Bankruptcy

September 14th, 2008 7:03 pm | by John Jansen |

The New York Times is reporting(via Deal Book) that Lehman will file for bankruptcy this evening.

The story notes that the Federal Reserve will take lower quality assets as collateral for loans and a consortium of banks will provide financing to assist an orderly liquidation of the company.

I am not sure that one can have an orderly liquidation of a company which has been around for a century and a half. This is confirmation,proof positive that we live in a most troubled time. One week ago we watched and cheered( I did )as the Treasury rescued FNMA and Freddie Mac.

That effort provided only the briefest interlude of calm in the markets. There is some historic climax to this series of crisis lurking just around the corner. At every twist and turn in this year long saga the result which has ensued has always been the worst case scenario. We are ,I believe, headed for a very very ugly end to this story.

Government has not been able to hold bank the forces which have taken down financial giant after financial giant. Capitalism demands pain. Good risk is rewarded and imprudent risk is punished. We were engaged in an orgy of imprudent risk taking for nearly a decade and now a heavy price will be paid for the violation of so many simple and common sense precepts of trading.

I truly fear for our economy and our system the next several days.

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  1. 14 Responses to “Bankruptcy”

  2. By soupcon on Sep 14, 2008 | Reply

    It takes an enormous shock to the system to tip an economy into recession.9/11 was once such event,though for the first time ever, consumer spending actually rose during that 2 Q recession.

    The Chapter 7 filing of LEH isn’t such an event.It’s a misery for the employees, but not for US economy.

  3. By FI nagler on Sep 14, 2008 | Reply

    Are you kidding me? It is the appearance what matters in this case.

    It may not be big in terms of market value, but the impression the general public and the markets in general will have is good. Have you looked at the futures?

  4. By Nathaniel C on Sep 14, 2008 | Reply

    I am somewhat surprised by the alarmist nature of your article John. Over the past 100+ yrs, Wall Street has lost hundreds of investment banks and yet the Wall Street continues on. In fact Lehman’s demise is good for the overall system: it shows Wall Street that the government will not always be there to bail you out, and that one brokerage house failing does not mean a collapse of the worldwide financial system.

    I expect the markets to gap lower similar to waht happened on Bear Stearns day and then bounce higher as people realize that the world is not collapsing and that the stronger financial companies will benefit from less competition in the future.

  5. By MattJ on Sep 14, 2008 | Reply

    Which stronger financial companies? Merrill? AIG? WAMU? Wachovia? Is there any reason to believe that any of these will exist in 3 months?

    The amount of asset value being eliminated at this point is staggering. I have been expecting/fearing this for about 2 years now,and I have no idea what financial institutions will survive this period.

  6. By TV on Sep 14, 2008 | Reply

    Spot on John

  7. By Adan Lerma on Sep 14, 2008 | Reply

    there is always reason at times like this to be concerned at a very high level, and to be equally hopeful an emotional sounding will occur –

    it’s people’s growing belief that this is but a repetition of times past (for exp, the 20’s – 30’s), without a lasting solution, that’s the truly worrying

  8. By Ed on Sep 14, 2008 | Reply

    Come ON !

    The “problem” here is the complacency allowing the DC kleptocrats to continue. I would say for the past 12 years at least. The hypnotized masses of Miniver Cheevys vote in these evil and destructive people again and again, perhaps aspiringly “if only they could be one”.

    Does anyone remember that stock market always does better under Dems, perhaps due to a higher standard of honesty ?

    When this stygian pool is drained and its smell extingushed, even Wall Street wil become again honest and accountable. But not until.

  9. By John Jansen on Sep 14, 2008 | Reply

    Miiniver Cheeveys? Stygian Pool? That is good stuff.

    I have seen data which posits that equities perform better under Dems than Republicans. I dont think the data is meanigful.

    Bill Clinton,for example, what the luckiest man in history and the beneficiary of a perfect storm. he happen to get elected following the demise of the Soviet Union. Ergo, there is no evil empire threatening civilization.
    He also benefitted from the effects of the technolgical revolution. The world passed through a revolution in production and information gathering during his administration which revolutionized the way we live and work. I do not believe Clinton had anything to do with that.

    Finally, he happened t be President when the largest demographic group in history ( the Baby Boomers) reached their peak earning years and collectively spent their time throwing money at financial assets of every ilk. Ergo, booming stock markets and tumbling interest rates.

    He was a beneficiary of history. Tolstoy suggests that one man can not do too much to change history. The forces are in play and it is very difficult to chane their motion.

    He was in the right place at the right time.

  10. By anon on Sep 14, 2008 | Reply

    The difference in stock market performance between Democrat and Republican administrations is very easy to explain.

    Markets are forward looking.

    With a Democrat administration, things can only get better (by electing a Republican), and with a Republican in the White House, the gloomy prospect of a Democrat win leads to poor stock market performance.

  11. By kevsto on Sep 14, 2008 | Reply

    “when people are greedy be fearful, when people are fearful be greedy” warren buffet

    greed ruled the markets from 2004-2007, fear now reigns untill at least mid 2009.

  12. By bsetser on Sep 14, 2008 | Reply

    anon — one small problem: by your logic, McCain’s rise in the polls should have encouraged the market. I would give Clinton a bit more credit than John Jansen — interest rates were high when he took over, and he took some courageous steps to reduce the deficit that helped bring rate down and contributed to the boom. But he was also in the right place at the right time. the fact that the US was at the epicenter of the innovation that led to the ‘net helped a lot. On the other hand, i would argue that W’s policies didn’t exactly lay the basis for a sustained, healthy expansion after the .com bubble burst … and we are now in a much worse position to manage the .home crisis than the .com crisis because we didn’t build up a fiscal buffer during the good times analogous to the surplus at the tail end of the 90s.

  13. By soupcon on Sep 14, 2008 | Reply

    This is the washout event that creates a meaningful bottom.You do need hard selling to shakeout weak hands, and since the previous cycle’s winners are being buried,then it is certainly NORMAL for hysteria to be at it’s highest pitch right about now.

  14. By ekzept on Sep 15, 2008 | Reply

    @soupcon,

    Seems to me people have been talking about “washout events” and “bottoms” for months. I think you can only see those in retrospect. There’s still an awful lot bad that could happen, and a bunch isn’t controlled by the government. Worse, attempts to minimize damage for foreign creditors, like the nationalization of Fannie & Freddie seemed to be, incur structural costs and distortions which may make flows and operation in the near-mid term bumpier, not smoother.

  15. By soupcon on Sep 15, 2008 | Reply

    BSC’s March collapse was one such washout.It was when the dollar bottomed.It made a retest of that low in July, just when the energy complex topped.New stock market leadership has emerged with traditional growth stock names like WMT,MCD,BAX,JNJ,PG,GIS,etc moving into new multi year highs, and smaller OTC growth cos emerging from an 8 yr period of underperformance.This is the normal course activity at the last stages of a bear market.

    We’ve had a dramatic dollar decline since 2002 and that adjustment process causes asset prices to bear the brunt of the dollar inflation.The last time we experienced such events was the late 70’s into the mid 80’s, and mortgage holders, thrifts, banks and financial intermediaries got creamed.Alas, for poor LEH, they held the wrong stuff, at the wrong time,just like S&L’s back in 1981.

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