stakes Poker Update: Barclays Refuses To Go "All In"
Following is an update on the High Stakes Poker Game involving Lehman (LEH), Merrill Lynch (MER), J.P. Morgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Bank of America (BAC), Barclays, and others.
Please consider Lehman to be the pot. Lehman is not a player, Lehman is being played for. The other players around the table are deciding how much that pot is worth.
The Fed, the Treasury, and the SEC are acting as the dealer (or if you prefer the carnival barker). The role of the carnival barker is to get the amount bet as high as possible. The preferred scenario was to goad Barclays and the Bank of America to go "all in".
The problem with the "all in" scenario is there is a "side pot" to consider (i.e. the bad bank). In this case the "side pot" has negative value. The other players at the table would have to fund the bad bank while not sharing in the main pot.
Furthermore, only Bank of America and Barclays have enough chips to bet on the Lehman main pot, but they are reluctant to do so unless the value of that pot is guaranteed by the dealer.
The dealer, however is adamant that it will not have a stake in either the main pot or the side pot. This topic was discussed in detail in Paulson's Claim Of "No Government Sponsorship" Reviewed.
Lehman Heads Toward Brink As Players Refuse To Bet Chips
Now that we have identified the players let's look at the current state of the game as described by the New York Times in Lehman Heads Toward Brink as Barclays Ends Talks.
Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward liquidation on Sunday, in what would be one of the biggest failures in Wall Street history.
But Barclays, considered the leading contender to buy all or part of Lehman, said Sunday that it could not reach a deal without financial support from the federal government or other banks, making a liquidation more likely.
The leading proposal had been to divide Lehman into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.
But that plan fell apart on Sunday, making it likely that Lehman would be forced to liquidate.
The overarching goal of the weekend talks was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, notably Merrill Lynch and the American International Group, both of which have come under mounting pressure in the markets.
A.I.G., one of the world’s largest insurers, may need to raise $30 billion to $40 billion to avoid a severe downgrade to its credit rating, according to people briefed on the situation. An A.I.G. spokesman, Nicholas J. Ashooh, called that estimate speculative and declined to comment further.
Some considered the weekend talks as high-stakes brinksmanship.
The prospects of a deal involving Bank of America appeared to fade as talks progressed Saturday and it became clear that the government would not stray from its position.
Some considered the weekend talks as high-stakes brinksmanship.
Indeed that is exactly how I considered it.
Mike "Mish" Shedlock
[link to globaleconomicanalysis.blogspot.com] |
| Berkut
User ID: 315479 (OP)
9/14/2008 5:52 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Saturday, September 13, 2008
Paulson's Claim Of "No Government Sponsorship" Reviewed
Inquiring minds are reviewing Paulson "adamant" no government funds for Lehman.
Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.
"There are two things that make this different from Bear Stearns. The market's been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process," the source told Reuters.
Stop right there. Do you see the lie? The Primary Dealer Credit Facility (PDCF) is the lie.
The PDCF is a government sponsored swap of funding for crappy collateral that broker dealers are holding. If and when the Fed swaps cash or treasuries for crappy not marked to market collateral, the Fed is at risk. While it is true that the Fed may be able to cover its loan by selling the assets, the odds are long against it.
The reality is that the Fed is acting as pawn broker with one huge difference. A normal pawnbroker does not pay out at fair value and especially does not pay out at above fair value. The Fed does. And this puts the Fed at risk.
Note the above holds true even if no such swap takes place. That the PDCF exists at all and that it is on the table in a discussion of a Lehman bailout is enough to make those who suggest no government sponsorship do not know what the hell they are talking about at best, or are openly and blatantly telling lies at worst.
Mike "Mish" Shedlock
[link to globaleconomicanalysis.blogspot.com]
Click Here To Scroll Thru My Recent Post List |
| Berkut
User ID: 315479 (OP)
9/14/2008 5:56 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Sunday, September 14, 2008
High Stakes Poker Update: Cinderella, Merrill Side Bets
This post is an update on the High Stake Poker Game involving Lehman and a consortium of bankers and brokers still in progress. Interestingly, two new side games are forming. More on that in a moment.
Those just tuning can catch up by reading
High Stakes Poker Game In Progress
High Stakes Poker Update: Barclays Refuses To Go "All In"
The State Of the Game
The dealers (the Fed, the Sec, and the Treasury) are getting annoyed that no one is willing to make an "all in" bet. In fact, all the players are just sitting around the table holding their cards close to their vest not willing to make any bets, let along go all in.
