SPENGLER
Lehman and the end of the era of leverage

The failure of Lehman Brothers and Bear Stearns does not reflect the breakdown of a particular kind of corporate culture. What took both firms down, rather, is a sudden break in the chain of expectations between the present and the future. Today's savers no longer have any confidence that they will earn enough to fund their retirements by putting money at risk. And so the Great Crash of 2008 enters a new phase. (Sep 15, '08)

Silences say it all
Lehman Brothers' death throes demonstrated that here, at last, was one US financial institution that, though big, was not "too big to fail", one that at last would pay for its promiscuous and profligate ways. If we should say nothing but good of the dead, then there's nothing else to say. Next up for the measuring tape is Bank of America/Merrill. - Julian Delasantellis (Sep

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CREDIT BUBBLE BULLETIN
Too big to suffer a loss
Commentary and weekly watch by Doug Noland

It is my sense that the financial maelstrom has now reached a new erratic and highly uncertain stage.

That the Fed would respond to the collapsing US credit bubble with a string of rapid rate cuts was no surprise.

That the Fed would step up and bail out Bear Stearns, while at the same time providing liquidity facilities to the Wall Street firms, was similarly predictable. It was like clockwork when the GSEs responded to market tumult and the mortgage collapse by heedlessly expanding their obligations. And while I was surprised that the likes of James Lockhart, director of the Office of Federal

Washington has certainly brought out the big guns - resorting to them so early in the crisis but to alarmingly limited avail. Negative real interest rates and even unprecedented bailouts do little to address the deep structural deficiencies that have developed over many years. Sustaining inflated US asset markets requires massive ongoing growth in credit and speculative trading.

The deeply maladjusted US "services" bubble economy is sustained only through ongoing credit excess. To be sure, the heart of today's predicament lies in the reality that a heavily impaired US financial sector is simply incapable of partaking in the degree of credit excess required to sustain inflated assets prices, incomes, corporate profits, government receipts and much needed (restructuring-related) investment spending. The problem is systemic. bailouts and other government measures have minimal impact because they are not inciting heightened credit expansion.

And while the media directed its attention to Lehman, the pricing of AIG Credit Default Swaps (CDSs) exploded this week. This is a company with a trillion dollar balance sheet and enormous exposure to the CDS market and other derivatives. And although its balance sheet is only about a third the size of AIG's, Washington Mutual also saw its CDS blow out. And while most holders of Fannie and Freddie obligations have come out of the GSE fiasco unscathed (or better), one can see how this crisis going forward will see more pain meted out to the corporate bondholder - not just the poor lowly equity owner. Perhaps the prospect of Lehman debt holders suffering losses has pushed the acutely vulnerable CDS market to the edge.

The last thing the crippled leveraged speculating community needs right now is dislocation in the CDS marketplace. Again, the attention this week was on Lehman, while I believe a much more unwieldy facet of today's crisis mounts with the bursting of the historic hedge fund Bubble. Perhaps Sunday we'll read news of BofA acquiring Lehman – and perhaps the markets will rally big on such news. But such a transaction would have little if any impact on crisis dynamics that have engulfed the leveraged speculating community. The various markets – global equities, real estate, mortgages, energy and commodities, currencies, CDS and risk assets generally - have all become an absolute and unmitigated mess. Money is being lost in waves; scores of favorite trades are being unwound; redemptions are gathering pace; and the ugly side of Ponzi Finance Dynamics has taken firm control.

Importantly, there is today no magical cure - no government bailout - that is going to rejuvenate robust speculator returns. The credit bubble burst, and now the speculator bubble is bursting. As we have been witnessing of late, stock market rallies tend to show their greatest force in the sectors where the speculators are short.

Meanwhile, stock market declines tend to see the favored sectors lead on the downside. Worse yet, astonishing volatility throughout the markets has created a backdrop where it has become too easy to "get your face ripped off". Repeated government interventions have only exacerbated market instability and vulnerability. much more

The more of the malignancies that can be, excised the better.

GOPers suffer from CHIDS (Chronic Humor and Irony Deficit Syndrome), prounced 'kids' with that parental sigh

Stock markets in Japan, South Korea, Hong Kong and China were closed for holidays, although other markets slid. The benchmark Taiwan index shed 4.1 percent and the BSE lost 3.6 percent in Mumbai. The FSA in Japan is reviewing Japanese exposure to Lehman.

