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Let’s Try This Another Way: The Bleeding Begins

Wall Street in Crisis

By: Francis Cianfrocca (Diary)  |  September 15th, 2008 at 06:15 AM  | 

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As I described here, this is the weekend that the Treasury and the Federal Reserve decided to stop bailing everyone out. Secretary Paulson has been hinting for weeks now that we have to let capitalism work the way God intended it to. Which means: if you screw up, you die.

This is what we free-market conservatives have been saying we wanted all along, folks. We’ll be getting a chance to eat our own dog food. On balance, I have to say it’s a good thing… I hope.

We are now going to see the unwinding of the 158-year-old broker-dealer Lehman Brothers. The regulators are going to try this another way, and they decided to let Lehman die without the benefit of an overt and specific public bailout, as had been the case with Bear Stearns and Fannie Mae/Freddie Mac.

Lehman, which had been the fourth-largest Wall Street broker-dealer, will declare bankruptcy. Meanwhile, the third-largest, Merrill Lynch, will be acquired by Bank of America in a deal that values Merrill at about half what it was worth a year ago. The last two left standing, Morgan Stanley and Goldman Sachs, are strong and not in danger. (Not today, anyway.)

The AIG Companies, an insurance-holding group, is said to have sought a bridge loan from the Fed, as it seeks to raise desperately-needed capital by selling assets. AIG has sold a large amount of credit-default swaps, many of which may be triggered in the next few hours and days.

There have been reports that Merrill was ordered to sell itself, by authorities at the Fed. If so, someone must have wanted to pull off all the scabs at once. The blood is running in Wall Street this morning.

The Federal Reserve did announce last night that its various emergency-liquidity facilities would be significantly broadened and expanded in scope. If you’re so inclined (and I am), you can consider this another kind of bailout. But the Treasury and the Fed both refused to give Wall Street what the latter were looking for, which is an explicit public guarantee of Lehman’s distressed assets. It’s a completely new chapter in the Panic of 2007. (And 2008. And 200…)

Whether Lehman’s assets and trading positions are liquidated in an orderly or disorderly fashion will determine the tone of the next few weeks in financial markets.

And it could also determine the tone of the real-world economy, of jobs, goods and services, for the next year or more.

This morning, more or less as expected, markets are in shock. China and Japan didn’t trade overnight due to national holidays. Singapore, Taiwan and the Phillipines all saw sharp losses in their stock markets. European stocks are also sharply lower, and US stocks in Europe are trading several percent down. Best guess, US stocks will lose at least a few hundred points today.

US Treasury securities, meanwhile, are on the biggest rally in months. The dollar opened weaker overseas but has steadied. European and British monetary authorities have announced that they’re ready to support their money markets aggressively, should the need arise.

Hang on tight, everyone. This is a hurricane warning.

-Francis Cianfrocca

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COMMENTS

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  • joe24pack

    The government (i.e. Joe Taxpayer) should not be bailing out failing companies. Let the system work this out, in the long run it is for the best. Looking at this from a slightly different angle, bailing everyone out is not unlike the fire suppression policies of the Forest Service that allowed too much underbrush and too dense of a tree cover to accumulate in dry western forests which eventually resulted in devastating forest fires.

  • Marcus_Traianus

    BoA and ML together; whoa! I heard the rumors over this weekend but frankly didn?t bite. I truly thought they would take Lehman, but once Paulson said he really meant no FED role it was the coupe de grace. As mentioned, I didn?t personally see Lehman?s overall value to the market as such that it portended another taxpayer ?intervention?.

    That said; look at the powerhouse this creates with BoA?s organization, ML products and now a bank to provide a direct, stable liquidity source? Can you say market behemoth? As the market improves their combined power will be unequalled; save JPM and my guess is they will make another move now for either WAMU or Wachovia (if Wells doesn’t move first).

    Furthermore, I would start to think about a vast population of broker-dealers independent from banks as relics of a bygone past. Goldman might be the last one standing, but I wouldn?t place any bets on Morgan Stanley just yet (as an aside I am curious what Purcell is saying about the Discover Bank spinoff now?).