The players all want the dealers to make a bet. But the dealers have insisted they will not have a stake in the outcome. Remember that Lehman itself is the pot (see High Stakes Poker Update: Barclays Refuses To Go "All In")
Side Games Form
It is fitting that side games would start forming given that nothing is happening at the main table for hours. One of the dealers has left the main room and is now dealing a new game in the "Cinderella Pumpkin" side room.
Here is the main condition governing play in the Cinderella Pumpkin Room.
If LEH files for bankruptcy by midnight tonight any trades (bets) made during this session stand, otherwise they're all broken.
The above information is from a reputable source of mine at the casino. who states "At least a few of our credit sales traders are in the office today. I just spoke with one -- they're having a special 2-hour trading session today from 2-4pm ET. The deal is if LEH files for bankruptcy by midnight tonight any trades done during this session stand, otherwise they're all broken. Wild."
Another casino employee with awareness of the side game informs me that Credit Default Swaps (CDS) on the investment index are up 50 basis points in this special session. Not being at the Casino, I cannot confirm any of this.
The Merrill Lynch Side Game
With Lehman crumbling, attention is now focused on the Merrill Lynch Side Game.
No one is interested in Lehman and the dealers are increasingly desperate for some large bets to be placed. Inquiring minds need to consider Bank of America in Talks to Buy Merrill Lynch.
Bank of America is in advanced talks to buy Merrill Lynch for at least $38.25 billion in stock, people briefed on the negotiations said on Sunday, as a means to preserve that investment bank while Lehman Brothers looks likely to collapse.
The move suggests a desperate effort at triage on Wall Street, as Bank of America works to shore up the likely next victim of the credit crunch. A deal, valued at between $25 a share to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.
Bank of America, the nation’s second largest bank by asset size, had been mulling buying Lehman, perhaps in a consortium with other financial players. But with financial aid from the government looking unlikely, Bank of America has moved on to Merrill, these people said.
As Lehman began to totter in recent weeks, investors feared that Merrill would be the next victim of the credit squeeze. Shares in Merrill, which has already reported tens of billions of dollars in losses, have plunged more than 68 percent over the past year.
Why or how Bank of America is in any position to be able to buy Merrill Lynch at an amazing $38.25 billion (Merrill closed at $17 on Friday) when BAC was not in a position to buy Lehman remains a mystery, but that is the amazing rumor from the Merrill Lynch side room.
Mike "Mish" Shedlock
[link to globaleconomicanalysis.blogspot.com] |
| Mr. Berkut
User ID: 350133
9/15/2008 12:24 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Lehman is liquidating $640 Billion in assets. |
| Berkut
User ID: 350133
9/15/2008 12:32 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
FIXING ONE SUB-PRIME CRISIS BY CREATING ANOTHER?
The Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather Lehman Brothers Holdings Inc.'s plans for bankruptcy.
Webmaster's Commentary:
The road to this ruin began when the mortgage industry started going wild on sub-prime home loans. These were loans made to people with less than good credit, marginal ability to pay, using the purchased house as security. As long as the real-estate market kept booming upwards, everything was fine.
But gravity can be a bitch and what goes up must come down, and as soon as home prices began to fall, loans started defaulting. The problem cascaded upon itself, accelerated by ARM upwards adjustments on the people still making payments to cover for those who were not. This in turn created more defaults, and the system faw down go boom.
So, here we have the Federal Reserve making loans to brokerages, who clearly may have some problem repaying. And as collateral the Fed is taking stocks. This will work fine as long as the stock market continues to climb, but the market has been in decline for quite some time, and tomorrow will probably see a major drop. We risk seeing a re[eat of the cascade effect when home prices dropped and put homeowners into technical default. If the Federal Reserve loans out $80 billion to the investment banks, and the stock market drops, or he investment banks collapse, guess who will get stuck with the bill?
Even $80 billion may not be enough. The total derivatives exposure for Lehman is ten times that amount. Those obligations do not just vanish in a bankruptcy. There are counter parties to every one of those securities, who may themselves be driven under by a pennies on the dollar liquidation.
