Monday, September 15, 2008

What Happens Next?

That's the question I am asking myself today. The Fed is taking unprecedented actions today in order to keep the market working. Lehman officially went Bankrupt this morning:

"Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990."

Quick Take:

The fall out of the Lehman bankruptcy poses a huge risk to the derivatives default swap market. Bloomberg reported on this today:

"Sept. 15 (Bloomberg) -- Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern than the $62 trillion credit-derivatives market will unravel.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded near an all-time high in North America, driven by a rise in Goldman Sachs Group Inc., Morgan Stanley and American International Group. U.S. two-year Treasuries climbed, pushing yields below 2 percent for the first time since April, as investors sought the relative safety of government debt.

``The immediate problem is the derivative default swaps market, in which a plethora of institutional accounts and dealer accounts are at risk,'' Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in an interview with Bloomberg Radio yesterday. ``It induces a tremendous amount of volatility and uncertainty.''

My take:

We will just have to wait and see how this all plays out. The market is holding steady after dropping 300 points. The uncertainty and fallout however has only just begun. It appears that saving Merrill has saved the financial system at least for now.

I just watched the Merrill/BofA love fest news conference on CNBC. What a charade that was. When asked if the Fed pressured BofA to do the deal, BofA's CEO replied by saying no and blabbered on about how much strategic sense it made to acquire Merrill.

In almost the next sentence, BAC's CEO admitted that discussions to acquire Merrill started only two days ago on Saturday. Yeah OK Mr. Lewis, I am sure there was no pressure by the Fed for you to spend $50 billion to acquire Merrill after only having only 2 days to look at their books.

There is no doubt in my mind that this deal was shoved down their throat. Remember, if Merrill went down today, all of the pigmen would have been in deep trouble.

Bottom Line:

I see nothing but a big love fest on CNBC and the other financial media markets today. Everyone is holding hands and pretending everything is just fine. Don't be fooled by this charade.

The Fed is pulling out all the stops from a liquidity standpoint in order to make this huge transition in our banking system a smooth one. Unfortunately, this means more manipulation in the markets which creates more uncertianty. I also understand why this had to be done.

I am proud that the Fed did not go into bailout mode this weekend. Kudos to Paulson for finally closing up his pocketbook. Lets hope this is a trend that continues. Its the only way Wall St. will learn a lesson.

The ramifications of what happened today will take weeks to play out. Hold onto your seats because its going to be a bumpy ride.

Things to look for:

Watch the credit agencies on AIG today. They are threatening to downgrade them if they don't find a huge infusion of capital. If they get downgraded, it will trigger another wave of massive writedowns. Also keep an eye on the CDS fallout. Lehman's balance sheet was around $600 billion.

It will take time to figure out who is most exposed to Lehman, and what the ramifications are of having one of the largest investment banks go BK.

The way I see it, this whole debt bubble is unraveling and it cannot be stopped at this point. Dive into some treasuries for awhile and hangout. This is no time to be bottom feeding.


ART said...

Paulson doesn't need to bail anyone lease out, he got what he wanted last week, the "big fish". Lehman has under 1 trillion of debt, it's nothing compare to Fannie and Freddie.

Minton Mckarkquey said...

Well, Mr Jeff, it's hard to know where to start, isn't it?

I'm glad that Lehman finally went belly up, not just because they contributed to the massive fraud that culminated in the "once in a century" economic crisis that Greenspan described. Fuld is an idiot who thought he could save part of his $500mm of stock, at the expense of shareholders. Now he's lost it all. He'll go down as one of the worst CEOs in history. GE will probably want him next.

As for the Fed, I think Bernanke would have been writing checks again if it weren't for the "open-ended risk" on Lehman's book that Barclay's described.

But I think we've barely even begun on the fallout here. Lehman had trillions of dollars of debt, and it makes me wonder where the dominoes fall next (Citigroup had a crapload of their debt).

I don't know about you, but my nerves are getting strained!!

Avl Guy said...

When Karma met Bill Gross: stay tuned.

Jeff said...


Mine nerves are too. Today was an unbelievable day. The strong sell off in the last hour could be a signal of a huge dump tomorrow.

I have a headache from researching all of this!


Yeah Lehman was smaller but the liquidation of them is killing the banks assets.

I will get into it tonight on a post I am working on. There are so many things that are so intertwined.