Lehman: more socialising the losses of the rich

Talks Continue in Effort to Rescue Lehman

The fate of Lehman Brothers, the beleaguered investment bank, hung in the balance on Sunday as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings trying to complete a plan to rescue the stricken bank.

The talks took on even greater urgency on Sunday as government officials push for a deal to be completed before the markets open.

After weeks of agony, Lehman's fate appeared sealed by the end of last week, as its stock market value dropped 74% in a few days, after having lost more than 80% since the beginning of the year. That the Fed and Treasury have called an emergency meeting over the week-end ensures that things are over for the bank and it will either be bought over the week-end (with someone taking over its liabilities) or go bankrupt.

Note: This is a cross-posting of Jerome's essay from European Tribune.

And the very reason the government took action over the week-end is also the one that ensures that it will not go bankrupt: it is considered too big to fall. As the WSJ notes:

A disorderly unwind of Lehman's derivatives trades is only one worry. Another worry is that if Lehman collapses, its distressed assets -- such as commercial real estate -- could suddenly hit Wall Street for sale, forcing prices even lower and potentially forcing other dealers to mark down once again the value of their own holdings.

With both Merrill Lynch and AIG seen as extremely weak (both lost more than 30% of their market value on Friday alone), a liquidation of Lehman could bring them, and others, down, in a collapsing house of cards.

The reason is that in a liquidation, all the liabilities become immediately due, whereas the assets need to be sold to willing buyers. So the "loss" in such a collapse is not, as it would be in normal times, the difference between the liabilities and the assets, it is the difference between the liabilities and what money can be realised fast with the assets. It's the difference between the value for you of a mobile phone, and its value for a junkie that needs to raise cash quick to get its cash.

In normal times, or for non-financial companies, such a loss could be tolerated, but in today's context, this would have a number of nasty consequences:

  • other banks that deal with Lehman would suddenly lose the counterparty to these transactions: whether Lehman had committed to take a risk, or to make a payment, that commitment is suddenly in doubt, and if these transactions were a hedge for another transaction, that other transaction suddenly becomes something different. In each individual case, the risk may not be that big, but the problem is that Lehman is a big player in some markets that have become staggeringly large, like CDS (credit default swaps), which banks use to move risk arond, and which reach into tens of trillions of dollars (yes, trillions with a t). These markets are zero-sum games, but if ou suddenly remove one link in the chain, it can unravel all interlinked transactions. In a calm market, such ripples might be tolerated, but at times when banks are weakened, hoard cash and don't trust one another, it could be absolute chaos if all scramble to protect themselves in an uncoordinated way;
  • even more worrisome for banks would be a firesale of Lehman assets. Banks are forced by accounting rules (which they pushed for when times were good and these rules favored them) to "mark to market", ie to value the assets they have on their books as the markets values them. For simple stocks, this is a no-brainer, but for more complex financial instruments that are not usually traded on public markets, this means valuing them by using the price comparable products fetched in recent transactions. If Lehman sold its financial assets at distressed prices, this would force many other banks to mark similar assets on their books at such prices, causing more losses to appear: these would be paper losses, to be sure, but the impact on accounts would be real and would certainly trigger regulatory requirements to raise more capital to plug the holes - at the very time when banks are struggling to shore up their balance sheets already.

In other words, a Lehman collapse could cause chaos in the markets, and bring other banks down.

So far, the solution pushed by the Treasury is not unreasonable, as the NYT describes it (link above):

The leading proposal would divide Lehman into two entities, a “good bank” and a “bad bank.” Barclays of Britain would buy the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.

Under that plan, the Wall Street banks would agree to provide up to $30 billion of support to absorb the losses of the bad bank. That is roughly the same amount of money that the government agreed to commit to support JPMorgan Chase’s emergency takeover of Bear Stearns in March.

The assets of the bad bank would be sold over time as the market for mortgage-related assets recovers and buyers emerge. If the assets appreciate, the bank consortium would share in the profits. But they would also be responsible for any losses.

Saving Lehman would avoid massive problems for Wall St's other banks, and thus it would be appropriate to get them to contribute the (much smaller) amounts that would allow for an orderly closing down of Lehman.

The problem is, of course, that each has an incentive to put up as little money as possible, as long as others put something. And none want to help the buyer of the good bits to get a good deal at their expense. But of course, no buyer has any reason to do any deal and put any money on the table unless it makes sense for it to do so.

A classic "freerider" problem, which can only be solved if there is an outside force to coordinate contributions and, if necessary, impose them. This is the function that the Treasury and the Fed can play.

But - they are themselves against the wall: if no solution is found before the markets open on Monday (and that's only a few hours away in Asia now), then there is a good chance of a total financial meltdown, something that the Treasury is desperate to avoid.

Thus it is likely that the Wall St banks are holding their own commitments to the last minute to push for public money to help make the deal. Given the precedents that have been set first with Bear Stearns in March, and only last week with Freddie Mac and Fannie Mae, it is not surprising that they expect the same to happen again.

So my bet is that we'll see another bailout of Wall Street and the financial investors it serves, with large amounts of public cash committed in a way that looks painless today (ie, no money upfront, but large liabilities into the future, likely to cost hapless taxpayers billions later--after the election).

Has this administration ever behaved otherwise? The mores and havemores have created massive problems, but they are "the base", and they cannot be let down.

They gorged in the good times, and they are letting taxpayers deal with the hangover. A sweet deal if you can get it (all you need is a few billions).

I'll update the story as I can over the next few hours.

The latest twist is that (according to the NYT) Barclays is pulling out:

Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward bankruptcy on Sunday, in what would be one of the biggest failures in Wall Street history.

The fate of Lehman hung in the balance as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings on Sunday trying to complete a plan to rescue the stricken bank.

But Barclays, considered the leading contender to buy all or part of Lehman, said Sunday that it could not reach a deal without financial support from the federal government or other banks, making a bankruptcy filing more likely.

The WSJ says on its front page that this might still just be a negotiating ploy.

The Financial Times in London is more specific:

Top Wall Street executives and regulators were on Sunday night racing to thrash out a rescue plan for Lehman Brothers as Barclays of the UK, one of two front-runners to buy the stricken bank, said it would walk away unless the US government provided a financial safety net for a takeover.

Barclays said it would withdraw from the race after failing to secure a US government guarantee over Lehman’s potentially huge trading and credit losses. However, in a sign of the increasing brinkmanship over the rescue the UK bank indicated that *a change in the government’s position would bring it back to the table*.

Business failures 1929 style. Gambling, trading, speculation, leverage, massive borrowings, then bankruptcy. People who invest in money losing companies are likely to lose money.

Barclays Bank is worth, at an approximate estimate, sod all, so what is being attempted here is the takeover by one non-viable institution of another, conditional on hand-outs from the taxpayer.
Barclays had a rights issue, which just about scraped through, and have likely vastly understated their potential losses and need re-capitalising themselves.
This sounds like a double or quits desperation play, perhaps an attempt to ensure that they are 'too big to fail'

Agreed. It seems very much like you suggest. They are attempting to make the 'too big to fail' list so they are not cast to the wolves. In effect, the big financial players are attempting to consolidate their web of interconnectedness.

The global financial system is falling apart really quickly now... it's looking like they'll struggle to keep it going until the US election.

Unfortunately that makes me expect a worse distraction event soon.

Are there any shots from the Space Station showing how far reaching the waves of distruction are?

P.S. No I am not confused and thinking I'm on the Ike thread. This financial Storm is a monster and worthy of all the hype we can muster.

this is getting serious:

Wall Street Prepares for Potential Lehman Bankruptcy Filing

Sept. 14 (Bloomberg) -- A group of banks and brokers began preparing for a potential Lehman Brothers Holdings Inc. bankruptcy filing today, addressing outstanding trades that the company has in over-the-counter derivatives markets.

Financial firms have started ``netting'' Lehman trades on credit, equity, interest-rate, foreign exchange, and commodity derivatives, according to a statement from the International Swaps and Derivatives Association e-mailed to Bloomberg News.

``ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,'' the ISDA said. ``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.''

That is, if A is owed x by Lehman, and Lehamn owes x to B, A and B agree to eliminate Lehman and to say that A is owed x by B.

That's a good thing, but preparing for this means that the likelihood of bankruptcy is not remote.