    Lastly, I would have to slightly disagree on PDCF and TSLF. They basically aligned the PDCF collateral with that of everyday tri-party repo. It?s not as if they are letting them secure loans with junk grade stuff. This is not a bailout, just a sagacious alignment that enables more liquidity. On the TSLF again, they are allowing a pledge of investment grade debt securities; an everyday occurance outside that facility. This is another move that will permit additional liquidity in the market and restore overall confidence. Long term, I don?t see us left holding the bag on any of this.

    • Marcus_Traianus

      Notice the collective yawn this posture was met with. Nobody at the table felt taking on any risk associated with Lehman’s portfolio would have a material impact on their own valuations.

      The mark to market on these securities already anticipates a great deal of the current situation. This frankly creates a situation where the vultures are circling, looking at future upside opportunities not overtly concerned about how this will affect their own portfolios.

      That somehow the impetus for selling these securities directly correlates to value seems to be a substantial leap in logic.

  • txchick57

    I will note there has been a $10 short trade on SKF already this a.m.

    The market is saying something.

    • Marcus_Traianus

      Notice the collective yawn this posture was met with. Nobody at the table felt taking on any risk associated with Lehman’s portfolio would have a material impact on their own valuations.

      The mark to market on these securities already anticipates a great deal of the current situation. This frankly creates a situation where the vultures are circling, looking at future upside opportunities not overtly concerned about how this will affect their own portfolios.

      That somehow the impetus for selling these securities directly correlates to value seems to be a substantial leap in logic.

      • blackhedd

        …but with banks and broker-dealers, you have to mark positions to market on a frequent basis. This is both to manage counterparty risk (one of the legacies of the 1998 Long-Term crisis), and to comply with the newer bank-regulatory standards (including Basel II).

        Holding fixed-income assets to maturity is no longer an option, as they have to be reserved not against their risk-adjusted present value, but against comparable transactions.

        For MBS, there never has been a secondary market to provide those reference points. And now there no longer is a primary market either.

        So if Lehman or anyone else is forced to sell MBS or other securitized assets in a panicking market, everyone will suddenly face far lower marks to market on their own holdings.

        And that will stress their capital levels, possibly enough to force them to dump perfectly good assets like stocks and corporate bonds.

        That’s what everyone is really worried about.

        • Marcus_Traianus

          Notice the collective yawn this posture was met with. Nobody at the table felt taking on any risk associated with Lehman’s portfolio would have a material impact on their own valuations.

          The mark to market on these securities already anticipates a great deal of the current situation. This frankly creates a situation where the vultures are circling, looking at future upside opportunities not overtly concerned about how this will affect their own portfolios.

          That somehow the impetus for selling these securities directly correlates to value seems to be a substantial leap in logic.

  • bs

    What does it mean for the “central banks” to “inject liquidity” to markets? According to one of the marketwatch.com headlines this morning: “Fears that the collapse of Lehman Brothers could cause worried banks to freeze lending to each other and customers prompted central banks around the world to aggressively add liquidity to money markets Monday.”

    What does that mean???

    • blackhedd

      Boy did it take balls, though. We’re going to lose one more big bank, probably, and then things will start to settle down.

      Marcus_Traianus is right, it’s nice to be BAC right now.

  • Spartan4Life

    It is strictly anecdotal, but it sure seems to me that in the last 15 years that the Democrat party has become the party of Wall Street. All those investment bank types in the Clinton administration i.e. Altman, Rubin, Franklin Raines etc., Corzine, and I believe I read recently that Barney Frank was the number one recipient of Freddie Mac and Fannie lobby money. He was referred to as the “Patron Saint” of Fannie Mae.

    I think if Obama tries to hang this one on George Bush he could be stepping into another McCain trap. After all, Congress legislates this stuff, last time I checked my constitution. I am sure there are Republicrats whose hands are dirty, too. I say let McCain and Palin throw all the bums out.

