Lehman Deader Than The Dodo

[aerius]

Emphasis mine. Just because Merrill has been in trouble doesn't mean that they aren't worth a hell of a lot more than their share price. Bank of America is making a very smart move by picking them up so long as they can properly manage the exposure.

That's the big if, if they can fence off or dump off Merrill's bad assets. If they can do it they'll come out laughing, if not they're going to get roached. Personally I think the circus goes on until all the banks are forced by law to reveal their Level 3 assets and mark them to the market price. Once that happens there's no more "hide the sausage", and we'll find out what BAC really bought.

[K. A. Pital]

Well, well, well.

It also looks like the ripples from your tanking economy are finally reaching Russia. Our currency is rather shaky right now, and the Central Bank balances it's fall versus the dollar by trying to re-direct it as a fall versus Euro (by changing currency shares)... uh.

[Broomstick]

Welcome to The Great Depression - The Sequel.

Really, I've been saying for some time we're going to have another Great Depression. I've also had economists scold me and tell me that's not what's happening, that it can't happen, that it's this other (still serious) thing - what they don't get is that what is happening will be called The Second Great Depression because the things that matter to the average person will repeat - loss of jobs, income, investments. We even have environmental catastrophes - the fact that in the 1930's it was Drought and Dustbowl and now it appears to be Hurricane and Flood is mere details.

If the crash is inevitable let's get it over with so there's a chance I'll see the other end of the mess in my lifetime, m'kay?

[Phantasee]

Welcome to The Great Depression - The Sequel.

Really, I've been saying for some time we're going to have another Great Depression. I've also had economists scold me and tell me that's not what's happening, that it can't happen, that it's this other (still serious) thing - what they don't get is that what is happening will be called The Second Great Depression because the things that matter to the average person will repeat - loss of jobs, income, investments. We even have environmental catastrophes - the fact that in the 1930's it was Drought and Dustbowl and now it appears to be Hurricane and Flood is mere details.

If the crash is inevitable let's get it over with so there's a chance I'll see the other end of the mess in my lifetime, m'kay?

Don't be ridiculous. Everything's fine, it's wonderful! BoA got a great deal buying Merrill Lynch, can you believe it? It's just fantastic! We'll all be okay if we can get a good deal on a bank ourselves! Let's buy...WaMu!

So now the bankers are trying to seal themselves off from the living dead (soon to be really dead, as shown by Lehman)? Well, I don't know how well that worked for Europe during the Black Death, but we'll see...

[Tribun]

Btw., doesn't this come at the worst time for the Republitards and their terrible two McFries and Barracuda? I mean, if the economy is suddenly again in the public's field of attention after this, this will be bad for their strategy to avoid the matter, right?

[Grasscutter]

Btw., doesn't this come at the worst time for the Republitards and their terrible two McFries and Barracuda? I mean, if the economy is suddenly again in the public's field of attention after this, this will be bad for their strategy to avoid the matter, right?

According to a good chunk of their convention speeches all of America's woes are caused by the spend-crazy, big-government, liberal congress that's REALLY in control of the country. And a depressingly large portion of Americans believe what they're telling them.

[Fingolfin_Noldor]

Well, well, well.

It also looks like the ripples from your tanking economy are finally reaching Russia. Our currency is rather shaky right now, and the Central Bank balances it's fall versus the dollar by trying to re-direct it as a fall versus Euro (by changing currency shares)... uh.

Got any links to that. Normal western papers hardly cover Russia (big surprise).

[Macunaima]

Btw., doesn't this come at the worst time for the Republitards and their terrible two McFries and Barracuda? I mean, if the economy is suddenly again in the public's field of attention after this, this will be bad for their strategy to avoid the matter, right?

According to a good chunk of their convention speeches all of America's woes are caused by the spend-crazy, big-government, liberal congress that's REALLY in control of the country. And a depressingly large portion of Americans believe what they're telling them.

McCain stated this very morning his old quote that "The Fundamentals Of Our Economy Are Strong", while campaing on Florida. I mean, the guy is really that much disconnected from reality up to the point to say such a thing that may hurt their own position on the issue, as it makes clear how much clueless he is?

[Broomstick]

Let him be an act clueless if it will help get a competent and aware person into the White House (and maybe replace some of the deadwood in Congress, too)

[Darth Wong]

I am still not convinced that his bullshit will be rejected by the American people, who have shown themselves to be more than capable of accepting epic idiocy if it soothes their egos.