I don't see how they could do this all in 2 hours. It's just not that transparent and most trades are not queal apples to apples but Macintoshes and Granny Smiths.

If LEH goes bankrupt (which after having worked there, I won't say will make me happy), the financial markets will get crushed tomorrow (though a 'bankruptcy' might indicated reality to a system suddenly used to Monty Hall campaigns.)

Yes, this is a total mess.

BTW, Macintosh is a computer, Mcintosh is a fruit,
but maybe that's what's meant.

Things are accelerating... this is the front page of the WSJ website right now (4:30pm EST)

Merrill and AIG are also in desperate straits if Lehman goes bankrupt and these are their attempts to push that off.

Reuters: Merrill Lynch in talks to sell itself to Bank of America for at least $38.25 billion

That's about a 50% premium to Friday's closing price. The short covering rally in Merrill will be rather dramatic.

why would BAC take on such deal at this joint?

Bank of America to buy Merrill Lynch for $29/share: CNBC, citing WSJ

Bank of America Reaches Deal for Merrill

It sounds as though they have created an institution which is 'too big to fail'.
Perhaps this is of a size whereby if it gets into trouble an attempt by the US government to guarantee it would bankrupt them?
How would a bail-out if it became necessary compare in size to the F & F bail-out?
Why the heck is BOA paying over the odds for Merril Lynch?
Something smells very, very fishy to me, and my guess would be that taxpayers money and/or guarantees are being funnelled surruptitiously:

Without this buyout announcement Merrill Lynch (MER) would have gotten absolutely crushed Monday. That is absolutely certain. The closing price of Merrill Lynch was $17.05 on Friday. Mother Merrill's market cap was roughly $26 billion.

Thus... Bank of America (BAC) agreed to pay $44 billion for a company that would have been worth $18 billion on Monday's open, assuming a $5 markdown on Monday to $12. Why?

No one had any cash to buy Merrill other than BAC - so what's the rush?


Lehman Inches Toward Bankruptcy After Potential Buyers Drop Out

``The best case is that the Fed offers a 48-hour standstill by backing Lehman's liquidity directly to win time for other bidders to come forth or the previously interested parties to reconsider,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``The worst case is bankruptcy, and Lehman goes down the tube.''

bank holiday?

Pimco's Gross sees tsunami of risk if Lehman fails

"It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buyside universe,"

Sounds like he is looking for more taxpayers money. That is what he was predicting if F & F were let fail, so if we are in for a tsunami anyway perhaps he would refund the $1.7bn or so he has conned out of the Government.

The DJ INdustrial futures are already getting hammered...


The more things change, the more they remain ...

This is similar to the collapse of the Bank of the United States in December, 1930. It was spurned as a merger partner by Wall Street banks and it collapsed. The backwash eliminated hundreds of smaller banks across the country.


The problem here is the Fed and Treasury have painted themselves into a corner. Bailing out Bear Stearns and the GSE's have left them with an empty tool box. The bill for Fannie and Freddie is unknown, with Credit Swaps, mortgage- backed security overhang and other expenses yet to be tallied. This amount could count into $500-billion or even much more. With AIG and Citigroup poised to cross the 'event horizon' into deflation's Black Hole ... the government has to carefully husband its resources.

This leaves out the Credit Default Swap markets; this is a $60 TRILLION market!


This market overhangs all; is unregulated, opaque with no margin requirement. It ... and the currency swaps markets ... are much larger than the outstanding debt and FX exchange whose risks the swaps themselves were designed to hedge against.

The leverage that inflated these markets a year ago are now working in reverse ... with a vengeance.

gold down .1, silver up .17 , USDX down .46

Lehman to File for Bankruptcy Protection

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

But Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive as a going concern. It will instead liquidate its holdings.

Fed to take broader range of collateral on loans

WASHINGTON (Reuters) - The Federal Reserve announced a series of steps on Sunday night to boost liquidity and try to avoid widespread market disruptions in the wake of the apparent collapse of efforts to sell Lehman Brothers.

The U.S. central bank said it was broadening the type of collateral that financial institutions can use to raise money and now will accept all investment-grade debt securities. Previously, only Treasury securities, agency securities and AAA-rated mortgage-backed and asset-backed securities could be pledged for loans.

Fed to take equities as loan collateral

WASHINGTON (Reuters) - The U.S. Federal Reserve on Sunday said it would begin accepting equities as collateral for emergency loans for the first time ever, as it laid out a series of steps to calm financial markets and brace for the expected collapse of investment bank Lehman Brothers.

I wonder if we are seeing what amounts to a global margin call, which is causing the forced selling of winning positions in paper commodity holdings, especially energy?

Of course it is.

I guess the question I am circling around is what happens if, as I expect, fourth quarter demand for oil imports exceeds fourth quarter oil exports. A price mechanism has to allocate the exports to the high bidders, but what happens if we see a disconnect between the paper market and the spot market as owners of paper barrels are forced to sell while physical buyers are clamoring for oil?

It's a recession. Who will be clamoring? China which is economically slowing quickly?
Why do you expect demand for oil to rise?
The governments which used to subsidize their domestic oil markets like China and India had money in some cases backed up by US real estate which is dropping in value.

This is the 'unwinding', 'bubble-popping'--liquidation.

Worse, the reputation of the 'reserve currency' of the world is damaged so they can't simply print a lot of money without hyperinflation.

Peak Oil is on the way and we're in a much worse condition to deal with it than we thought we were.

I agree - Peak Oilers correctly, but myopically, have focused all their attention on supply, when demand, especially when we still have 86 mbpd, can easily drop more than depletion or net imports...(at least for a while)

There are certain trends in global oil pricing that probably just started to get underway. Or, that just started to reveal themselves. My experience with markets suggests that once certain ideas or behaviours start to show themselves, they then ebb away some, only to return. Hoarding, scarcity-rent, Hotelling Rule (awareness of), Price-Setting through demolition (Nigeria), and strategic control. One might see these all as high-price driven developments, that could relax with lower prices. Or, it may be both high-prices and also awareness of scarcity among producers that have triggered some of these. My experience is that the same assets can be priced very differently at different times, based on perspectives of the participants. So yes, users (demand) are currently in drivers seat but perhaps not for so long. For example, I understand that in the 1970's, many futures curves of commodities were places for capital to hide from inflation. There was little to no scarcity wager, like today, in the curves (which were in contango).

In the near-term, however, markets always revert to historical models--so Demand Destruction while real (I actually think its demand suppression) carries the day theoretically regardless of what's actually occurring.

Finally, I would note how the USD recently rose against the EUR simply because views changed about the Eurozone, not because views changed about the USD. So, we could see all sort of new perspectives coming into oil pricing in the years ahead, with both up and down effects--simply because views about a range of other asset classes changed.


Why do you expect demand for oil to rise?

Who was talking about increasing (total) demand?

The last two years of EIA data showed an accelerating decline in net oil exports, from -1.1%/year to -2.2%/year, so total demand for net oil exports had to fall, in tandem with falling supply.

I expect to see this pattern--an accelerating net export decline rate and total demand for net oil exports falling in tandem with supply--to continue for the indefinite future.

This graph shows the year over year change in net oil exports for our mathematical model (ELM) and for two actual case histories, the UK and Indonesia. All three cases show an accelerating net export decline rate. While the magnitude is of course different, two years of annual data show the same type of accelerating decline rate worldwide. This is of course profoundly bearish for financial institutions.

Hey hey Westexas,

A hypothetical question for you. If we first assume that the commodities markets are going to be functioning rationally. That is pricing oil in terms of its availability and not on margin calls from hedge funds.

What rate does demand for imports need to fall at to decrease prices? For example: If exports are falling 2.5% per year and demand for imports falls at 3% per year, then prices would fall, right?

Follow up question for anyone who feels like taking a stab at it:
If Lehman fails and things deteriorate rapidly aftwards. How much reduction in demand would occur from a TOTAL FINANCIAL MELTDOWN?

Thanks in advance,

Certainly demand can fall faster than net oil exports fall, but the model, case histories and available annual world data show an accelerating net export decline rate, so my contention is that the accelerating net export decline rate ultimately outpaces the decline in demand, resulting in increasing oil prices, in order to balance supply & demand, especially given what the developing world wants to consume.

I agree that ultimately ELM and peak oil are more powerful forces, but what rate does demand need to contract at in order to mask these problems?