    • blackhedd

      …you don’t lend him any money. Not even overnight.

      A central bank can “inject liquidity” in several different ways, but it’s usually done with repo agreements in which they purchase certain securities in exchange for cash. That makes it easier for banks to meet their obligations to each other without having to borrow from each other.

  • Shaggy_Dog

    After all, it is a Known Fact that everything bad that happens in America is the Bush Administration’s fault.

    It is a further Known Fact that Bush and Cheney have been tearing up all regulations that govern Wall Street for the past 8 years, enabling this crisis (pay no attention to the fact that the last Democrat SecTres was a former GS CEO).

    It is also a further Known Fact that all Billionaire Wall Street Fat Cats are Republicans (actually a majority are Dems but that’s not important) so it must have been Republican policies favoring these guys that let them get so out of control.

    Obviously all of the above is nonsense, but the D’s will no doubt throw it against us and I hate to say it but will probably get some traction out of it.

  • Thomasfrank

    In the aftermath of George Bush fiscal conservatives, championing the American Entrepreneurial Spirit, must reassert their best natures and demand that leadership once again take empirical evidence into account when making economic, and foreign policy decisions.

    {The rest redacted – it’s a reprint of this guy’s Talking Points Memo screed, which means that it was Lefty boilerplante at best and uncritically supportive of misogynistic bigots like Andrew Sullivan at worst. – Moe Lane}

    • Oz

      Look, troll, Andrew Sullivan has shown himself to be a complete idiot in the past, anywhere from 2 weeks to 2 years, he’s completely psychotic when it comes to Sarah Palin so none of that flies.

      Secondly, what in the world are you smoking if you think that Obama will be “the candidate they know will reassert their best natures.”

      What does that even mean?

      You mean fiscons should vote for the guy who has asserted that he wants to add a huge chunk of government spending instead of the gadfly whose fought his own party over spending?

      • Moe_Lane

        …if I wanted to read Lefty, well, talking points I’d go to Talking Points Memo and read them there.

        Don’t do that again. And don’t do anything stupid, like argue with me. You’re already on the edge thanks to your linking of bigots like Sullivan.

        Moe Lane

        • Rod_Patrick

          Obama couldn’t even manage his wimpy campaign. Many of us have A STRONG FEAR about Obama’s preparedness to manage the economy. HE COULDN’T EVEN HELP ILLINOIS economic downturn in the last 7 years. You can add the social degradation of Chicago. Never mind Biden. He’s just waste of money for the American people.

          As for Andrew Sullivan, he is under Obama’s tutelage, right? To many of us, Sullivan is just one of those democrat/liberal journalists out there pretending to be unbiased.

          • Jack_Savage

            1) No, I do not agree that the last eight years have been fraught with leadership failures. So therefore, “we all” do not agree. This “everyone agrees that…” tactic is so sophmoric and worn that it is hardly worth a response any more.

            2) American leaders of the 20th century had foresight? You mean like Bill Clinton? Do you think he foresaw the smoking holes in Manhattan, pal? Do you think that having a Republican Congress to administer some fiscal discipline helped during his administration? Do you have the ability to recognize that a war is going on, and that might have something to do with things as they stand?

            3) Let me give you a clue – Obama is worse than more of the same. He is more of the same left wing crap without even a shred of competence or experience. He’ll pee in his pants if a world leader looks at him funny. Having said that, if “best natures” means maliciously smearing Sarah Palin, or walking through a field of flowers singing together while terrorists behead our families, then you may have a point.

            4) “Wall Street Melts”, huh? Do you know this fiscal conservative’s stance on that issue? Life’s a bitch. Make bad decisions, suffer the consequences. Sorry.

            5) Andrew Sullivan? You quote him like he has even a molecule of respect among conservatives any more, and go further to play to your side’s “Best Natures” by offering an idiotic and slanderous quote about Sarah Palin.

            Pathetic.

  • TomOConnor

    That it is much better, from an election point of view, to get this blood-letting out of the way now versus a week before the election.

    I would think this mess will be well on its way to be clearing up prior to Nov.

