Lehman - At Least The Socialists Are Happy

The Lehman crisis has dominated news today, in every quarter. Amid all the doom and gloom there are some people who are as happy as a Goldman banker at bonus time. The socialists.

I have read so much on the web about capitalism getting what it deserves (finally) and comments on blogs about 'greedy bankers' causing the downfall of the financial system.

It's all very entertaining and I can see why certain sectors of the community have no sympathy. For years now we have seen bankers and their CEO's pay themselves huge bonuses, beyond what has ever gone before and some people don't like it. When one of our number gets it in the neck you can see why the socialists would throw this in our faces.

The irony is, however, that regardless of the net affect on the global markets over the next few days, and the knock-on affects of the Lehman failure, the very fact that it is being allowed to fail is a shining example of the free market in all its glory.

Although I agreed with the Fannie and Freddie bail-outs I was becoming increasing uncomfortable that failed banks were being bailed out in the manner that they have been. A correction is the capital markets' natural way of cleansing itself and if there is no downside to moral hazard then we would be living in a socialist state, would we not?

Yes the integrity of the financial system should be kept in tact and yes, we should not let our banking system fail, so there has to be some form of support. But to let bankers pay out millions and millions of dollars to themselves on (what turned out to be) shaky financial constructs and therefore 'false' profits was, to put it mildly, irresponsible.

To then bail-out these same bankers and allow them to continue with their million dollar salaries without come-back is not what the capitalist system is all about.

Risk has an inherent reward, the more risk you take the higher the potential reward, that’s how it goes. To turn this on its head and protect the downside of dodgy financial instruments by bailing out big banks who took those risks and created those products is to destroy the system and create an 'untouchable' elite group of millionaires who will never pay a price, no matter what risks they take.

How many small wealth managers, small banks and small brokerages are suffering because of this crisis? Will they ever see any assistance if they look as though they are failing in this market? Not a chance.

I know of several owners of small companies in this industry who are now putting back their salaries and bonuses from the good times to save the businesses they have built. This is the way it works.

I have no idea how much the big wigs at Lehman earn, but I bet they are not poor. With their accumulated wealth one would assume that they could make a significant dent in the monies required to keep the company afloat. Maybe then Barclays et al would have had more confidence that the bank would survive.

The capitalist economy flourished in the early days because management had most of their wealth wrapped up in their companies, these days, this is mostly not the case. One thing I do know, however, is that a number of junior bankers at both Bear and Lehman had the vast majority of their wealth tied up in the magic beans of stock in the companies they believed in and today they must be very unhappy with their former bosses. Shouting 'Power to the People' at them today may not be good for your health.

Lehman Brothers - Natural Selection At Work

It finally happened, Lehman Brothers, the US investment bank, has said that it intends to file for bankruptcy protection "in order to protect its assets and maximise value".

Consequently, expect the markets to tank on the news as potential ripples spread through the markets today.

Barclays Bank and the Bank of America pulled out over the weekend after the potential buyers said they were not convinced that Lehman, which last week announced a loss of $3.9bn in just three months, would be a good buy for shareholders, a not so subtle code for 'they are in big trouble and we don't want to take it on'.

As of writing the Dow futures are down 330 points, an ominous sign for the open of the Euro bourses and, obviously, the US.

The good news, if there is any, is that a Lehman collapse could trigger a shake up of the entire US financial system which has been stuck in the economic doldrums since the mortgage crisis hit more than a year ago.

"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," Peter Kenny, managing director at Knight Equity Markets in New Jersey, said.

"It's a new financial world on the verge of a complete reorganisation."

The US Federal Reserve and a banking consortium had already announced measures to offset a further credit crunch in the wake of a Lehman bankruptcy.

The consortium of 10 global commercial and investment banks had said earlier that it would provide $70bn "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets".

Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement that they had agreed to create a "collateralised borrowing facility" of $70bn, with each bank contributing $7bn, to help ease access to credit.

"These actions reflect the extraordinary market environment," the banks said in a statement.

Emergency credit

The announcement came moments after the US Federal Reserve announced new steps to ease access to emergency credit for struggling financial companies, by broadening the collateral to be used for central bank loans.

The end of bidding for Lehman prompted a rare emergency trading session on Sunday which market sources said was initiated by the US Federal Reserve with the aim of reducing risk associated with any Lehman bankruptcy.

The lack of a government guarantee to resolve the Lehman crisis is the main reason Barclays decided to exit the negotiations, according to a person familiar with the talks.

So far this year, the government has bailed out mortgage giants Freddie Mac and Fannie Mae, and saved Lehman rival Bear Stearns from going under by extending it cheap loans and allowing its forced sale to another rival, JPMorgan Chase.

Within hours of the collapsed Lehman talks, there were already reports of talks involving the takeover of Merrill Lynch & Co and the expected sale of assets by American International Group.

Bank of America announced early on Monday that it was to buy Meryll Lynch for $80bn - creating the world's largest financial services company in the process.

Over the weekend Alan Greenspan, the former US Federal Reserve chairman, projected the failure of "other major financial firms" but added that this did not need to be a problem.

"It depends on how it is handled and how the liquidations take place," he said on US broadcaster ABC.

"And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

The collapse of Lehman's comes on the tail of the Fannie and Freddie 'nationalisation' and the Bear Stearns sale both of which have garnered criticism from certain quarters about tax payers dollars being used to bail out 'greedy bankers'.

While F&F was, in our opinion, a crucial move need to protect the integrity of the US financial system, a bail out of Lehman's may have been seen as the silver bullet for moral hazard. A bail out of too many of the banking institutions may have signaled that whatever problems you get yourself into the government would bail you out. This, though comforting for investors, may have paved the path to a worse financial crisis years down the road.

In our opinion, it is better to take the pain now and let this crisis run its course.

On the whole the philosophy of 'survival of the fittest' has been the key to success of the financial system for a hundred years, to give too much downside protection at this stage in the cycle could spell disaster for years to come.

Nature has a way of cleaning out the biggest users of resources in a forest by creating forest fires. After the chaos of a fire dies down new trees grow, plants that could not get enough light and whose resources were previously sucked up by big trees flourish and another forest is born.

The sad truth is that these banks that are succumbing to the fires of sub-prime gorged themselves on profits, dominated the markets and they have now slipped up. Smaller firms now have the opportunity to bask in the light and a new financial forest will be born.

Sure, it is sad to see a bank with history go, but the words of the fictional 'Gordon Gecko' from the movie 'Wall Street' should be ringing in the ears of bank executives at the moment; 'either you get it write, or you get eliminated'.

Source: www.hf-markets.com