[Broomstick]

Ya, Mike, but since some of us have to live here we keep hoping

[The Kernel]

That's the big if, if they can fence off or dump off Merrill's bad assets. If they can do it they'll come out laughing, if not they're going to get roached. Personally I think the circus goes on until all the banks are forced by law to reveal their Level 3 assets and mark them to the market price. Once that happens there's no more "hide the sausage", and we'll find out what BAC really bought.

It may be years before we know, but BoA isn't going totally willy nilly here; Countrywide and Merrill are both incredibly strategic acquisitions and they DID turn down Lehman of course.

Really it's hard to predict much without having a hundred auditors pouring over the Merrill financials for a month. But we can be sure that BoA did their due diligence on this acquisition.

[The Kernel]

Welcome to The Great Depression - The Sequel.

Really, I've been saying for some time we're going to have another Great Depression. I've also had economists scold me and tell me that's not what's happening, that it can't happen, that it's this other (still serious) thing - what they don't get is that what is happening will be called The Second Great Depression because the things that matter to the average person will repeat - loss of jobs, income, investments. We even have environmental catastrophes - the fact that in the 1930's it was Drought and Dustbowl and now it appears to be Hurricane and Flood is mere details.

If the crash is inevitable let's get it over with so there's a chance I'll see the other end of the mess in my lifetime, m'kay?

Oh please why is it that everytime we are in a bear market like this that someone cries "Great Depression II"? Just in my lifetime I've seen the S&L crisis, the real estate meltdown of the late 80's and following recession, the tech bubble and resulting implosion on wall street and the aftermath of 9/11 on the economy. There are always people that will claim the sky is falling and that we are doomed during any financial crisis, but it is never born out in reality.

When we start seeing double digit unemployment then you can be worried and you might be able to make the comparison. Until then this sky is falling crap just makes you look foolish.

[J]

Now that I've had a bit more time to digest the weekend's events, I think Lehman's going belly up and the buyout of Merrill Lynch by Bank of America aren't the big story. The really important change was the Federal Reserve Bank is now accepting equities and junk bonds as collateral, and they've also waived the rule limiting how much money a bank can transfer from its retail banking to its investment banking operations.

NYT link

Fed Loosens Standards on Emergency Loans

By EDMUND L. ANDREWS
Published: September 15, 2008

WASHINGTON — Even though the Federal Reserve refused to provide a financial backstop to potential buyers of Lehman Brothers, concerns over what may unfold in the market on Monday led it to dramatically loosen its standards on making emergency loans to major Wall Street investment banks.

At the same time, a group of 10 major banks agreed to contribute $7 billion each to an emergency borrowing facility that any of the banks can tap if they run into a crisis similar to the one faced by Lehman Brothers. The fund may grow in size as more banks agree to contribute.

Taken together, the Fed’s expanded lending facility and the banks’ emergency borrowing facility indicate that Washington officials and Wall Street have grave concerns about future losses at banks beyond Lehman.

In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.

The Fed created the emergency loan program in March, at the same time that it engineered the shotgun marriage of Bear Stearns by JPMorgan. In itself, the program marked a historic expansion of the Fed’s lending to cover investment banks rather than only commercial banks.

Wall Street firms have used the emergency lending program very little in recent months, though Lehman Brothers and perhaps other companies are likely to use it this week.

Before the Fed’s announcement on Sunday, investment banks could pledge as collateral any kind of “investment grade” debt securities, which meant securities rated BBB or higher and included many securities backed by subprime mortgages.

But with the new announcement, the Fed will accept stocks and some debt that has junk-bond status and some securities that may have few real buyers.

It was unclear Sunday night just how much in the way of high-risk collateral the Fed would be willing to accept. The central bank said it would broaden its list of eligible collateral to “closely match” the practices of the “tri-party” overnight lending facilities run by two major clearing banks — JPMorgan Chase and Bank of New York.

Those programs allow about 15 percent of their collateral to be in equities or debt that is below investment-grade, and most of that is reserved for equities.

On Friday, Timothy F. Geithner, president of the New York Federal Reserve Bank, urged Wall Street chieftains to come up with a solution to stem the growing crisis of confidence. Echoing comments made earlier in the week by the Treasury secretary, Henry M. Paulson Jr., Mr. Geithner said the government would not rescue financial firms.

In the end, the government succeeded in getting Wall Street to create its own insurance policy. But at the same time, the Fed, in agreeing to loosen terms under which it lends money to firms, is potentially putting more taxpayer money at risk.