The problem with this latest move by the Federal Reserve is that it continues the process of transferring the risk/losses from the investment banks and their stockholders onto the backs of the American taxpayers |
| Mr. Berkut
User ID: 350133
9/15/2008 12:34 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Lehman: The Counterparty Risk
As we write this, CNBC is reporting that Lehman Brothers, Inc. (LEH) has a notional amount of outstanding OTC positions of nearly $800 billion. Since Lehman is going into bankruptcy, what does that mean for the rest of the financial markets?
Each of these trades has a counter party, an institution that is expecting to pay off or get paid according to the terms of the agreement.
The music has stopped, and there is a shortage of chairs |
| Berkut
User ID: 350133
9/15/2008 12:36 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Each of these trades has a counter party, an institution that is expecting to pay off or get paid according to the terms of the agreement.
Explaining Counter Parties
Let us start with an example that everyone can understand. Suppose that you occasionally make a football bet (completely illegal) with an online sports betting service or a local provider of such services. Since you are a recreational player, your normal unit is $100, an amount less than tickets to a local sports event. If you lose, you have to sacrifice some fun. If you win, you can have more fun. Either way it is not a life-changing event.
Let us further suppose that you have a friend who is a rabid fan of some team with uncertain potential. Your friend wants to bet on the game. He does not have a place to bet, and he wants to bet with you. Let us suppose that he offers a bet of $1000 and is willing to lay 3 1/2 points.
Since you can "lay off" this action with your dependable source while giving only 2 points, you take the bet. If you lose to your friend, you collect from the other party. If you win from your friend, you collect from your source. If the result if the game is your friend's team winning by 3, you collect on both bets, making $2000. If you win from the friend and lose to your illegal source, you pay the "juice" and lose $100, your normal risk amount. You decide to bet with your friend and lay off the action, locking in a low-risk position with considerable upside.
The risk in this totally illegal maneuver relates to the counter parties. Let us suppose that your friend's team loses big. You need to collect from him to pay off the other side. Finally, let us suppose that you later learn that your friend has made ten such bets, and you are standing in line to collect. Meanwhile, your obligations are instantly collectible.
This is the risk of "trading" without any legal guarantee.
Guaranteeing Counter Parties
In financial markets there is a process for guaranteeing the counter party. If there were not, trading liquidity would be destroyed. Let us consider the trading of options on an exchange.
On the day of the 1987 crash, options traders were guaranteed by firms that "cleared" their trades. The clearing firms were further guaranteed by the Options Clearing Corporation. These guarantees were the fundamental basis of the system.
In 1987 trades were reconciled at the end of the day. A trader in the pit made a trade, perhaps buying an index put at $12, 100 times. The trader watched the market move lower, and later sold the put for $20. On a theoretical basis, the trader had locked in $8 on the trade, 100 times for a gain of $80,000.
A trader might make many such trades during the day, keeping the overall position in balance and locking in profits.
Let us further suppose that the market sold off even further, as was actually the case during the 1987 crash. Suppose that our hypothetical put reached a price of $50. Our hero now has a $38 exposure, 100 times, on his supposedly locked-in profit. That is a loss of $380,000 instead of a win of $80,000 if the other side says "don't know" to the trade. These were career-changing trades for options traders on the day of the Crash.
The problem? In 1987 many traders, some of whom had losses exceeding their own capital, were playing with the money of their clearing firm. They went "all in." At the end of the day, some traders simply dropped their trading cards on the floor, never reporting the trades. A few left for O'Hare, leading to the term "airport play" where the trader leaves the clearing corporation on the hook.
This can no longer happen, since hand-held devices provide instant updates to clearing firms, allowing for immediate intervention.
In 1987 the system was preserved. In one case Continental Bank stepped in with additional funds for a subsidiary clearing firm, First Options, to satisfy the losing trades. The system survived and improved, but it required intervention with more capital.
The Current Situation
With the background examples in mind, one can more readily understand the real significance of the current crisis. Lehman has many positions with many counter parties. This afternoon there was a special meeting for Lehman counter parties. The objective of the meeting was to "net out" offsetting positions, reducing the aggregate notional amount.
There is no overall guarantor for these trades. The parties acted with the expectation that the other side was creditworthy, would continue in business, and would honor any losses. To the extent that these trades were insured, the risk was transferred to the insurers.