    On a side note, it is about time that the old adage “Ye reaps what ye sows” finally hit home with The Street.

    • Thomasfrank

      America is one country with many points of view. I openly commented on both a left leaning and right leaning blog.

      You have every right to disagree with me. I respect the opinions of both the fiscal and social conservatives, as I do progressive and advocates for social justice (liberals).

      in this case, at this time, I worry about the Bush administrations penchant for foregoing evidence and the sound economic practices that made this country great. The practices of this administration threatens both the conservative and progress movements. Whether your interests lie on Wall Street or Main Street, the fact is that My Street and Your Street did not do well under Bush and I fear that the continuation of his policies threatens the future strength of our country.

      • We All Suffered Under Bush.

      So lets settle this cultural battle and pledge not to resort to degrading language like “bigot”, but argue the issues and strengthen the American fabric.

      Thank you for hearing out.

      • PaRep

        Meds EVERYDAY !!!

  • Thomasfrank

    America is one country with many points of view. I openly comment on both a left leaning and right leaning blog.

    You have every right to disagree with me. I respect the opinions of both the fiscal and social conservatives, as I do progressive and advocates for social justice (liberals).

    Forgive my transgression of quoting Andrew Sullivan on this site. I reveals my insensitivity.

    But in this case, at this time, I worry about the Bush administrations penchant for foregoing evidence and the sound economic practices that made this country great. The practices of this administration threatens both the conservative and progress movements. Whether your interests lie on Wall Street or Main Street, the fact is that My Street and Your Street are not doing well under Bush and I fear that the continuation of his policies threatens the future strength of our country.

    • We All Suffered Under Bush.

    So lets settle this cultural battle and pledge not to resort to degrading language like “bigot”, but argue the issues and strengthen the American fabric.

    Thank you for hearing me out.

    • bs

      You presume to speak for all of us, do you? Omniscience isn’t your strong suit, bub. My family and I are doing quite well, thank you. But your liberal talking point is noted and riotously laughed at.

      • Moe_Lane

        I’d say that I was sorry that you didn’t, but judging from your choice of colleagues it’d be a bit of a lie on my part.

        I note that you have not indicated that you understand my instructions to you. Rectify that. While you’re at it – tack on a sincere apology for favorably linking to such a notorious bigot as Andrew Sullivan.

        Next post, please.

        • bs

          You are a master. I bow to you.

          • Rod_Patrick

            Top 10 states with poorest economy are managed by Democrats. The reason is obviously the wrong economic policies of their democrat leaders. These democratic states are the ones pulling down the NATIONAL AVERAGES.

            The error in your argument is your lack of appreciation of how the Fed and state governments work.

          • Thomasfrank

            Jack,

            1) If you do not agree that the last eight years have been fraught with leadership failures, your in the minority, and that’s ok, I still want to hear your view point. Please support yourself.

            2) I DO NOT MEAN BILL CLINTON. I mean the leaders who oversaw the greatest industrial expansion in history and the rise of the highest standard of living for the largest population this earth has ever experienced. But unlike you, I do not attribute fiscal discipline to the republicans, I attribute it to the fiscal conservatives, of which we have had too little of lately. And yes, I do recognize that the war has something to do with what we are experiencing in the markets today. Again, I call upon the best nature of fiscal conservatives in both parties.

            3) In this case, at this time, I do believe Obama is the better choice. Whether your from Wall Street, Main Street or my street most of us suffered under the Bush policies. I don’t think we can continue to degrade Americas economic standing in the world.

            4) I agree, “Life’s a bitch. Make bad decisions, suffer the consequences. Sorry.”

            5) I am sorry, I do believe the choice of Sarah Palin as McCain’s running mate ought to call into question his judgement. She clearly does not understand the Bush doctrine. She was for the bridge to nowhere before congress cut it off – and she still spent the money. I can go on with out being slanderous. She is just not what we need right now – A FISCAL CONSERVATIVE.