I fear that the present situation is a worst case scenario where peak oil and all of its knock on effects are hidden by economic contraction for years. Mitigation efforts take a back seat to economic hardships until the world recovers. But when it does it immediately runs into a rapidly declining energy supply.

So the relevant number are the rate of decline in energy exports from ELM and the rate of decline in consumption for a financial meltdown.

If exports are falling at

then is it possible for demand to dry up at a faster rate? I remember from a post here at TOD that coal usage during the Great Depression dropped 30% from peak to trough. What magnitude of decline in consumption would be necessary to lower prices for a couple of years? And is it possible for a financial event to cause a that level of decline?


Many things are possible, but if we consider the Thirties, the charts that I have seen indicate that world oil consumption in 1939 was higher than in 1929.

I appreciate you replies and I'm not trying to give you a hard time, but I'm looking for an answer to a particular question.

I didn't know that oil use increased during the depression, but coal use decreased. I assume that since so few people had cars in the 30's that unemployment didn't save many 25 mile commutes to work, but now it would.

So the two questions for anyone who wants answer.

1) What amount does demand need to fall by in order to 'hide' peak oil?

2) What amount of demand is likely to be destroyed in a financial collapse?

Since Argentina is frequently offered as a parallel, does anyone know what the reduction in oil demand was for Argentina's collapse?

I'm sorry to keeping posting with the same question, but talk of the second great depression is usually of topic at TOD so this thread is my one chance to get this question answered.

Again, thanks in advance,

Argentina's oil consumption fell 16% from its peak in 1999, before rebounding to its 99 consumption peak in 2006 according to EIA.

But China and the Middle East will compensate for any US fall in demand. China's oil consumption is about to take off if we look at the development history of neighboring Japan and South Korea. China is right at that point in its development where Japan and S-Korea were when their oil consumption shot through the roof. "2 annual barrels per person-China" has a big gap to fill on "17 annual barrels per person-South-Korea".

Yes, it was called building up for World War II.

That might have been a contributing factor, but the what allowed consumption to increase was increasing production:


Our model, recent case histories and two years of annual data worldwide show an accelerating decline rate in net oil exports. Our (Khebab/Brown) middle case shows the current top five net oil exporters, accounting for about half of current world net oil exports, being down to about half of their 2005 net export rate 10 years from now.

Historical footnote. The US was a key net oil exporter in 1939 and a primary source of oil for the Allies in the Second World War, but in 1939 we were less than 10 years away from becoming a net oil importer--more than 20 years before our production peaked.

I think that if the US cut consumption by about 20% we would see $20/barrel oil. http://mdsolar.blogspot.com/2008/06/oil-is-too-expensive.html

To hold the price there we would have to be prepared to be completely off of oil within a couple of decades or less. There are a number of advantages to making the large easy cuts in consumption all up front.


If demand exceeds supply then there's a contraction in the world oil export market, in a normal market WITH sufficient liquidity.

But with a market failure you don't have sufficient liquidity.
A market requires product AND cash.

Are we really saying the same thing?

I would say that if the market flat out fails, people can't do business and consumption dives and producers shut in production.
And I think we are almost there(certainly for some countries).

What a spot to be in.

"I would say that if the market flat out fails, people can't do business and consumption dives and producers shut in production."

And then the troops move in to take the oil fields.

Hey hey speek,

What is the magnitude of a dive? -10% in a month? -7%/YOY? I'm asking because I honestly have no idea what will a serious failure of the financial sector do to oil demand. I'd love to hear anyone's ideas in percent or barrels.


I don't think some one day "dive" is going to do the trick. the problem is that the problem we face is fundamental - we drive our economy on debt, which, in order to continue, must be paid for by more debt. So, if credit starts tightening and credit loosening measures don't relieve the tightening, then what? Right? If I owe $10,000, and my creditor comes to me and says "pay up" and I can't find another creditor, then I go bankrupt (see Lehman). Now, since virtually every single entity in the US is in debt (federal gov, corporations, individuals, state govs), and suddenly everyone needs money to pay some of those debts because they just lost 10% in a "dive" (whether it's stock market crash or drop off in business orders), then there's going to be a wave of bankruptcies because no one is going to be able to find credit.

I'm completely with Ilargi these days - financial collapse and ruin is going to result in sub-$40 oil and we still won't have the money to pay that. Demand will be destroyed and waves of bankruptcies and economic failures are going to cascade around until an equilibrium is reached. And then when we try to rebuild, we'll run into the ceiling (glass for many, quite opaque and visible to most on this site) of declining oil supplies.

Sorry if this doesn't answer your question: to be more succinct, yes, I think economic ruin is going to hide the truth of Peak Oil for another 5-10 years.

Right...who's got the cold hard cash to buy...the once easy credit is drying up. Welcome to Peak Credit which is causing a contraction down to the real price of things.

Complex events and the consequences of their unwindings are moving fast.

The world may become much more simple very quickly.

Interesting idea, I suppose it is possible, margin calls leading to the forced sale of winning ssets and being done by such large players as to distort the actual value of the winning assets. I would think such a disconnect as you put it would have to be temporary, as the assets (oil in this case) are valuable and have just changed hands.

That is to say oil has true value while money is an abstraction used to represent value. If valuable oil becomes more scarce then to be worth less dollars (over long term) there would need to be fewer dollars, deflation. I suppose there might be a scenario where there are both fewer dollars and they are judged less valuable if it is a second rate currency but still by some abstract measure of exchange, dollars, Euros, rubles, less oil means higher priced oil. Long term, I don't see any way around this until oil becomes substituted.

More likely, to my mind for the current lowering oil price, is the perceived future demand destruction brought on by a slowing economy versus the perceived future supply available. Of course, world markets were not overly optimistic about available supply in the very recent past;) Let's see what happens after next week's EIA report. (Do I hear new lows in gasoline stocks and close to new lows in crude stocks, how about natural gas below average?)

One can also hope that the price correction, represents a new valid estimate of the value of oil. And decreasing the value of oil, i.e higher mpg cars, electrified rail, public transport, city design etc. should be foremost in public policy. Unfortunately, while it begins to appear the US may be insolvent to the core it politically appears to be concerned more with war, banalities and, to borrow a phrase from James Kunstler, financial "algorithmic turpitudes" than paying attention to helping its citizens create (as they've historically done like none before them) tangible wealth for themselves and others. This recent financial news though almost defies comment, what a financial clusterfuck.

"Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry."

Shakespeare's Hamlet

Would you explain what that means?

See my comment above. I think that the deflationary trend in the auto, housing, finance, etc. sectors was predictable, as was the inflationary trend in food & energy prices. Like a lot of people, I predicted exactly those trends (most explicitly in my case in my April, 2007 missive on Economize; Localize & Produce):


I have been advising for anyone who would listen to voluntarily cut back on their consumption, based on the premise that we were probably headed, in a post-Peak Oil environment, for a prolonged period of deflation in the auto/housing/finance sectors and inflation in food and energy prices.

I guess my point is that auto/housing/finance asset deflation is spilling over into the energy sector, partially due to forced selling of energy assets, but what happens if, as I expect, we continue to see an accelerating decline rate in net oil exports? In any case, an interesting very long term (annual posted) US oil price chart:

The stock of many oil companies is selling for less now, with $100/barrel oil, than it was a year ago when oil was selling for $70/barrel.

Since the credit consolidators are being liquidated, yes. The investment banks like Bear, Lehman, Merrill Lynch are proxies for hedge funds and institutional traders which were heavy investors in commodity indexes.

They now need cash and will get it any way they can.

Begging in the Subway ...

No worry here folks. This is just next chapter in the consolidation of power to further the centralization of finacial control. These people have our best interests in their hearts.

"[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country, and the economy of the world as a whole. This system was to be controlled in a feudalist fashion, by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences.
The apex of the system was the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks, which were themselves, private corporations. The growth of financial capitalism made possible a centralization of world economic control, and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups."
~Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (New York: Macmillan, 1966) p.324

So... when will they walk the cat back...

a) restate the books and earnings for the last 5 or 6 years to reality,

b) send this generation of financial managers to jail,

c) recover the bonus money they were given for creating this mess.

This too-big-to-fail concept needs some teeth.