The events over a harrowing weekend indicate that top officials at the Federal Reserve and at the Treasury will take a harder line on providing government support to troubled institutions. But that does not mean they are unwilling to provide indirect help, or even relax regulatory requirements temporarily.

At first glance, the new strategy by Mr. Paulson and the chairman of the Federal Reserve, Ben S. Bernanke, represents a purer and tougher insistence that Wall Street work out its own problems without government help.

But before the weekend was over, it was also clear that they could stand by their principles — and be creative, too. For example, if Bank of America completes its acquisition of Merrill Lynch, its capital reserves would immediately fall below the minimum requirements for bank holding companies. Regulators, including the Federal Reserve, would have to show lenience for as long as it takes the capital markets to regain their confidence — which could be quite a while.

And the expansion of the Fed’s lending facilities adds another novel approach to help stabilize markets, but without supporting yet another bailout.

The Fed and the Treasury may be sticking to their guns for now, but Lehman and Merrill Lynch are hardly the only troubled financial institutions, and some experts wonder how long the government can stand by and watch more failures.

Administration officials acknowledged last week that more bank failures were inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust its reserves.

That is similar to an approach urged by Alan Greenspan, Mr. Bernanke’s predecessor as chairman of the Federal Reserve. Mr. Greenspan, who has long been a staunch opponent of government interference in the economy, said on Sunday that the federal government might have to shore up some financial institutions.

“This is a once-in-a-half-century, probably once-in-a-century type of event,” Mr. Greenspan said in an interview on ABC. “I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions — and this is one of them — it’s desirable to prevent them from liquidating in a sharply disruptive manner.”

Banks can now pledge their own shares in addition to all their illiquid bad assets to the Fed in exchange for loans which they can invest on the market, in effect, the Fed is now a margin lender for the stock market. Basically, the banks can take a piece of paper & crayon and write "this is worth a bajillion dollars" on it and turn it in to the Fed in exchange for billions of dollars. Which they'll likely lose on the stock markets trying to play double or nothing to get their money back. And of course it's all completely illegal under the Federal Reserve Act, not like that's going to stop anyone these days.

The foreign exchange and bonds markets took a shit at this news, and rightly so. Once the equities market "gets it", it'll be time to short the entire phone book.

[Admiral Valdemar]

McCain stated this very morning his old quote that "The Fundamentals Of Our Economy Are Strong", while campaing on Florida. I mean, the guy is really that much disconnected from reality up to the point to say such a thing that may hurt their own position on the issue, as it makes clear how much clueless he is?

LOL! The biggest debtor nation in history, with the biggest energy imports and trade deficit to boot. Don't worry, people. I hear iPods and Starbucks with financial services will save the day!

If I didn't know better, I'd say he was senile. But that would mean all Republitards were too, and senile dementia doesn't affect the very young types.

[ray245]

So in essence, a great depression is good to everyone NOW as compared to waiting for it to happen in the future?

And if it is such a case, how do you ensure that such a depression will not last too long, and the economic shakeup can be resolved in a short amount of time?

[The Kernel]

Banks can now pledge their own shares in addition to all their illiquid bad assets to the Fed in exchange for loans which they can invest on the market, in effect, the Fed is now a margin lender for the stock market. Basically, the banks can take a piece of paper & crayon and write "this is worth a bajillion dollars" on it and turn it in to the Fed in exchange for billions of dollars. Which they'll likely lose on the stock markets trying to play double or nothing to get their money back. And of course it's all completely illegal under the Federal Reserve Act, not like that's going to stop anyone these days.

The foreign exchange and bonds markets took a shit at this news, and rightly so. Once the equities market "gets it", it'll be time to short the entire phone book.

Oh come on, this doesn't say that at all. The proposal is that 15% of collateral for loans can be below investment grade (it doesn't say how much) and a rating means that one of the rating agencies has agreed with the value assessment. How do you figure that someone can just arbitrarily assign a value and get one of the rating agencies to buy into it?

[Fingolfin_Noldor]

Oh come on, this doesn't say that at all. The proposal is that 15% of collateral for loans can be below investment grade (it doesn't say how much) and a rating means that one of the rating agencies has agreed with the value assessment. How do you figure that someone can just arbitrarily assign a value and get one of the rating agencies to buy into it?

How something is assigned a value depends on whatever model they use to quantify the value.

