The financial crisis that hit Wall Street’s most powerful, has us common folk asking what does it mean to us? I mean besides getting stuck with the bail-out bill that is. To recap this string of events we have; Lehman Brothers filing for bankruptcy (after it couldn’t find a buyer); Merrill Lynch was forced to sell itself to Bank of America, (cheap, real cheap) and AIG announced a major restructuring. Mainstream Media didn’t pick-up the AIG story but it is being reported that AIG sought a “$40 billion dollar lifeline from the FED” with no luck. All of this on a Monday, a very Black Monday, one I am sure will go down in financial history as the mother of all Maalox moments for the financial sectors.
The biggest worry is the effect on derivatives markets, particularly the giant one for credit-default swaps. Lehman is a top-ten counterparty in CDSs, holding contracts with a notional value of almost $800 billion. On Sunday, banks called in their derivatives traders to assess their exposures to Lehman and work on mitigating risks. The Securities and Exchange Commission, Lehman’s main regulator, said it is working with the bank to protect clients and trading partners and to “maintain orderly markets”.
Government officials believed they had persuaded a consortium of Wall Street firms to back a new vehicle that would take $40 billion-70 billion of dodgy assets off Lehman’s books, thereby facilitating a takeover of the remainder. But the deal died when the main suitors, BofA and Barclays, a British bank, walked away on Sunday afternoon. Both were unwilling to buy the firm, even shorn of the worst bits, without some sort of government backstop.
But Hank Paulson, the treasury secretary, decided to draw a line and refuse such help. After the Fed had bailed out Bear Stearns in March and the Treasury had taken over Fannie Mae and Freddie Mac last weekend, expectations were high that they would do the same for Lehman. And that was precisely the problem: it would have confirmed that the federal government stood behind all risk-taking in the financial system, creating moral hazard that would take years to undo and expanding taxpayers’ liability almost without limit. Conceivably, Congress could have denied Mr Paulson the money he needed even if he had been inclined to bail Lehman out.
Thanks goodness Paulson recognized continued bail-outs as a “moral hazard” or should I say the picking of America’s pockets. Do you believe taxpayers should pay to bailout businesses? I believe bailouts create and encourage more stupid risk. There is talk now that the big 3 automakers are wantng the FED to come to their rescue. I can think of a hundred reasons that shouldn’t happen.
In retrospect, I think the Bush Administration, through the eyes of Greenspan, Paulson and their cronies were clueless as to how extensive and far reaching the financial cookie would crumble. While they were asleep at the mortgage wheel, the lobbyist and power brokers on Capital Hill were having a de-regulated free for all and people were getting rich, filthy rich but only on paper.
Even Alan Greenspan, who is partly to blame for this mess. Mr ‘pot calling the kettle black’ himself said that the economic crisis “we are in is a once in a half century, or once in a century event”. “It out-strips anything he has seen in his career”. Duh, You think?
Here is Greenspan’s take on our economy
[Paulson] says this;
I realize that intrinsically, we all pay the cost of a company like Lehman failing, but I don’t see how compounding that loss makes any sense. For now that Maalox stock is looking pretty darn safe and that’s good because I think we have a long way to go which means if you own stock, more customers.