Dream on. I'm thinking that some of these failures are part of "locking in" the gains. Deliberate.

a) when it becomes advantageous for the current mgmt and administration to do so.
b) never
c) never

"Too big to fail" may be a matter of perspective. Politicians, bankers, and taxpayers have differing agendas.

This is true, its all about perspective. Consider the power of the world’s central banks. Call them the "House". While banks corporations and groups of taxpayers go bust the house always collects its share. This process will continue to happen as excess energy consumption is bled from the middle class by market forces. It will only end when the "house" can no longer enforce the laws it has created. The steady erosion of the “privileges” we were given is just an example of how power begets power. Like the “invisible hand” that guides the free markets there is an invisible hand that perpetuates power. When declining net energy destroys the rulings class ability to maintain the Leviathan then we will see the feared "bellum omnium contra omnes"...

“If we consider the wealth of big banks, in comparison to the wealth of industrial corporations – or nations for that matter – we find a scenario much like that in a poker parlor. The corporations and nations are the players, and the banks are the house. Players go up and down; some get rich, some go into debt, and some go broke - and they all suffer when economies experience recession or depression. But the house never loses, always takes its share of every pot, always collects its debts – and can change the rules of the game whenever it sees fit.”
~Richard Moore

"Too big to fail" may be a matter of perspective.

We'll see how this looks tomorrow when the trading stops kick in.

There's going to be a lot of 401K money evaporating tomorrow.
If/when that happens "never" won't cut it...

At this rate the crisis is unfolding exponentially. The US treasury will find that soon enough companies will be "Too big to bail." Unless they decide to hyperinflate to hell beating peak oil to the finish line.

Why does this sh*t always happen at the weekend while I am trying to take a break from the woes of the world? :o)

I don't really know when Peak Oil will happen but It will be a Sunday for sure...


4. Remember the Sabbath day and keep it holy.

These meetings should be conducted during banking hours when the market can provide valuation input.


It's timed for Kunstler's Clusterf%ck report. Should be a doozy tomorrow.

My view is that the size of outstanding derivatives in the system (the shadow banking system) has been scary for more than a decade. Had a triggering event (this time, mortgage credit) occurred in 1998, we would have seen the same outcome. This is much more than a story of excess, or favored players in the system. This is a story of financial engineering, and the math geniuses who created the products, and the failure of the regulators to place limits on the take-up of the derivatives. It of course has always been the dream of every trader or trading house, to be able to lay off risk via offsetting positions. Financial engineering not only supplied myriad new insurance contracts for this purpose--but--the take up of these products gave all the large players the illusion of safety. Which allowed them to take on more risk.

I blame Alan Greenspan, in part, who is currently dismbodied enough from himself and reality, that he sincerely sees no role that he played in all this. To wit: Alan looked squarely into the abyss 10 years ago this month, when the rats nest of derivatives at LTCM was disclosed. It's my understanding that only 5 years later, players like JPM were carrying a derivative portfolio with a notional value far in excess of LTCM.

The connection between the rapid expansion of insurance contracts to cover every event under the sun (derivatives), and increased risk-taking should have been seen years ago.


There seems to be considerable differences between King at the Bank of England and Bernanke's approaches.
King has announced that the swap facilities for banks will not be continued after October, and that the housing market must sort itself out.
Whether he will be able to hold the line must be open to doubt, but he has considerably reduced the Governments room for manoeuvre and appears to be far more Volker-like.
The fact that Sterling is not the world's reserve currency must also be relevant.
Overall for the present it seems to my somewhat uneducated eye that the effects in the UK may be deflationary, and in the US inflationary.

If there is no rescue and Lehman's $85 billion in real estate loan assets are liquidated at pennies on the dollar, and other banks are required to mark to market, also making their real estate loan portfolios worth pennies on the dollar, what does that say about the value of the $6 trillion real estate loan portfolio that the U.S. taxpayers picked up last weekend?

A markdown of only 20% of the $6 trillion of Fannie/Freddie assets would amount to $1,200 billion. That makes the $30 billion of toxic waste the U.S. taxpayers got stuck with in the Bear Sterns bailout look like chump change. Remember when that seemed like a lot of money? It makes one nostalgic.

So what's another $85 billion?

I agree, Jerome. I say Paulson craters and the U.S. taxpayers get stuck with another $85 billion in toxic waste.

yep, $85 billion sounds good now.

But how much more for Merrill, Wachovia, WaMu and AIG in the coming days?

Have you noticed that each upcoming financial failure leads to a larger failure? Systems analysis suggests that we are into an area where the derivatives are increasing carrying the system down more quickly. In the United States the removal of meaningful regulation by Reagan/Bush/Clinton/Bush W has placed the entire financial system into an unprotected state (this is much, much worse than the S&L crisis because so many actual regulations have been eliminated; we are in very deep waters.

The story of how Fannie and Freddy became companies under LBJ, during his last year, is not a happy one. It was a one-time accounting trick to help pay for the Vietnam war. We are very far from the end of this 6 to 10 year down turn. My economist friends tell me this is a once in a century economic crisis.

is he one of your economist friends?

Greenspan Says Crisis May Be `Once in Century' Event

I'm not sure that failure is leading to failure. I think it is simply that deleveraging reveals the weaknesses one by one, as the relevant entities have to show that their portfolios made sense only through high leverage, and without it they have to pay the equivaent of margin calls that clobber them.

Freddie and Fannie was still bigger than this one - it's just that as things keep on going in the same direction, more and more players are running out of ways to avoid the endgame - and markets are on the lookout for more, which only accelerates the process.

well at some point, perhaps today, perhaps in 6 months, they will have to choose the perceived lesser of 2 evils: 1)to retreat and let the markets find their own bottom of the deleveraging or 2)continue printing IOUs and risk the integrity of the currency. IMO, as soon as they recognize that 2) is possible or imminent, they will choose 1).

You might be right, they might decide against destroying the dollar in a Volker moment (which may turn out to be today), I think it's far from certain though. Especially in an election year, surely the long-term good will be sacrificed for the short-term. I'm interested in which power centres have an interest in each of these outcomes.

They CAN'T raise interest rates in a Volker-esque manner. The US govt could never afford the interest they'd have to pay on the natioal debt.

I take your point. I didn't actually mean raise interest rates as such. I was just likening the final decision not to totally destroy the currency - through inflationary bailouts.

Perhaps if they cut entitlements and raised taxes massively, they could afford to raise rates. Agreed though, it's not going to happen before the election, if ever.

My economist friends tell me this is a once in a century economic crisis.

I don't like this wording, 1930 was not 100 years ago.....................


Looks like Lehman is heading for bankruptcy according to bloomberg and the NY times.

Does anybody else find this topic self-indulgent and largely off-topic? There's little or no pretence at direct informed discussion of PO issues. I'm relieved that the Oildrum gun lobby has recently fallen silent but could do without the financial lobby stepping in as eager replacements.

I'm not sure why it is off topic. Energy and economics are directly related. Energy flows drive all activity on earth. Economics is about “control” of natural energy and also social energy. Economics is essentially a bookkeeping system. The bookkeepers control who has access to energy. Economics is just a means to an end and the end is control. What happens economically is going to directly affect the control and consumption of natural energy.

Does anybody else find this topic self-indulgent and largely off-topic?

Well, up to now TOD has always had a mix of technical articles relating to PO together with articles dealing with the broader ramifications. If there were ever a broader ramification, it's the meltdown of the financial system. The increase in oil prices is a direct contributor to the massive devaluation in the housing market, and is spreading from there to all other markets.

The financial people and economists always think in cycles -- it'll blow over. It's only when you have a PO perspective that you can imagine that it might not just blow over. It's not off topic.

A ship hull designer who happened to be riding on the Titanic couldn't be blamed for taking an interest in icebergs, having spotted one off the bow, could he?

Coromo: Maybe in Europe, but right now in the USA what do you have? The most important player in the country right now (more so than Bush or Cheney) is Hank Paulson, renowned for insider dealings. A senile senior citizen who has zero interest in the future of the USA is the likely next President, with a hockey mom as VP. The parasitic financial sector is consolidating control over the entire economy almost weekly-any discussion of an energy policy or any mitigation plans for oil depletion are so far down the priority scale it isn't even funny. The country's gasoline stocks are at record low levels-in response the most powerful are hammering futures prices rather than attempting to deal with the actual physical situation. Other than all this, you are right-it has nothing to do with oil depletion.