Now if this is the same model they used to justify the Subprime rate related bonds and so forth, I will be skeptical about how his model is used else where.

[J]

Oh come on, this doesn't say that at all. The proposal is that 15% of collateral for loans can be below investment grade (it doesn't say how much) and a rating means that one of the rating agencies has agreed with the value assessment. How do you figure that someone can just arbitrarily assign a value and get one of the rating agencies to buy into it?

It's not a proposal, it's a DONE DEAL. As for the ratings agencies, well, they had Lehman's rated as AAA well into this summer and I don't believe they ever lost their "investment grade" rating until the last minute. Same for Bear Stearns, "investment grade" and "strong buy" right up until they were taken out. Do I have to say more on this?

[The Kernel]

It's not a proposal, it's a DONE DEAL. As for the ratings agencies, well, they had Lehman's rated as AAA well into this summer and I don't believe they ever lost their "investment grade" rating until the last minute. Same for Bear Stearns, "investment grade" and "strong buy" right up until they were taken out. Do I have to say more on this?

If you looked at the history of investment banks, you'd know that this is very typical. Investment banks tend to crash hard and fast like a helicopter with little warning to anyone. This does NOT mean that the credit rating agencies are not doing their jobs.

I'm sure that any collateral that investment banks are going to put up for loans is going to be rated accurately. It's not like the lid hasn't already been blown off these collateralized debt structures and groups like S&P and Moodys are struggling to retain their image so if anything they are going to be MORE conservative about these assets.

In any case, your thesis that these investment banks can just float a number for their junk assets is silly.

[Broomstick]

Welcome to The Great Depression - The Sequel.

Really, I've been saying for some time we're going to have another Great Depression. I've also had economists scold me and tell me that's not what's happening, that it can't happen, that it's this other (still serious) thing - what they don't get is that what is happening will be called The Second Great Depression because the things that matter to the average person will repeat - loss of jobs, income, investments. We even have environmental catastrophes - the fact that in the 1930's it was Drought and Dustbowl and now it appears to be Hurricane and Flood is mere details.

If the crash is inevitable let's get it over with so there's a chance I'll see the other end of the mess in my lifetime, m'kay?

Oh please why is it that everytime we are in a bear market like this that someone cries "Great Depression II"? Just in my lifetime I've seen the S&L crisis, the real estate meltdown of the late 80's and following recession, the tech bubble and resulting implosion on wall street and the aftermath of 9/11 on the economy. There are always people that will claim the sky is falling and that we are doomed during any financial crisis, but it is never born out in reality.

This is different. I know you don't believe that, but it is.

This is not just a stock market bubble, it's a bubble combined with natural disasters (the Midwest Flood in the spring plus the current hurricane season), rising oil prices (the current dip most likely is temporary) and no safe place left for investments (real estate was supposed to be the failsafe fallback for many). Up until about 2 years ago there was always cheap petroleum to power the economy, that's gone. The late 80's real estate "meltdown" was minor compared to the current one (we didn't need to bail out Fannie and Freddie in the 80's after all), the tech bubble was limited largely to tech and didn't affect other segments, and 9/11, while traumatic, left the rest of the country intact.

So, for example, it's not JUST the spring floods knocking out crops that helped raise food prices it's also greater cost in transporting food due to rising gas prices and also increase demand from those trying to make biofuel. Any one of those factors would have raised food prices, but we have all three at once. That's part of the problem - you can't point to just one thing that's the source of any of a various number of problems, there are multiple factors at work here.

When we start seeing double digit unemployment then you can be worried and you might be able to make the comparison. Until then this sky is falling crap just makes you look foolish.

Please observe the U-5 and U-6 columns in this BLS page. The U-5 measure hit 7 in July and continued to rise in August. Do you think with the layoffs this month - including but not limited to Lehman - that will go down? U-6 is already showing double-digits. All measures of unemployed show a rise over last year. Or maybe you're like the pundits who pick and choose whatever stat is most favorable to them?

We're in a downward spiral here - layoffs and job loss and credit woes lead to less spending which leads to another round of layoffs which means fewer people have the money to spend on anything, which lowers demand still further, which leads to more layoffs....

Of course, there IS a bottom. There always is. It's just a question of how far down it is.

So in essence, a great depression is good to everyone NOW as compared to waiting for it to happen in the future?

If a crash is inevitable and if putting it off will only make for a bigger crash then yes, we're better off getting it over with now rather than waiting for later when the effects will be much greater.