We now (seem) to know two things:
The federal government refused to step in as it did in the Bear Stearns situation, assuming the risk for questionable assets;
Lehman was unable to access the expanded Fed lending facilities, since the firm did not have enough qualifying assets;
Private institutions are stepping in to provide capital to guarantee the trades. The amount of $50 billion has been reported.
What it Means?
The key question is the actual size of the risk and what role government agencies will play.
We have three observations:
The notional amounts exaggerate the problem. Investors should understand that the true losses are actually net amounts of winning and losing trades. It is bad news, but no one yet knows just how bad.
The system is being tested. There is pervasive criticism of the SEC, the Treasury, and the Fed. The past decisions of these institutions will be evaluated by historians. The question for investors is how they will deal with the crisis tomorrow.
Pundits have underestimated the commitment and resourcefulness of government. The leaders now in power have inherited some difficult positions. The Fed, the Treasury, and even the Congress have created new policies and facilities that no one even imagined fourteen months ago. This creativity will now be tested again.
There will be plenty of time for opinions on past decisions. Investors should instead look ahead. It is a continuing story, and Monday's trading will provide important information on the ability of government and leaders of financial companies to deal with a crisis. |
| Berkut
User ID: 350133
9/15/2008 12:38 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Greenspan: Other big U.S. finance firms may fail
T
Former U.S. Federal Reserve Chairman Alan Greenspan on Sunday said he suspected "we will see other major financial firms fail," but it did not need to be a problem.
Oh, well, then I can relax! |
| Berkut
User ID: 503919
9/15/2008 4:17 PM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Monday, September 15, 2008
Fed Sponsored Poker Party Morphs Into "Old Maid"
All weekend long I monitored the ongoing high stakes poker game sponsored by the Fed, the Treasury, and the SEC. Progress of the game appears below for historical reference. A quick summary will follow.
Play By Play Recap
High Stakes Poker Game In Progress
High Stakes Poker Update: Barclays Refuses To Go "All In"
High Stakes Poker Update: Cinderella, Merrill Side Bets
AIG Struggling To Stay Alive, Begs Fed For Cash
Another Shotgun Marriage: Bank of America and Merrill Lynch
AIG wants $40B from Fed; Market Cap is $32B
Game Summary
Fed, the Treasury, and the SEC were acting as the dealers (or carnival barkers if you prefer). Merrill Lynch (MER), J.P. Morgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Bank of America (BAC), Barclays, and others were all players at the table. Lehman (LEH) was not a player. Lehman was the pot.
The role of the carnival barker was to get the amount bet as high as possible. Dealers hoped to goad Barclays and/or the Bank of America to go "all in". Both refused. Numerous side games developed and a deal was struck between Merrill Lynch and Bank of America. Another side game is still in play with AIG begging the Fed for cash.
At midnight, in the Cinderella Pumpkin Room, the game morphed into The Old Maid.
The Old Maid
Inquiring minds just might be asking "Who is kissing the old maid?" It's a good question too. The answer can be found in Pimco, Vanguard Are Biggest Bond Fund Losers in Lehman Collapse.
Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show.
John Woerth, head of public relations at Vanguard, said the company holds Lehman bonds among the $450 billion of fixed income it manages.
Axa SA, Europe's second-biggest insurer, and unnamed affiliates, own 7.25 percent of Lehman's equity, according to the filing.
US Treasuries Rally
Interestingly, the cards nearly everyone thought to be old maid cards (treasuries) are rallying strongly. I continue to expect new all-time lows in yield on the 10 year notes and long bond.
Also of note today, the US dollar index and the Euro are both flat on the day. Inquiring minds may wish to read US Dollar Rally Not Over Yet for further commentary and charts.
Fun While It Lasted
Professor Kevin Depew was on top of the call this morning with a very pertinent reminder in It Was Fun While It Lasted.
The most important thing equities investors and traders should keep in mind here is that this debt destruction will be an ongoing process. It is tempting to see the Lehman (LEH) bankruptcy, the Bank of America (BAC) and Merrill (MER) deal, as signposts marking the culmination of a financial stress event They are not. They are merely symptoms of an ongoing debt crisis.
By allowing Lehman to fail, the Fed has, perhaps inadvertently, embraced debt deflation and even contributed to it. The net result of the failure is more credit contraction and debt destruction.