European indexes are down 3.5-4.1%, and the European Central Bank said in a statement Monday that it was “ready to contribute to orderly conditions in the euro money market.” The European subsidiary of Lehman has been labelled a defaulter.

The Bank of England is providing US$9 billion in loans to mature on Thursday to maintain market stability in the short term money market.

In Australia the Macqaurie Group slumped over 10%.

Interesting times....

Bloomberg, By Adria Cimino and Lynn Thomasson, September 15

U.S. stock-index futures tumbled, pointing to the steepest retreat by the Standard & Poor's 500 Index since September 2002, as the bankruptcy of Lehman Brothers Holdings Inc. fueled speculation that turmoil in the credit markets will deepen.

Lehman, once the fourth-largest U.S. investment bank, plunged 90 percent after the 158-year-old firm's subprime mortgage losses pushed it into the biggest bankruptcy filing in history. American International Group Inc. retreated 47 percent and was poised to erase 47 points from the Dow Jones Industrial Average as the biggest U.S. insurer sought capital, while Bank of America Corp. slumped 14 percent after agreeing to buy Merrill Lynch & Co. for $50 billion. Stocks fell across Europe and Asia, while U.S. Treasuries surged.

``It's all basically going down the drain,'' said Franz Wenzel, who helps oversee about $830 billion as deputy director for investment strategy at Axa Investment Managers in Paris. ``The rhythm of the shoes that drop has accelerated. That's what we follow with caution.''

Bloomberg's summary page. Bovespa futures down around 6% at the moment.

A little Monday morning black humor.

This gem from Yahoo Finance -

Lehman Brothers Holdings, Inc. (symbol LEH)
ANALYST RECOMMENDATIONS
=====================
11-Sep-08 Citigroup: Hold
10-Sep-08 Argus: Hold
10-Jun-08 Wachovia: Mkt Perform
10-Jun-08 Credit Suisse: Neutral
24-Mar-08 Oppenheimer: Perform

This Marketwatch commentary(1) is a good, if indirect, counterweight to the outrageous New York Sun(Murdochj editorial(2). Marketwatch, however, doesn't take the "where did it go wrong?" back to Glass-Steagall and doesn't mention the Wall Street firms (like Goldman) that refused to take on more risk to keep Lehman alive. or the remarks by Sen. Charles Schumer that may have made Indymac's failure inevitable.
.
1. Lehman crumbles and Wall Street turns its back (original title).

Where did it all go wrong?

Was it almost 10 years ago when after the bailout of Long-Term Capital Management Federal Reserve Chairman Alan Greenspan waved off lawmakers trying to rein in hedge funds?

Was it during the past five years when the rampant practice of securitizing mortgages took responsibility out of the loan-making game?

Was it the expiration of the uptick rule that allowed short sellers to drop rumors like matches on the gasoline of market panic?

Wall Street was supposed to be a place where everything had its price and where glory was for risk-takers. Now, four firms have been allowed to collapse and the only buyer, JPMorgan Chase, agreed to a deal only when the government guaranteed chief executive Jamie Dimon that his bank would have almost no exposure to risky assets. more .

The (in my opinion,rancid) New York Sun editorial, that pretends company CEO's only own shares in their own companies....

2. A Lehman Lesson -...This is a lesson to remember the next time the left denounces the gap between rich and poor in America, or between the merely rich and the so-called mega-rich. Many of the super-rich get that way by taking on risks that others shy away from. And the mega-rich don't always stay that way. The dynamism of a capitalist system that creates great fortunes can also destroy them. To put it another way, it doesn't always require the imposition of a death tax to prevent a billion-dollar fortune from being passed along to the next generation. more

_{"The mythical John McCain is an affable, straight-talking, moderately conservative war hero who is an expert on foreign policy" - Bob Herbert}

September 16, 2008
As Economy Slows, China Eases Monetary Policy
By KEITH BRADSHER

HONG KONG — After five years of tightening monetary policy to fight inflation, China abruptly reversed course on Monday, cutting interest rates and easing bank lending restrictions in response to signs that growth in the Chinese economy was slowing.

China’s restrictions on large movements of money in and out of the country and its immense reserves of foreign currency have insulated its financial markets from the troubles shaking Wall Street. But this has not been enough to protect China from a global economic downturn.