You are not alone. TOD is at it's best when discussing the oil supply, or, say, the latest research on Ghawar or some other aspect of geology, and at its worst when discussing these general interest or 'effects of peak oil' topics. In my opinion these should be restricted to the Drumbeats, not given keyposts of their own.

After PG, Leanan Gail and myself have spent the better part of 2 weekends+ obtaining details and graphics and stories on gulf of mexico energy infrastructure, this piece by Jerome was all that was in the cupboard. Keep in mind we are all volunteers and a few of us are pretty fried.

People write on blogs for many reasons: for money, to be the head of some esoteric tribe, to get clients via internet marketing, to vent frustrations, to be creative and smart, etc. THIS blog has had the objective of changing the way we look at and ultimately use energy.

I speak only for myself in questioning the impact all this work has even had. People gripe about $3 gas, energy is only a minor distraction in the national debate, and that primarily whether to drill now or drill later.... there is still a gigantic ethanol mandate, solar and wind (ecosystem service) credits remain tenuous, oil imports have continued to increase, and the topic of reducing consumption is basically anathema to the american way. In the interrim we've also burned 100 billion barrels since the site began. What would happen if TOD disappeared? Nothing, probably.

For what it's worth: you've made a difference in my thinking. I'm small potatoes - but I have friends and I am trying to spread the word. It takes a while for a groundswell to develop - and TOD has a really harsh message to give. I really appreciate the information and discussion, and I am thankful to have found you on the web.


Well, for what it's worth...I really enjoy this website and all your contributions. "They" say the best things in life are free and the oildrum.com is, well, free...and well, "they" are very busy this weekend trying to plug the holes and well, will it be well? Will we be well? Well, why not? We will be well. Because we will have looked deep into the well and we will have seen. The depths of the well. It runs deep. And what do we see when we peer into the well? We see our reflection. We are the well. And the oildrum.com helps to reflect that well back to us. Well, what can I say, but thanks.

Thank you. I will raise these 'towards what ends' questions at some future date.
Lets keep this thread on the topic at hand....

Outcomes of Lehman bankruptcy ... why here?

Because many outcomes will be felt in energy and transportation.

First; the mortgages held by Lehman (collateral for funds) will not be hammered down in forced- sales for pennies on a dollar. Nor will Lehman's investment management operations. The Fed will back the mortgage securities (as it did with Bear) through its Term Auction Facility for investment banks. This paper is accepted as collateral currently. The valuable management assets of Lehman will be purchased by other banks or spun off. Some of the players in this weekend's talks will wind up with pieces ... the good stuff. The fixed income department will likely be liquidated.

The liquidation will be orderly. The Court will probably appoint a Trustee to oversee the process. Keep in mind, this outcome was likely from 1970 onwards when the New York Stock Exchange allowed the closely held private firms and partnerships to become joint-stock companies. The switch allowed partners to 'cash out' enormous sums but rendered their capitalization vulnerable to market swings. Lehman (and Bear and Merrill as well as the GSE's) Failed ... because of unregulated leveraging in debt markets and because their capital base was the stocks of the companies themselves!

One thing Lehman (and other Wall Street banks) did was debt placement for large projects such as this:

The Beltway HOT lanes will be built under a $1.4 billion private, federal and state funding partnership
that includes $409 million from the Commonwealth, $349 million in private equity and $1.1 billion from
tolls paid by motorists to support bonds and loans.


This and many other projects like it are 'pay as you go' which means work stops when the funds stop flowing. There will be no return to the investors until the project is complete, which is scheduled for 2013. Interim funding is a scaffold of debt. With the Department of Transportation's Highway Trust Fund running out of cash in a few more weeks, and the flow of private funds likely to be interrupted, infrastructure projects will grind to a halt. This is something to watch for, a sign the 'Wall Street Woes' are impacting the real world.

Unfortunately, other energy projects require funds, too. These come from Wall Street with subsidy backing. With Washington's fingers desperately plugging more and more holes in the financial dikes, the difficulties for funding wind farms, solar power stations and grid/rail improvement becomes increasingly dicey. Some projects such as rail expansion and eleotfication are top priority but will require massive private funding. The breaddown of the financial markets becomes a very important component of energy independence - as has been noted here many times before.

Does Lehman's failure impact energy prices? Yes and no. Lehman's failure shrinks available credit and puts downward pressure on prices, particularly in leveraged commodity markets. The Treasury market will likely rise sharply as money dudes take their investment funds out of equity markets and 'other' bonds and flee to Treasury 'safety'. All of this is highly deflationary. At the same time, other items such as food will increase in price as processors/distributors try to pass along price increases they sustained in the energy run-up earlier this year.

The squeeze is on and it's going to get very interesting from here on in ...


I find TOD to be the best place on the web and your(collective) efforts are very much appreciated by me. I have learned much and passed on what I've learned. Anyway, I am enjoying this discussion and I think the PO crowd brings a unique perspective to financial discussions.

PO is not just about geology. For those who say TOD should stick to geology, I say, go soak your head.

What would happen if TOD disappeared? Nothing, probably.

except the disappearance of intelligent & informed discussions on current affairs by and from people of differing backgrounds & perspectives who care deeply about our energy security and future.

In a world where the mass media spouts titillation and calls it edification, where dumbing down is rampant, and where hedonistic carelessness marks a general attitude towards our common good and commonwealth, I for one would be poorer if TOD gave up the ghost.

Beam me up Scotty, there's no intelligent life down here. TOD at least gives me hope that there just might be a few sapiential (http://www.thefreedictionary.com/sapiential) homo sapiens left.

And since energy is a key component of contemporary wealth generation I for one also see potential links with wealth disappearance ... and/or barring that ... at least the possibility that as our financial world tumbles it may have an impact on the future use and exploitation of a finite resource that is blindly considered infinite.

My sincere gratitude to Nate, PG, Leanan, & Gail. Keep up the good works folks.

Aye, Captain, there is intelligent life down here and, what's more, it's friendly! Cheers!

I monitor a number of threads on Peak Oil and the Financial state of our world. The most cogent discussions on both subjects are found amidst the discussions here on TOD. Yes, there are a number of nonsensical inputs, but those are easy to pass over and ignore. Mixed in are some of the most well-thought out ideas that can be found on the web.

Peak Oil can be viewed as a strictly engineering concept, but that approach ignores how it affects everyone's life. It is a social, and therefore, financial issue. It is all tied together. It is fine to search for the absolute truth about what and when the peak occurs, but it is more important to understand what that event will do to our civilization. This particular thread is a great source of information on a vital subject. We are seeing the restructuring of the basis for the world's economy, and that will have a fantastic effect on how and when oil is produced -- and vice versa.

You, Leanan, Gail, and everyone else who support this effort are doing a great service to the rest of us trying to understand where this world is going, and trying to figure out how we can make a difference in the final outcome. Accept my thanks and gratitude for what you do, and please, keep it up. You are important people in today's world.


I come here repeatedly, and am grateful for, the great info on peak oil and the oil infrastructure etc. I respect the staff and think they generally do a great job. However, it does not bother me if there is no new material for a couple of days, I think TOD is strong enough to survive a couple of days with a bare cupboard, especially after such thorough coverage of the gulf of mexico stories.

To put this another way:

details and graphics and stories on gulf of mexico energy infrastructure

Above, absolutely fantastic.

this piece by Jerome was all that was in the cupboard

Above, off topic, of lower quality and not what I'd like a first time visitor to see.


Maybe you should simply click the little "x" in the upper right hand corner and then click on the hyperlink for today's "drumbeat." That would solve you personal concerns re this thread quite easily.

Coromo asks

Does anybody else find this topic self-indulgent and largely off-topic? There's little or no pretence at direct informed discussion of PO issues.


Yes. Debt and Energy would be a great topic. However "Lehman: more socialising the losses of the rich" has no bearing. This is a social issue (or socialist issue?) that has re-occurred in POLITICAL discussions for at least decades.

I do find the comments interesting. But is the first article a new visitor to the Oil Drum should see? What does this article have to do with Peak Oil and energy?

