Well, most of the underlying issues with these failures have been due to their exposure to the debt markets (I.e., mortgages), and not the equity markets (which include stocks and other securities).
Sure, the stock market will be rattled tomorrow, especially the financial sector. And there’s no guarantee that these failures won’t have a larger carryover effect on the rest of the economy, sending us into a deep recession that we won’t recover from until there are mysterious phrases in Mandarin on all of our currency.
But the underlying causes of this meltdown will have little direct effect on the stock market.
IANAEconomist, but you missed a bit out there. A liquidator will probably try and sell the good assets for as much money as possible. Unfortunately, dumping several tens of billions of dollars of real estate on to an already weak market will invariably depress prices. That in turn, depresses the value of everyone’s real estate assets. Someone is going to have pull a rabbit out of a hat to avoid upsetting the whole tower of cards.
I don’t think the ‘Wall Street could help, but they don’t care about us!’ implication is necessarily accurate or fair. Wall Street ‘putting up the money’ doesn’t mean the executives of the firms opening up their private check books, it means putting the firm’s money at stake. If you were a shareholder, would you want them buying Lehman Brother’s bad assets?
Wall Street’s greed and sense of complacency is what got them into this mess, and LB was no exception. Unlike Merrill Lynch and other companies that were faster at taking action, LB did little the past year to shore itself up, despite rumors as far back as February that the firm was in trouble. Unlike Bear Stearns, LB doesn’t have enough lucrative businesses offsetting the unsellable assets.
I’ve had a running bet for a number of years that ML would be acquired at some point (I thought HSBC was the more likely buyer - ML would be a great fit, and it’s small enough that it could be assimilated fairly quickly, would substantially boost their US presence, and HSBC is big enough to pay in cash and not blink). So the ML move in and of itself doesn’t surprise me in the least.
But the implications of the ML sale are far, far bigger than the Lehman’s bankruptcy. Everyone saw the Lehman train wreck coming for months; firms have had ample opportunity to reduce exposure. ML, on the other hand, is known for its extremely proud - bordering on arrogant - corporate culture. ML bankers are usually very good, but cut-throat - that the company offered itself up for sale (albeit at a hefty 70% premium over its Friday share price close - you think BOA shareholders might have something to say about that?) is stark evidence that things may be far, far worse than anyone thought.
LB’s failure will have some impact on the the underlying debt and credit markets, but the impact will be mostly psychological more than anything. I expect a couple of days of wild swings in the Dow, then things will settle down - the Fed will make it clear that they will continue to act as a lender of last resort for firms too big too fail (Lehman Brothers, of course, is too small to save), and the fact that the LB issue is now has a known outcome will work in the stock market’s favor - investors prefer any known negative to the unknown.
mark to market means valuing your assets what what they are trading for in the market. eg, a stock is only worth what you can sell it for (not what you paid for it). the issue with sub prime is
there is no liquid market
the rating agencies and everyone else have no clear idea of the risk
the street essentially made up what the mark to market value of sub prime is worth with no risk control, thus creating this mess.
Note: it was painfully obvious months early that banks didn’t have a subprime problem because they were using the purchase price as the mark to market value. internal risk management and regulators are fully responsible for this fuckup.
Lehmans has a 10+ year history of being on the edge of bust. i worked in lehman’s hong kong fixed income. lehman’s risk control was a joke. they and many others pured gas on the asian crisis.
what is astonishing too me is that Lehmans had billions of sub prime on the own books. the cardinal rule of post Amex Lehmans was to fuck your clients. seriously, take all sorts of stupid risk and trades as long as you stuff it into the client base. that’s what they did in 1997. eck, that’s what they did to the florida state school district in july 2007 after the subprime started to blow.
I’m amazed Dick Fuld allowed such a big proprietary bet and even more surprised it took this many years to die.
above poster is correct - banks did the math and will lose less money know with lehman’s dying than if they try keep those losers afloat.
Asian markets were largely closed on monday. tuesday Asia will mirror whatever happened on monday in europe and the US.
Can someone pause and explain to me why its a bad thing that Fannie Mae and Freddie Mac have been taken over? It seems logical to me that if the private sector cannot handle the burden of doling out mortgages, let the federal government do it. I know the mantra “The government is inefficient” rings true for some people but, really, is the U.S Postal Service - which is run by the government - a failure by any standard?