China’s exports have slowed sharply, particularly when adjusted for inflation and expressed in China’s currency. Real estate prices are weakening, particularly in coastal cities that depend on exports, and China’s stock market has lost three-fifths of its value since October.

Since 2003, China’s top economic priority has been to control inflation. But China’s Politburo, the country’s highest decision-making body, decided at a meeting on July 25 that the top economic goals should shift to sustaining economic development and limiting inflation, in that order.

The People’s Bank of China, the country’s central bank, echoed the Politburo on Monday in announcing the new direction of monetary policy.

The central bank said in a statement that the goal of the policy shift was to “solve prominent problems in the current economic operation, implement the principle of giving different policies for different needs and optimizing the economic structure, and ensure a steady, rapid and sustained development.”

Stock exchanges here were closed Monday for a holiday. The central bank has a history of announcing important monetary policy shifts over weekends or public holidays, often giving advance warning so banks have more time to prepare.

Western economists welcomed Monday’s moves toward lower interest rates and less stringent limits on lending.

“We see these adjustments as a positive step given the unprecedented uncertainties in the international financial markets and rising downside risks in the domestic economy, in particular the real estate sector,” Goldman Sachs said in a research note.

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This blog will be updated during the day, with the newest items at the top to enable returning viewers to see what is new. It can be best read from the bottom.

1 p.m.
Share prices are broadly stable again, with the Dow down less than 300 points.

One good thing about the financial crisis is that it overshadows other things. The industrial production report this morning seems to have been almost ignored. But the most interesting part to me is that production of consumer goods in August was down 3 percent from a year earlier. The last time such production fell that much was in 1980.

To be sure, that is due largely to a slump in auto production, but even production of nondurable consumer goods is down.

Could it be that consumers really are pulling back?

12:15 p.m.
Vikas Bajaj reports:
The spread between 3 month Libor and 3-month T-bills blew out to 200 basis points from 134 on Friday and 111 last Monday. We are now widest since March when we hit 203.

To translate from the finance, this indicates continued worry about bank credit. It is not a good sign, but given the fact that we’ve learned some big banks are not too big to fail, it is not a big surprise.

11:55 a.m.
What does a central banker do when everything goes wrong?

Joachim Fels, a Morgan Stanley economist, answers that question today:

MORE

come in, then it will get amusing.

Next year, when the credit system is cross wired like a Christmas tree and the bill for the bail out comes due... we could see a climax to this bear market.

WaMu shares hit hard
Is There Anyone Left To Help WaMu?

Already battered, Washington Mutual shares fall as potential capital sources' attention is diverted.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 15, 2008: 1:10 PM EDT

NEW YORK (CNNMoney.com) -- Don't forget about Washington Mutual.

more

Postcards
From the pinnacles of power by Fortune editor at large Patricia Sellers

September 15, 2008, 1:07 pm
A top Lehman exec’s lament

“It didn’t have to go this way,” a devastated Barbara Byrne, a vice chairman at Lehman Brothers (LEH), told me this morning. Like a lot of senior folks at the now-bankrupt firm, she spent most of the weekend at the office, hoping, praying, and consoling the rank and file. “Talking to a single mother of two, a secretary, in tears is the hardest thing,” she said.

She’s right that the fall of the house of Lehman didn’t have to happen this way. Until 2 p.m. Sunday, there was a deal on the table for Barclays, the British bank, to buy Wall Street’s fourth-largest firm. But authorities in London reportedly balked at the terms, and the deal collapsed. Meanwhile, another potential acquirer, Bank of America (BAC) backed out over the weekend and decided to buy Merrill Lynch (ML) instead.

If he’d been able to hang on this week, Lehman CEO Dick Fuld would have announced progress on a survival plan he unveiled last week: He was going to announce the sale of 55% of asset manager Neuberger Berman to either Bain or Hellman & Friedman on Thursday, during Lehman’s third-quarter earnings call. He also planned to provide details on a spin-off of Lehman’s commercial real-estate assets — the toxic center of its troubles.

But Fuld ran out of time, and Treasury Secretary Hank Paulson, who was under intense pressure to bail out Lehman, decided against it. Lehman’s bankruptcy leaves 28,000 employees with an uncertain future at best. Many had their savings tied up in Lehman’s now all but worthless stock. And as of this morning, no one had heard from Fuld — no email, no nothing.