Land values surrounding American cities are tied closely to gasoline prices- higher pump price=lower land values. Loans were made on expectations of low pump prices. Those expectations are not being met, land values now are less than the loan value. The loss in land value is being eaten, but it seems that our financial digestive tract is being overwhelmed. Stated another way: if gasoline stayed at $1 per gallon from 2001-2008, these financial crisis would not be happening. Energy and land markets are not separate.

I don't understand the complaints wrt this post at all. A major component of the discussion on PO is coded in the term "energy descent/decline." When thinking of PO in this context the other factors affecting PO - including future funding for energy - there is no subject that is off-topic.

No money, no investment, no energy.

Hell, if anything, there is too little integration of all the elements that may or may not lead to some level of collapse/shift in societies worldwide.

The Perfect Storm Cometh.


As someone fairly new to TOD (this is my first post), I would say that while on the edges of the core topic, the discussion of the financial meltdown we are seeing at the moment is still relevant.

As has been mentioned, perhaps this is "peak credit". And now we are on the other side, it is all chaos while the people in charge (supposedly) flail around trying to sort things out. Is this just a foretaste of what will happen when we pass peak oil and start down the other side?

The fact is there have been warning signs for a long period (I'm sure I read a link to an article from 2002 giving a warning that Warren Buffet gave about overheating credit markets), yet the great and good carried on regardless, heading ever faster toward the situation we now have.

So the same with PO. I remember as an eight year old at school being told by my teacher that oil will run out in 30 year's time. Now I am 35, and she is looking fairly accurate. So obviously in the intervening 27 years we have all been working hard, lead by our glorious leaders, towards a sustainable world no longer dependent upon fossil fuels with plenty of alternatives in place. No? hmmm... seems like a common theme.

Does anybody else find this topic self-indulgent and largely off-topic?

The investment banks have played a role in growing solar and wind power. Lehman Brothers is among these. If we cut off this route for money to find innovation, we may be left with just old energy companies involved in energy. That would, I think, lead to catastrophically stale approaches to energy problems. If we get rid of the investment banking sector, we'll either need to find another mechanism to gorw new companies or we'll have to nationalize Peabody Energy and the oil majors on anti-trust grounds so that we can force them to switch off of fossil fuels. The end state of Peabody energy should be a Christmas novelty company, not a state monopoly in wind energy.

Possibly that mechanism already exists. If banks like the ones Jerome works with in Europe end up owning all of the new US energy infrastructure, Peabody and Exxon should contract. It will just be a case of energy security being the joke of the century.


You know, Jérôme, it all sounds like it could work out the way you picture.

But I'm getting an itchy patch in an unspeakable place.

Yes, letting Lehman crash would cause huge problems on the Street (not to mention the Hamptons). Thing is, so does saving it. Maybe my itch tries to tell me that we're sort of circling around a breaking point.

A completely unlimited, in all directions and amounts, bail-out of Fannie and Freddie, just 7 days ago, lifted spirits for 24 hours -if that-, and then it was gone. So what do the chosen few who are gathered over in Lower Manhattan believe, concerning the amount of time that a few billion for Lehman will provide the system? Not a confidence booster. At those odds, it may not last through their lunchbreak.

They have no way of knowing what's in Lehman's vaults, and for what they know is there, they have no reliable value estimates, other than that there’s $85 billion in paper that’s in reality barely worth three tomatoes and a sycamore tree.

It's totally possible that they get a deal, but it'll be stillborn, and they know it. And tomorrow morning AIG, Merrill and WaMu, Fifth Thirds, National City, Key Corp etc. (maybe even Wachovia) may get their turn. Lehman is going to hurt, but then so is Washington Mutual (2600 outlets, $500+ billion in deposits). At least Lehman has no risk of bank runs.

They’re simply afraid they’ll be meeting again next weekend, they have to be. And that’s not even their worst fear.

If they accept a gutter-scraping deal for Lehman, they face new- lower- values for their own toko’s. So why not pretend Lehman is the odd one out, without paying a dime? Why not focus on giving the impression that your firm is fine? Either a relatively high offer for Lehman, or let it meet its maker. It’s a gamble, but so are all other options.

At a certain point the credo becomes the title of my Automatic Earth Debt Rattle today:

Women and Children First

It's not 100% impossible to get a deal done, but there's no way it'll look pretty, or live long enough to have any chance of ever making it to kindergarten.

Look, Lehman will never return to profitability. So the Lords of the Street might as well move on. Only, they can't.

Lehman is so intertwined and entangled and tentacled into the sphere of international finance that it's not enough for the happy few to have their accountants tell them what their own exposure to the latest dead bank talking is. They would have to know those numbers for everyone they do business with. Only, they can't get them.

Sure, one or the other of the movers and -shaky- shakers may offer two calves, a sheep and a hardly-ever-used rosy-cheeked kitchen maid for the lot, but accepting that would just be too risky. If on Monday morning that is set as the value for all of Lehman, then the value of their own firms will need to be re-calibrated along the same dark math. Not good: there goes the yacht.

As you and others have already noted, things are accelerating - Merrill and AIG are seen as doomed even before the markets have opened to absorb the Lehman situation... Maybe we're approaching the point where they fall off the cliff - the coyote awareness moment?

Yeah, but only if you include that Wile. E's downfalls were invariably staged by the storytellers. No Free Will for Wile. E.

Follow the money: BoA offers a $10 surplus on Merrill's share price. ¿Perqué?

Who holds that stock? We are talking to the hand here, me thinks.

Reuters now reporting a "breaking news" headline that Bank of America and Merrill Lynch are in merger talks.

It would appear FED and Treasury went into weekend with the view to get MER and AIG problems sorted out as well, especially in the case that the LEH problem did not resolve itself optimally.

It strikes me that the BAC-MER merger in particular simply had to occur, in the event LEH did not work out. Ring-fencing. Meanwhile, I note that AIG has announced a restructing.

It's clear now what the intention was for this weekend: get it all out.

My call: it would actually be more bullish for equities globally to have at least one outright BK here. So far, we have the BSC bailout, the FRE/FNM bailout, no question BAC will get support from the FED on MER, just as they did on CountryFried.

That leaves WaMu.

Again, if equity markets can surive an LEH BK, it's better. The market gods and the cultural sentiment wants at least one of these to go down in flames (they don't care about "systemic risk").

Most forex is advancing late this afternoon against the USD. Especially JPY and GBP. Though AUD and EUR are also firm--the latter firmer than AUD. DEC Gold futures are indicated to open a touch higher at 771, and SPX futures are indicating something close to unchanged--however, neither has actually opened yet here at 17:25 NY time.


I disagree. I think the charades game is ending. The bailouts have only postponed the inevitable. Yes, it will have global repercussions and bring down more institutions and banks, both large and small. That, too, is inevitable. New games can begin once the bailouts end. Like limiting market withdrawals, freezing short selling, limiting outflows from accounts and funds. We're approaching the end game in this credit bubble and there's nothing to stop the freight train. Also, the US taxpayer can no longer afford to bail out this entire global financial system, much as Germany, China and every other country would like it to. Ilargi predicted weeks ago that no one would want to buy Lehman and he was right. Meredith Whitney has also been more of a realist mathematician than a cheerleader concerning this subject. Too many people have used the excuse that the system is "too complex" to understand what is happening. I've dreaded this day and now it's here.

Mid afternoon Sunday and everyone is pulling out. Looks like the feds are going to let the Brothers Lehman go bankrupt. Or someone is playing some tough ball here. The markets are going to go nuts Monday morning no matter which way this goes.


It should be an 'interesting' day in the markets tomorrow!

BoA buying Merril makes some superficial sense. It'll lift the markets for the duration of a ping-pong match. And all the more because of it, Lehman looks done:

Extremely rare event: Derivative traders open session to reduce Lehman risk

A rare emergency trading session has been opened Sunday afternoon between Wall Street dealers who have carried out transactions with Lehman Brothers that may be put at risk if the investment bank files for bankruptcy, the International Swaps and Derivatives Association said.

U.S. regulators and bankers were making last-ditch efforts on Sunday to prevent toxic assets from ailing Lehman Brothers spilling into global markets and rupturing investor faith in the international financial system.

"This is an extremely, and I stress extremely, rare event. It also speaks to the more general notion that, in today's highly disrupted financial markets, the unthinkable is thinkable," said Mohamed El-Erian, the chief executive of Pimco, the world's biggest bond fund, based in Newport Beach, California.