So - is it dumb for me to start getting scared now? Because, truth be told, I’m getting scared. I have relatives who lived through the Depression - I chatted with them at a family get-together last summer. They tried to tell me how bad things can get when the economy truly derails, and I more or less dismissed it - “Yah, Aunt Pearl, but things aren’t going to get that bad. The economy is fundamentally sounds.”
Damn. I really, really don’t want to see a Great Depression for my own generation. Will I?
Other developed nations manage to have fully private mortgage lending markets without entities like the GSEs. The argument, I believe, is that GSEs were distorting the market by having unfair advantage via guaranteed debt & bad risk controls, enabled by the Government as quasi state entities. The argument goes, “Worst of Both Worlds.”
Gah, typo in previous post ‘it was painfully obvious that the banks DID have a mark to market problem and were badly exposed to the sub prime.’ banks were able to make regulatory reports saying no worties because the mark to market was essentially the same price they bought these assets at. reality that these assets were worth cents onthe dollare as the hundred billion and rising write offs.
US taxpayers are going to foot the bill. US Fed is keeping rates low so banks can make big margins on lending, inflation will take off, US treasury has taken tens of billions in sub prime debt and noe equities as collateral, interest rates will eventually rise to combat inflation, dollar will stay weak or go weaker/petroleum prices will rise, etc.
it ain’t pretty but the bottom line is US taxpayers will pay for mess.
Mr. Excellent - so far, my buddies that work in the markets rate this as not as big as the savings and loan crisis. That said, stock prices could drop 50% from here. Stock markets are going to suck for at least 2 more years with Asia recovering first.
Well - I would first point out that we have yet to see even one quarter of negative GDP growth. We came close in 4Q 2007 - growth was only up 0.6%. But second-quarter 2008 GDP growth was revised up, from the preliminary 1.9% figure to 3.3%. Unemployment is up, true - but at 6% it’s hardly on par with the Great Depression, when unemployment was over 25%.
We are in a credit crunch. This is a housing market slump, not a massive economy-wide recession. Yes, it will mean slower growth - companies around the world are affected by the credit crunch, which means they are going to invest less in production. Companies scale back on inventories when they are uncertain if they will be able to sell them. Lower inventories means less production of machinery, components, and parts. The result is a nasty cycle of production cutbacks, lower sales, higher unemployment, declining wages, and the cycle starts over again.
But the underlying fundamentals of the economy are fine. There has been no damage to underlying productivity - in fact, the US is still far more efficient in terms of output per worker than, say, Europe or Japan. It’s one reason why the US economy is actually doing better than both of those two regions, even though the subprime problem itself started in the US.
Is the worst over? Probably not. Will the economy recovery right away? No. But neither am I prepared to think that we’re facing another ‘Great Depression’. I think the US will see a year or so of relatively slow growth, but I would be surprised if we have more than one or two quarters of actual negative GDP growth overall.
If you’re a 20-something couple just getting married, save up for a year or two, and be ready to plunk money down on a house in late 2009/early 2010 or so. Not only will you get a great deal, you’ll be able to lock in at very low rates.
My dad and I both have money with Merrill Lynch. I put a call into him today and I’m inviting my dad to a conf call since we both have the same guy. I actually like our dude and I want to get some straight talk from him (is it feasible to even expect that under the circumstances?). My investment is paltry compared to my dad’s. I’m very concerned, but something tells me they did the right thing…for now.
Anybody know how much LB stock the senior VPs dumped last week? Seems like the management always manages to take care of itself first!
The taxpayers be damned!
The execs loot and run. They give themselves huge leaving bonuses and retirements. Even Fannie and Freddie execs expect to get about 30 mill for leaving. They are immune from the damages they cause. It is not an incentive to do the right thing.
Canada has the Canada Mortgage & Housing Corp, a federal Crown corporation. The CMHC only provides mortgage loan insurance, for mortgages where the buyers pay less than 20% of the purchase price. Those insurance premiums are built into the mortgage cost so are ultimately paid by the purchasers, and the insurance is based on general insurance policies, so the government isn’t at risk of stepping in.
I don’t think that’s comparable to Fannie Mae & Freddie Mac. Those two actually provide funding and debt guarantees, don’t they?
Heres the jerk responsible for much of this. he is McCains economic adviser. Makes you all warm and fuzzy doesn’t it.
Last week the watch list for failing banks was at 200. Today it is 1000. It could get uglier. FDIC is getting emptied. Where does it end?