And if it is such a case, how do you ensure that such a depression will not last too long, and the economic shakeup can be resolved in a short amount of time?

You can't.

I think that point is escaping people - you can't guarantee any of what you're asking for. There is NO way to make sure a depression doesn't last "too long" - and how long is "too long" anyhow?

[Fingolfin_Noldor]

If you looked at the history of investment banks, you'd know that this is very typical. Investment banks tend to crash hard and fast like a helicopter with little warning to anyone. This does NOT mean that the credit rating agencies are not doing their jobs.

Wasn't there an inquiry on whether the credit rating agencies weren't doing their jobs? What ever happened to that?

[The Kernel]

How something is assigned a value depends on whatever model they use to quantify the value.

Now if this is the same model they used to justify the Subprime rate related bonds and so forth, I will be skeptical about how his model is used else where.

That's a fair point, but you should consider two things:

1) The subprime rating issue wasn't about how much the assets were worth, but what debt class they fell into.

2) At the time the rating agencies didn't have a clue how these CDOs actually worked. Although we've paid a serious price for their education, you can bet that the heat is on them and that they are being a lot more conservative in their ratings since this whole subprime mess started. There was a lot of press in Q1 of this year about the rating agencies reclassifying debt like this so I'm not too worried about optimistic ratings anymore.

[The Kernel]

If you looked at the history of investment banks, you'd know that this is very typical. Investment banks tend to crash hard and fast like a helicopter with little warning to anyone. This does NOT mean that the credit rating agencies are not doing their jobs.

Wasn't there an inquiry on whether the credit rating agencies weren't doing their jobs? What ever happened to that?

It wasn't so much that they weren't doing their jobs as that these CDOs were too complicated to properly understand and that they were being systematically lied to about the credit worthiness of some of the debt. A lot of people tried to dump the subprime mess on the credit agencies, but it was more that the people who were vetting these loans in the first place.

Hindsight is 20/20 though so the credit agencies have by all accounts seriously cleaned up their act.

[The Kernel]

This is different. I know you don't believe that, but it is.

This is not just a stock market bubble, it's a bubble combined with natural disasters (the Midwest Flood in the spring plus the current hurricane season), rising oil prices (the current dip most likely is temporary) and no safe place left for investments (real estate was supposed to be the failsafe fallback for many). Up until about 2 years ago there was always cheap petroleum to power the economy, that's gone. The late 80's real estate "meltdown" was minor compared to the current one (we didn't need to bail out Fannie and Freddie in the 80's after all), the tech bubble was limited largely to tech and didn't affect other segments, and 9/11, while traumatic, left the rest of the country intact.

So, for example, it's not JUST the spring floods knocking out crops that helped raise food prices it's also greater cost in transporting food due to rising gas prices and also increase demand from those trying to make biofuel. Any one of those factors would have raised food prices, but we have all three at once. That's part of the problem - you can't point to just one thing that's the source of any of a various number of problems, there are multiple factors at work here.

There's ALWAYS multiple factors at work in a down economy. Usually it takes more than a single thing to drive an economy in recession. That doesn't mean that any of these things prove that this will lead to another catastrophe along the lines of the Great Depression.

Please observe the U-5 and U-6 columns in this BLS page. The U-5 measure hit 7 in July and continued to rise in August. Do you think with the layoffs this month - including but not limited to Lehman - that will go down? U-6 is already showing double-digits. All measures of unemployed show a rise over last year. Or maybe you're like the pundits who pick and choose whatever stat is most favorable to them?

Did I deny that unemployment is up? However, don't bother to try to argue "marginally attached workers" is all that relevant; it's never been a very useful statistic because it applies to people who are not working and not looking, but might be interested in a job if the right one came along. That's a ridiculous metric to use for unemployment figures as it is highly unreliable (and has been proven so over the past decades which is why the official unemployment figure does not include it).

Currently unemployment is hovering above 6%. Bad to be sure, but it's a lot better than many other developed countries and I wouldn't be worried until it starts getting above 8%.

Even then, you have a long way to go to match the ~25% unemployment of the Great Depression.

We're in a downward spiral here - layoffs and job loss and credit woes lead to less spending which leads to another round of layoffs which means fewer people have the money to spend on anything, which lowers demand still further, which leads to more layoffs....

Of course, there IS a bottom. There always is. It's just a question of how far down it is.

...and you have done nothing to show that this is any different from any other recession.