SubscribeSaving Lehman would avoid massive problems for Wall St's other banks, and thus it would be appropriate to get them to contribute the (much smaller) amounts that would allow for an orderly closing down of Lehman.
The problem is, of course, that each has an incentive to put up as little money as possible, as long as others put something. And none want to help the buyer of the good bits to get a good deal at their expense. But of course, no buyer has any reason to do any deal and put any money on the table unless it makes sense for it to do so.
A classic "freerider" problem, which can only be solved if there is an outside force to coordinate contributions and, if necessary, impose them. This is the function that the Treasury and the Fed can play.
But - they are themselves against the wall: if no solution is found before the markets open on Monday (and that's only a few hours away in Asia now), then there is a good chance of a total financial meltdown, something that the Treasury is desperate to avoid.
Thus it is likely that the Wall St banks are holding their own commitments to the last minute to push for public money to help make the deal. Given the precedents that have been set first with Bear Stearns in March, and only last week with Freddie Mac and Fannie Mae, it is not surprising that they expect the same to happen again.
So my bet is that we'll see another bailout of Wall Street and the financial investors it serves, with large amounts of public cash committed in a way that looks painless today (ie, no money upfront, but large liabilities into the future, likely to cost hapless taxpayers billions later - after the election).
Has this administration ever behaved otherwise? The mores and havemores have fucked up on a massive scale, but their are "the base", and they cannot be let down.
They gorged in the good times, and they are letting taxpayers deal with the hangover. A sweet deal if you can get it (all you need is a few billions).
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system.RGE
Imagine if you worked for Lehmann in some part that has nothing to do with mortgages. This has got to suck hardcore.A former boss of mine is (according to his LinkedIn profile at least) an SVP at Lehman now. I doubt he's directly involved with anything to do with the mortgage business.
"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."
... Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.I know next to nothing about investment banks, but that last part worries me. It sounds like the Federal Reserve expects that (1) a bunch of banks are going to fail, and (2) the FDIC will be unable to insure depositors' money. Is that right? That can't be right. I hope that's not right.
Wall Street is a smoking ruinAnd then what?
See y'all at Thunderdome!TWO BANKS ENTER
“The court is on a path to reshape the law to conform to the Chicago school of law and economics,” said Albert Foer, president of the American Antitrust Institute, referring to the free-market theories associated with the University of Chicago. “The theory now is that markets rarely fail, and regulation of business is nearly always bad.”So yes, their monetary policies are nearly indistinguishable from the Democrats. But their fiscal policy is different, their regulatory policies are vastly different, and the ideology of the court appointments are night and day.
The weekend's momentous developments -- Lehman Brothers Holdings' looming collapse, Merrill Lynch's merger talks with Bank of America and American International Group's plans to sell assets -- all have one thing in common: The firms couldn't deal with tens of billions of dollars in mortgage exposure left on their balance sheets from the credit boom.
Anyone else holding large amounts of tainted mortgages has to worry. Lehman's potential unwinding, along with any aggressive actions by Merrill and AIG to offload mortgage assets, could mean widespread losses as other banks mark down their own holdings.
Things today just aren't that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons.
...
There have been 11 recessions since the Great Depression. And we're nowhere close to being in the 12th one now.
“I don't think the atmosphere should turn to one of complete doom and gloom,” Mr. Harper told reporters this morning as he kicked off the second week of the Conservative Party's re-election campaign.I guess I can't argue with that.
“My own belief is if we were gong to have some kind of big crash or recession, we probably would have had it by now.”
"Biggie was right..."Mo Money, Mo Problems""
Name 15-Sep Day Mtd Ytd ABN AMRO 120 32.2 34 70.4 Barclays 170 37.4 41 122.4 JPMorgan 192.5 48.5 80 142.8 Bank of America 200.8 44.6 71.5 151.6 Citigroup 267.5 79.9 99.7 195 Merrill Lynch 334.6 -120.4 23.4 209.3 Goldman Sachs 344.6 146.7 196.3 277.1 Capital One 421.7 72.5 71.7 196.7 Countrywide 445 72.1 101.7 -680 Morgan Stanley 496.7 234.8 279 399 Lehman Brothers 706.7 0.00 371.2 587 AIG 1908.1 1005.7 1534.9 1839.3 WAMU 3231.4 484.2 1830.2 2818.9Just to give you an idea of how things have changed, I've got a bunch of Bloomberg screen dumps I posted Wednesday, September 10th in a different thread.
In December, Fortune magazine admitted it had been remiss naming insurance giant AIG one of its "10 Stocks To Buy Now" before a yearlong 18 percent decline. "We... didn't expect [the] mortgage unit to be such an albatross," editors wrote. To correct the error, the magazine had a fresh list of "The Best Stocks For 2008" — including Merrill Lynch. "Smart investors should buy this stock before everyone else comes to their senses," Fortune wrote, calling a recent correction in Merrill stock "an overreaction." Investors who followed this advice are now down 93 percent.- How Magazines Led Investors Toward Ruin from Gawker.
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This should be a fun week in the markets. And politics.
posted by fourcheesemac at 5:43 PM on September 14, 2008 [1 favorite has favorites]