“Where is the apology? I’m mad. I’m furious,” says one ex-Lehman executive whose children’s education fund, still in Lehman stock, is wiped out. Many of the senior execs — a ton of talent there — will move in teams to the Wall Street survivors, Morgan Stanley (MS) and Goldman Sachs (GS), or to hedge funds or, as Byrne says, “to Montana to escape it all.”

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spending tens of millions in lobbying dollars to lessen any form of meaningful regulation of the enormous and global Ponzi scheme that these guys created, and now they go to the wall, whining for more bailout money...feh, a pox on all of them.

Wall Street suffered its heaviest losses in almost three years yesterday, as lacklustre earnings from some of America's biggest companies rattled investors and oil prices headed back up toward $70 a barrel.

The Dow Jones Industrial Average, the index of blue chip shares, plunged 213.32 points to 10,667.39 - the worst one-day point drop since March 2003. The Nasdaq technology index suffered its worst one-day points loss since September 2003, shedding 54.11 points to close at 2,247.70

Adding to the gloom, details began to emerge of Ford's plan to cut 25,000 jobs and close up to 10 plants. The plan, due to be announced on Monday, will deliver another heavy blow to America's fast disappearing manufacturing industry.

The declines were a sharp reversal for Wall Street. The Dow had rallied past the 11,000-point mark earlier this month for the first time since 2001, on the expectation interest rate rises were coming to an end. The Dow has now erased all of its gains in the first few weeks of 2006. In percentage terms, yesterday was the Dow's worst performance for nine months.

That story is from 2006... two and one half years ago.

What was the DJI when Bush took office?

10,587.60.

Adjusted for the GDP deflator, that is

12719.24

or in Euros that month:

12140

presently the Dow in Euros is:

7763

Or

63% of it's value in GDP weighted Euros.

In a time of high inflation and deflation, merely treading water, is an erosion of value.

1. If you haven't seen it,The NYT Dealbook blog entry of that name is worth reading, even if by the end it gets cloudy and mushy on its "Lessons" with the religious belief that "the economy is healthy"

There will be Blood

Lesson 1: Perception Is Everything

In financial crises, your actual capital adequacy and liquidity does not matter. Both Lehman Brothers and Bear Stearns — and Lehman particularly — were felt to be adequately capitalized only days before their fall. But once people thought that the end was near, the trading stopped, liquidity dried up, and the capital fled.

Lesson 2: Uncertainty Is Death

Lehman’s unfortunate problem was that we have already gone through one round of capital market infusions. The infusions have left the investors, mostly sovereign wealth funds, deep under water. Now, with continuing uncertainty over the price of Lehman’s assets, no one wanted to get hit again and potentially be forced to invest even more months from now — or worse yet, lose more money. Had Lehman faced this problem earlier or later in the cycle, it might have avoided bankruptcy (though probably still lost its independence).

It is the old adage all over again: If you can’t price assets, you can’t buy them.

Lesson 3: Know When to Fold ‘Em

John Thain, the chief executive of Merrill Lynch, made the right move in selling his firm to Bank of America. He took a deal when it was on the table. A month from now, it might have been better, but the whispers were that Merrill would be next. And in a down market, whispers can kill. more

2. Some of the commentary after the thread is better than the main post (and some is garbage) My favorite, posted by "a.k.a."

_{It’s not about the mortgage crisis, Professor Davidoff. If it were about mortgages, this crisis would not have gone further than Countrywide and Fannie and Freddie. It’s instead sent shockwaves from the housing lenders to Bear, to Lehman, Merrill, AIG and Japan’s Azoza and Mizuho banks … thus far.}

_{This is a regulatory problem beyond stock panics. It’s about ponzi schemes based around “securitization” and “risk management.” I am a bank, and I sell an “asset-backed” security to another “financial institution.” That firm pools the “risk” and makes up its own value for what it’s worth, then sells it to a third firm. And so on.}

_{The regulatory problem that has to be solved isn’t “can we put a temporary time out on short selling” — it’s: Get the lobbyists off the Hill so that sane people can create an independent regulator with authority to do two things: 1) rule in advance on ANY new innovation in what constitutes an “asset,” as well as what real value must be collateralized when selling intangible, “risk-based” derivatives. 2) Tell the taxpayer what private funds that now fly under the radar are doing.}

_{"The mythical John McCain is an affable, straight-talking, moderately conservative war hero who is an expert on foreign policy" - Bob Herbert}