          • FWGuy

            It will stick because:

            Rebubs are anti-regulation and this a great example of allowing investment banks to make there own rules if there is big profits in it.

            As long as the Real Estate bubble did not burst then there was not going to be a big problem. But allowing mortgage brokers to make Sub-prime and Alt-A loans. Then allowing investment bankers have these loans bought up and packaged into CDOs and SIVs for local and foreign investors as AA-rated debt was a house of cards that had to fall.

            Any attempt to regulate the market is aways opposed by the GOP.

            So now we have to take our medicine and understand and accept the consequences of allowing bad mortgage policy go own for so long in the 2000s.

            Also, remember these failed companies (Bear-Stearns, Country Wide, Lehman Bros, Merrill Lynch etc.) were handing there CEO’s 20-60 million dollar bonuses just last year and even this year.

            As for us little guys, I have seen my net worth drop 30% this year and I am getting nervous.

          • Moe_Lane

            …to the Directors: we collect ‘em.

            Moe Lane

            PS: Notice and remember, folks: these people would rather cut off their arms than admit that there was anything morally wrong about the way that they talk about women. Particularly women that oppose them.

          • CSUFBomb

            What do the top ten cities with the highest poverty rate all have in common?

            1. Detroit, MI hasn’t elected a Republican mayor since 1961;

            2. Buffalo, NY hasn’t elected a Republican since 1954;

            3. Cincinnati, OH … since 1984;

            4. Cleveland, OH … since 1989;

            5. Miami, FL has never had a Republican mayor

            6. St. Louis, MO … since 1949;

            7. El Paso, TX has never had a Republican mayor;

            8. Milwaukee, WI … since 1908;

            9. Philadelphia, PA … since 1952;

            10. Newark, NJ … since 1907.

          • simpson316

            that Detroit beat St. Louis in.

          • Neil_Stevens

            Failure isn’t illegal.

          • Jack_Savage

            I realize that I may be talking to a ghost, but speaking for me, my immediate and extended family, and every single one of my clients and business associates, we are all doing better than we were four years ago. ALL OF US.

            And as far as I go, I do NOT respect the opinions of liberals because they haven’t been right about one single, solitary thing since I have been alive.

  • Swamp_Yankee

    This issue is too complex for the average voter. Republicans cannot afford to get play policy wonks. Sarah is pitch perfect for the climate right now. Follow her lead:

    • TomOConnor

      Her lines are getting old, at least they are to me.

      She needs to sit down with the speechwriters and find some new barbs at Obama

      • Achance

        that one time and maybe a soundbite here and there on the news. It’s only wonks and junkies like us who are hearing that same stump speech over and over. But you’re right, she’s begun to grate on me a little with the same lines. Then again, Fox News is on over my shoulder most of the day.

        • PaRep

          & Rick Davis know a little more than you

          • aaronbg

            …wrt the sub prime loans you fail to mention that most of the lenders were forced to make loans to people who should not have been receiving those loans. This from my understanding had to deal with regulations in place wrt “Redlining”. So with that in mind how is more regulation going to solve this financial credit crisis. Should we at this point add regulations saying who can and cannot be afforded credit?

            I know you are an Obama guy and all that but really regulations for the sake of regulating is idiotic.

          • Vegas_Rick

            Since most of us have lead a pretty productive life these past eight years, you’ll have to give us a starting point.

            We’re not familiar with your suffering. So, tell us and let the conservatives put an end to your suffering. :)

          • Moe_Lane

            The first is I’m glad to be in X, home of the Y. Big crowd pleaser, but don’t get the details wrong!

            The second is the And why we’re the best people to handle [What's Important Today]. There half to be topical, and half because politicians don’t want to say the same blessed thing everyday, either.

            The third is, Hello, my name is…. I’m going to guess that this is what you two were reacting to. As Achance noted, it’s pretty much necessary at this stage, and the campaign will vary the text on that more or less when the crowds start indicating that they want to start hearing variants. Until then, the idea is transmit information (including emotional information), not keep us unbored. :)

  • txchick57

    Sickening thought if you’re a Lehman banker and the implosion wasn’t bad enough.

    www.creditslips.org

    and Greenspan’s Black Swan

    http://www.itulip.com/forums/showthread.php?p=47721#post47721

  • Steven_Willis

    This is good.