The session will run from 2 p.m. to 4 p.m. New York time (1800 to 2000 GMT) and will involve credit, equity, rates, foreign exchange and commodity derivatives, ISDA said in a statement. ISDA confirms a "netting trading session" was taking place for OTC derivatives. Market sources said the special session was initiated by the Federal Reserve.

The aim is to reduce risk associated with a potential bankruptcy filing by Lehman Brothers Holdings Inc. "Trades are contingent on a bankruptcy filing at or before 11.59 p.m. New York time Sunday (0359 GMT)," said the statement.

"If there is no filing, the trades cease to exist." Britain's Barclays Plc , which had appeared to be the frontrunner to take over Lehman -- excluding its bad mortgage-related assets -- pulled out of the bidding early in the afternoon, according to a person familiar with the matter.

That raised the risk of a Lehman bankruptcy. The special session "is a way to offset the risk between the remaining large banks and insurance companies and fund managers prior to the markets opening in Asia," said Mark Grant, managing director of structured finance at Southwest Securities, based in Dallas.

Does this mean a massive fall in the Stock Market?
I guessed around a 1/3rd to 2/3rds fall in Sept-Oct, but know nothing about it so would be grateful to see what others who do think about it.

Does this mean a massive fall in the Stock Market?

Yeah Dave, thats exactly what it means...but sooner then you think. I say in about 12 hours when the markets in America open Monday Sept 15th.
I made a similar prediction about a week ago on TOD about a 300 plus swing in about 12 hours...12 hours later and it happened on cue too the point. I dont think 33% or 66% though Dave. Try 15%.
Dave....remember you saw it on TOD first.

"Dave ... Dave ... Dave"

Open the pod doors, HAL.

Wondering what the halt trigger is on FTSE and DJIA ?

The ftse is down 5%, and HBOS 30%
Is this the next vulture food?
They borrow most of their funds on the wholesale markets.
All this is in spite of the Central Banks feeding in tens of billions in liquidity.

S&P Futures in the US are down about 3% as of 19:00 EDT. I'm guessing a Lehman BK and more importantly the apparent new resolve of the US Government to provide fewer bailouts will end up causing a market decline. That, mixed with the time of year (September & October always being such a depressing time for equities) says to me I'd much rather be short than long.

It is my sense that the faith of people in the ability and willingness of the USG to use taxpayer dollars (as well as the use of the magical FED piggy bank) to "fix the market" is the only thing keeping the market up these days. I'm guessing this is a halo effect from what happened after the dotcom bust.

Now the perception will be, the market has been abandoned to sink or swim on its own, and given the housing market these days, there will be more sinking than swimming going forward.

My guess would be, perhaps an additional 20% drop. I don't think there will be an end-of-the-world crash. Just a steady move downhill as faith in the government's ability to engineer a return to business as usual gets crushed slowly over time.

Sigh. I long for the more rustic days when a simple Salad Oil Scandal could bring down an investment bank, giving a white knight a chance to ride to the rescue.


Dumm question from someone with absolutly know knowlegde on how financial marktes work...

A bigg part of the problem now seems to be the lack trust between banks. Nobody knows how big the problem at the other bank is.

Would it work if the Fed or an other authority would force banks to open up the books, so then everybody knows how serious the problem is an we can start working on recovery?

I suspect that if all market participants knew all information at once, they wouldn't be able to engineer an orderly decline. It would probably be apparent at that point that the entire banking system had insufficient reserves, and there would be uncontrollable collapses as everybody rushed for the exits.

Here is 'The Telegraph''s take on what was going on this weekend:

Looks like Lehman is going into bankruptcy according to the NY times.

"changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms."

I feel so tiny.

"Poised to pull the trigger on yet another Government bail-out of a good firm gone bad in 2008's escalating credit crisis, Treasury Secretary Hank Paulson, decided to take a 10 minute break from the heated discussions surrounding the fate of Lehman Brothers. While sitting on the can in New York Feds luxurious bathroom, Mr Paulson started reading theoildrum.com, (his homepage on his US Treasury Blackberry). After some deep thought, he realized that the heretofore Monty Hall campaign of socializing losses hasn't worked, and the words of Jerome a Paris' hit home. Taking a deep breath, pulling up his drawers, Hank walked back to the boardroom, and formally cut the Fed backstop to the Lehman deal. SP futures promptly dropped 40 points in night trading. But perhaps this time, he mused, things will go down then up, instead of up then down. From his briefings and reading, Hank also knows that coming declines in economic hemoglobin in the form of cheap global oil exports, will cause the bounce to be shortlived. But thats a problem for another day..."

Source: none.

ADDENDUM: After the investment banks left the meeting, Hank was strongarmed by some Japanese and European bankers, and agreed to participate in a backstop-lite. SP Futures promptly rallied 20 points..Time for drinks..

Has anyone else noticed how publicly absent Bernanke has been during this crucial period?

That's a really interesting point. Perhaps he's not getting support from his fellow members at the FED for any more creative action.

Or maybe it's more like tag team Pro Wrestling. First it's Bernanke in the ring, and then - TAG - it's Paulson.

Is Goldman Sachs likely to profit from this?
I can't remember if it was on Automatic Earth I read it, but Paulson is associated with Goldman Sachs, and eliminating the competition might be good for them.
Hence the path of virtue is being followed in this instance and there are no bail-outs.

That is the assumption-supposedly the importance of bailing Bear Stearns stemmed from potential damage to JPM.

Which raises the question: which bank has the biggest foothold in Washington?
Mapping the networks between and within the banking sector and government would reveal who stands to gain from this mess. Coincidentally, these are just the people I wouldn't mind seeing judged and juried to hell for eternity.

No Goldman won't survive this credit crunch, Their business model is dead. 3 of the 5 big investment banks are now gone, Bear, Lehman and Merrill. Morgan has more than enough toxic assets to go down and Goldman will eventually fall too simply because they need to be part of a bigger bank to survive. They borrow short term and use it to fund long term projects.

Has anyone else noticed how publicly absent Bernanke has been during this crucial period?

I'm noticing how Fearless Leader (aka GWB) is not out there on Wall Street with a bullhorn in hand to urge the first responders onward.

Paulson has a brother who works for Lehman Bros., according to the NYT.

Perhaps, they do not get along all that well.

Brother against brother, neighbor against neighbor, it's gonna get ugly amongst the moneyed class...

Other hedge fund managers recognize the dangers and the harm that is befalling bank employees who have been paid in their companies’ stocks. “My children, their playmates’ fathers work at Lehman,” said one manager who is short Lehman and asked to remain anonymous, citing the fragility of the situation. “Obviously I had nothing to do with what happened, and the idea that I profited, and they got clobbered, and I’ve got to see them on Monday is awkward. I feel badly for them.”


... it's gonna get ugly amongst the moneyed class ...

How many of these people were weeping when steel workers lost their jobs?

When autoworkers had their jobs off-shored to distant lands?
When Reagan destroyed the traffic-control union?
When the great sucking sound started coming at us from NAFTA, CAFTA and other free market initiatives.
Now the markets are "free" all right.
Free to fall.

ay-fucking-men to that

Here is an article on the same topic...

The U.S. Financial System is in Uncharted Waters – Is there an Iceberg Nearby? @ http://www.stockresearchportalblog.com/

It is a good article that sums things up quickly,
check it out, It should be helpful!

Now what do you rekon this means?

The fate of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as the Street wakes up to a world where the independent broker-dealer are increasingly thin in number.


I'm watching AIG, this monster has 32 billion in capitalization, if it goes, so does the market.

AIG turns down private equity infusion, turns to Fed

How many bailouts can we afford ?
How much debt can we absorb ?
How much will other countries loan us ?


Everyone seems to be focussing on the Fed not bailing out Lehman, but they are taking equity as collateral, are bailing AIG and may have to support BOA if the Merril Lynch takeover goes toxic.

It is also very suspicious that the stock market fell 22% on Black Friday, but in the current bout of financial troubles the losses on any given day have amounted to only about 2-3%.

The losses in the US were also, if we believe the stock market, less today than in Europe.

How many billions are being lost in market support, aside from the liquidity injections to the banks?

I feel the financial position is probably deteriorating much faster than event the pessimists on this board believe.