Some will argue that by adding $25 billion to the now $200 billion Treasury lending facility, accepting equities as collateral and by cutting short term interest rates, which the FOMC will almost certainly do tomorrow, the Fed is making more credit available, but that credit is being absorbed by the financial system so quickly that the net result is a still continuing credit contraction.
Inquiring minds will want to take a look at Kevin's article. It's an interesting read comparing jellyfish to financials.
The Ongoing Credit Destruction
The key point, and one I have been harping on for quite some time, is that credit is being destroyed far faster than the Fed is monetizing. This is deflation, and it is happening right here right now. There is no other logical way of looking at it.
Those playing Old Maid, betting that debt could or would perpetually be bailed out by the Fed and that treasuries would sink as a consequence, made the wrong bet. They are now kissing the Old Maid.
Mike "Mish" Shedlock
[link to globaleconomicanalysis.blogspot.com]
Click Here To Scroll Thru My Recent Post List |
| Berkut
User ID: 315479 (OP)
9/16/2008 9:29 AM | | Re: Lehman Brothers: High Stakes Poker Game - Taxpayer Potential Losers | Quote |
Lehman Fails, Cops Get Caught Eating Doughnuts:
Jonathan Weil
Commentary by Jonathan Weil
Sept. 15 (Bloomberg) -- Now can we get some subpoenas flying?
What happened this weekend at Lehman Brothers Holdings Inc. is nothing short of remarkable, and I'm not just talking about its death. Sunday night, one by one, stunned Lehman employees were filmed by TV news crews leaving Lehman's offices carrying away boxes and duffel bags full of heaven knows what.
Is there anybody left in the government with a pulse? Where's the yellow police tape? How about a cease-and-desist order to prevent document destruction? Are we supposed to believe that everything carted out of Lehman this weekend was a personal effect?
Can anyone give me a good reason why Lehman offices shouldn't be treated as a crime scene now? Or why there has been no sign of any investigation by the Securities and Exchange Commission into any aspect of Lehman's accounting or disclosure practices? Where is the Justice Department? Where is New York Attorney General Andrew Cuomo? How about the Financial Industry Regulatory Authority?
Not only is Lehman dead. Fannie Mae and Freddie Mac, which cooked their books in broad daylight, are taxpayer-owned zombies. American International Group Inc. and Washington Mutual Inc., whose accounting practices also stink, are on the brink. And while it's true that AIG is the subject of SEC and Justice Department probes, there's no sign that anyone in the government is looking into whether executives at these other places violated the law.
Never has it been more evident that the SEC and other government agencies think their job is to protect financial companies and financial executives, rather than the investors they rip off.
Chasing Shorts
Just two months ago, the SEC was firing subpoenas all over hedge-fund land trying to find a short seller to burn for spreading false rumors about Lehman. (They're still looking.) And yet there's no sign it ever occurred to anyone at the SEC to check if Lehman's books were cooked, or if Lehman's executives ever misled the public about the company's prospects.
There's no sign the SEC has done anything to inquire about the impossibly optimistic asset values on Lehman's balance sheet. There's no reason to believe the government has asked about Lehman's Enronesque dealings this year with an off-balance-sheet hedge fund run by former Lehman executives called R3 Capital.
There's been no signal that anyone in the government has expressed even a curiosity about whether Lehman executives believed the rosy falsehoods they spread this year about their company's financial health. All the SEC has been able to muster in the wake of Lehman's collapse so far are some boilerplate assurances that Lehman customers' assets will be protected.
Only Choice
After bailing out Bear Stearns Cos., as well as Fannie and Freddie, letting Lehman fail was the only acceptable option for the Treasury and the Federal Reserve. And it's a good start toward giving investors a reason to have confidence again someday that the capital markets are not a completely rigged game.
Merely letting companies fail isn't enough, though. For a free-market economy to work, investors must feel confident that they can trust the financial reports public companies produce. And to make that leap of faith, they must have confidence that the government will enforce the law when it's broken.
A big reason Lehman failed is that investors rightfully concluded that Lehman's financial reports and happy-talk assurances couldn't possibly be true. Yet there also was the sense that as long as Lehman remained alive, nobody in the government would do anything about it.
Before we get out of this banking crisis, we're going to need some scalps. There should be plenty for the government to find. Messes like the one we're in don't happen without a large number of highly paid people doing something very wrong.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
Last Updated: September 15, 2008 14:53 EDT |
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