    No real value will be lost today – except from panic. If the government stays out, that will return soon enough.

    The value lost by Lehman and Merrill Lynch evaporated months ago, if not years. Ditto with Freddie and Fannie. Capitalism cannot work without risk.

    To be trite, actions have consequences. We must let that sink in – and undoubtedly, this will happen again and again in our future as we re-learn history.

    I am a bit concerned about political statements regarding “reform” on Wall Street. I hope that means a lower chance of government bailouts and more market based accountability.

    I see two main problems in the past 15 to 20 years (Ok, number two goes back farther):

    1. Too easy money from the Fed, resulting in housing and market speculation. This may be fun on the way up, but bursting bubbles are not fun (except to watch from a distance). Despite my historic fondness for Alan Greenspan, his recent comments are disturbing – this is largely on his plate, so his comments are not helpful.

    2. Accounting firms lack of accountability because of conflicts of interest. CPAs need to audit and to stay out of the tax and management consulting businesses. If they want to be tax lawyers, they should go to law school and then tax school. If they want to be consultants, get an MBA – or at least another job. Then those that are CPAs should only be CPAs. We’ve moved in this direction, but I think not enough. This is for the accounting profession to regulate – not the government.

  • dt

    In your view, has Citigroup done enough to right its ship or could it be next in light of recent events?

  • txchick57

    I’d love to see him have to sit down right now and explain his understanding of all this and proposed solutions to the press. It would be embarrassing.

    The SKF is trading about 80-85 points lower than it was the last time the S&P was at this level in July. I don’t see it going up 80 points today unless there is complete market crash which of course there probably won’t be. Is the market saying something there?

  • Steven_Willis

    I notice an article in the economist this morning, which adds to the possible panic.

    http://www.economist.com/finance/displayStory.cfm?storyid=12231236&source=featuresbox_main

    The author states:

    “If Lehman’s assets are dumped in a liquidation, prices of like assets on other firms’ books will also have to be marked down, eroding their capital bases.”

    In my opinion (as a CPA), that is incorrect. Fire sale prices for assets do not automatically reflect value – except for those items in those circumstances. One of the main assumptions of accounting is the Going Concern Assumption. Applying this to other corporations, their asset values must reflect the lower of historic cost or fair market value (with FMV disclosed in any event, if only in a footnote). Lehman and ML values do not necessarily reflect FMV for a going concern.

    Nevertheless, reporting such as appears in the Economist and elsewhere will cause panic for awhile.

    We’ll live through it and it will be for the best.

  • Jack_Savage

    Who goes to jail?

  • Steven_Willis

    If Reuter’s reporting is accurate, Fuld was over confident and stupid. He bet his company and lost big.

    “This time, though, he was no match for the implosion of the mortgage boom on which he had staked the firm’s fortunes.

    Lehman, until recently Wall Street’s fourth-largest investment bank, for years did a big business in originating mortgages, re-packaging them and selling them onto other investors.

    Lehman was the top U.S. underwriter of mortgage bonds in 2007 and 2006, grabbing about 10 percent of the market.”

    http://www.reuters.com/article/reutersEdge/idUSN1341059120080914?pageNumber=2&virtualBrandChannel=10003

    “Lehman’s board, which includes retired CEOs like Vodafone’s Christopher Gent and IBM’s John Akers, may have been too slow to challenge Fuld — a former competitive squash player — as its share price spiraled lower.”

    I.e., they were sloppy and incompetent. They should suffer. Shareholders believed in them, so they should suffer, too. I certainly do not want to bail them out.

    I seriously doubt prosecutions would help anything – fear of prosecution for complicated crimes can often distort the markets, as much as it can help (in my opinion). Quick, huge, and deserved losses will do more. Let those who play craps lose when they lose. It may be painful, but it beats the alternative.