The Volcker scenario is bs to begin with. Higher rates only benefited those with money to lend and caused a recession. Since inflation is a surplus of currency, how do you cure it by rewarding those with a surplus in the first place and reducing overall demand? Inflation was brought under control by the 200 billion dollar deficits Reagan had run up by 1982. When the Fed sells debt, it retires the money. When the Treasury issues fresh debt, it primes the Keynsian pump and this further increases the need for capital.
Money can only be saved by investing it, so only as much as can be effectively invested can be securely saved. In an atomized society where everyone must be privately capitalized, investment standards have to be lowered sufficiently to increase and maintain the supply of necessary capital. Everyone knocks all this debt, but the model depends on it! If the government WASN'T borrowing 400+ billion a year, where would that savings go? Real estate, derivatives?
How about the brilliant idea of privatizing Social Security? So who do we let manage our retirement savings? Merrill Lynch? Society invests in its old age by taking care of its elders and safely raising and educating its young so they will do the same. That's investing for the long haul.

Here's my idea for reforming the monetary system:


Volcker caved to the St. Louis Fed and Friedman's policies (Friedman left out the velocity of money, and the whole thing just about went into the ditch-- so much for superstition based economics).
It was only Reagan's use of "Military Keynesian " that brought the system back to some stability.
Of course, the national debt was doubled (tripled by the end of Bush1)

Comments that I agree with. The folks with money (e.g. holders of treasuries) are now the only folks with money and they will do all that is possible to keep the system gasping for money and interest rates up.

When it was first obvious that the mortgage/banking industry along with millions of property holders/owners were in trouble, the first solution that came to mind for all parties involved was to simply reset all ARM's to fixed rate notes for a period 3-5 years at a reasonable interest rate, then reamortise them later. Sure, the Govt. would have had to pick up some of the difference in payments, but it would have been less than all these massive bailouts and most property owners and institutions would have been saved.

Instead, too much time was lost thinking the whole situation would simply blow over. Then piece-meal solutions of tweaking the system and helping individuals took place, but not enough to stop the mortgage meltdown.

Now it's a critical situation. Money is tight, which is slowing the economy. The only other time I can remember money being this tight is when Carter was president and for whatever reason the interest rates went skyward and most businesses took a hard hit and millions were out of work.

Economies do as well as the speed with which money moves, and right now it is slowing to a crawl! These piece-meal attempts to get the economy moving, like stimulus checks, are not working. But something must be done soon or things are really going to be tough for people this winter.

I honestly don't think your fix would have solved the problem.

If you look at housing price charts vs. median income, in 2007 prices were so far out of the historical norms vs incomes that there's no way a fix like yours would solve the ultimate problem. The problem being, incomes stagnated, while housing prices rocketed, and it was all supported by teaser rates and pick-a-pay loans.

Now the market is just readjusting prices to what people can realistically afford given their income given a 30 year fixed mortgage.

Of course, this "adjustment" process is no fun if you bought something in 2006. I did. Let me tell you, its no fun. Who could afford the place I bought at the price I paid? Very few people. Guess what's happened to the price?

Its definitely been an education in what makes markets move. Too bad I wasn't this educated a few years ago!

"If the helicopters are not in the air by midnight, you are all facing a firing squad"
--Subcommander Bernanke
(from CR)

Fittingly, perhaps, on the Catholic calendar, September 15th is dedicated to Our Lady of Sorrows

By inserting the feast into the Roman Catholic calendar of saints, Pope Pius VII extended the celebration to the whole of the Latin Church in 1814. It was assigned to the third Sunday in September. In 1913, Pope Pius X moved it to September 15, the day after the Feast of the Cross.[3] It is still observed on that date.


Bush, Paulson and Bernanke would likely be better off this weekend sequestered with Benedict XVI planning to declare tomorrow a universal holiday.

Promise a big Christmas bonus to anyone who could figure out how to extend the festivities until November.

The words, "pray for us sinners, now and at the time of our death", seems to have moved mysteriously to financial institutions.

Perchance a regrettable and unintended consequence of declaring corporations legal persons!


Developing Story on Reuters front page:

Ratings agencies threaten to downgrade AIG's credit rating by Monday morning; AIG downgrade would allow counterparties to withdraw capital from contracts with the company; AIG may survive for only 48 to 72 hours if counterparties withdraw capital: NYT

...the hurricanes keep coming!!

"So Leham Brothers survived the Great Depression, WWI, WWII, but it didn't survive the Bush Administration, imagine that!"

It's starting to get very unfunny out there.

When they fire your neighbor in that other financial house, that's called the R-word.
When they fire your friends in your own financial institute, that's called the D-word.
When you go home with your desk in a box, that's called the afterlife.

The London stock exchange is down 5%, but perhaps more importantly bank shares are taking a hammering, with Barclays down 16%, but worst of all is HBOS - my link gives the fall as 22%, but latest is 30%:

Apparently they are more exposed than most to borrowing in the wholesale market.
Anyone think that this could be the next domino to fall?

Was watching the banking shares myself. They seem (temporarily at least) to have recovered a little from the earlier declines.

Now I'm wondering which of the UK banks are going to be allowed to fail. Bradford & Bingley, Alliance and Leicester, HBOS seem possible candidates, and you'd imagine that in order for them to be interested in purchasing Lehman brothers in the first place, Barclays are likely to be badly hurt by their collapse.

With the UKs housing market falls being a little behind that of the US, we might be waiting a little longer, but with the interconnectedness, it's hard to say.

I expect there will be further falls over the next few days, in what might become a slow crash.

What do you think about the safety of mutual building societies? I ask from a personal point of view as I have a little money with the Cumberland BS. Some seem to think the demutualised ones are at greater risk, but I don't really know what the differences are.

As long as you don't have more than £35k in an individual BS, or £70k for a couple, you should be fine - they are guaranteed by the Government.
You may even be able to make a little money if you choose the right BS and it is taken over:

We seem to be running on a weekly collapse schedule at the moment, but it might accelerate as it gains momentum.
As I said above, in my very inexpert view the stock markets might be overvalued by up to 2/3rds as deleveraging and people trying to reduce their debt burden in a situation of rising unemployment as the lack of demand bites - this will hit earnings of the companies hard, with still more lay-offs and reduced demand.

Around 25% of the British workforce is involved in one way or another with financial services, essentially re-packaging debt and taking a cut.
Delevaraging takes their jobs away, and so the unemployment situation is primed to deteriorate very rapidly, perhaps to 1930's levels.
This will pump up the already large government deficit, hitting sterling and perhaps leading to inflation, although that is a toss up as the forces of deflation will also be savage.

I'm aware that the Financial Services Compensation Scheme (FSCS) is supposed to guarantee deposits (up to £35k), but when watching the Treasury Select Committee hearings a few months ago, I got an uneasy sense about the practical ability of the scheme to repay customers deposits in a timely - or even full way.

At the moment (with a very low number of bank failures), it takes a few months to receive compensation. Just think how the scheme would (wouldn't) fair with an HBOS failure! The FSA etc. are seeking to reform some of these things this autumn (as they realise the serious potential outcomes), but as far as I'm aware haven't yet. If it takes many months to return a customers money, how much may it's purchasing power have reduced by that time?

There is also some question about who is responsible for compensation where EU banks are concerned. Abbey National is one case in which the FSCS only seem to be partially responsible for deposit protection in the event of failure. I hope to catch up with the developments in UK banking reform, but think nothing much has happened since these flaws were exposed in testimony.

I agree with most of what you write by-the-way, and it is hard to make sense of the way inflationary and deflationary forces will play out over time.

As far as I understand it, the FSCS will still cover the full amount, the foreign ownership issue doesn't affect this, but it is actually more fundamental.

Namely who is responsible for Abbey if Santander goes to the wall? The Spanish? Or us Brits? Or how about the European Central Bank? No one knows

Yes, I think if Santander goes under the first port of call for compensation is the ECB (or other domestic scheme) because of their membership of the European Economic Area (EEA). In the case that they are sufficiently funded, there's no problem, but if the foreign scheme doesn't pay out, the FSCS will still only be responsible for a part of the compensation.

It's more the time component that I think is dodgy. How long might it take for people to get compensation? This is an aspect that the banking reform proposals are seeking to address by providing a protocol by which depositor information could be easily transfered to the FSA/BOE/FSCS in the event of an institution entering the special resolution regime (SRR).