As the one year implosion of Lehman is now past us, can we all just move on? I mean who cares? Nothing really was accomplished other than to make bankers more wealthy then they ever were. Bankers and traders today are as reckless, as greedy, as arrogant then ever before.
If you look at the credit and equity markets, nothing has changed, like Lehman never existed. But in fact a worse bubble is forming, a bubble that will pop maybe not this year, or next but eventually it will make 2008 seem like a walk in the park.
I have been reading and listening to the various media on Lehman's demise. Its the same stupid questions and comments over and over again.
What went wrong?
Have the right lessons been learned?
Could it happen again?
Should Lehman been saved?
Why was it not rescued like the others?
All of these questions and subsequent comments don't change the fact that fundamentally nothing has changed in the financial zeitgeist. Doe's it matter what went wrong? Who cares about the lessons learned? Who cares if it happens again? We all know that the government has no other option then to bail out insolvent institutions, because the financial institution have made that landscape inevitable. This is what happens when you enable banks to get bigger and fatter by getting rid of Glass-Steagall. The banks loaded and levered up on mortgages and other debt securities, not because they wanted to, they had to just to keep up with other banks. It wasn't just Lehman, although Lehman was the biggest player here.
Most amateur Wall Streeter's and 22 year old journalists would like us to believe that if only the Federal Reserve and the Treasury had leaped to the rescue of Lehman all would have been fine, this is total nonsense and outright preposterous bending of the truth. The real truth is that Lehman was not a cause but a consequence. A consequence of flawed lending practices, absurd risk management, and most importantly inadequate oversight by regulators.
Financial markets and Wall Street had lent on the basis of a bubble, a bubble in large part of their own making, although it was also a creation of consumer lust over anything credit related. Consumers were told to become homeowners because that is the "American Dream." The government made it very easy to get a home, tax credits, GSE's, and lax federal oversight all contributed to consumers lust over home ownership.It was all Hogwash! The American Dream is to get a job and work. After we buy a home, we need plasma's in every room. We need to start families, buy bigger bulkier gas guzzling cars, all completely ludicrous behavior to keep the credit flowing. From this Wall Street needed to create much more complex financial derivatives so they can balance the risks away from their own balance sheets. But the thing is this, one mans asset on his balance sheet is a liability on the other mans ledger. This is where its all connected.
Wall Street does what scorpions do. They had incentive structures that encouraged excessive risk taking and shortsighted behavior. Its really no accident that all of this was done via rigorous lobbying, which looked equally hard to prevent regulation of changes in the financial structure, new products like credit default swaps, which, while supposedly designed to manage risk, actually created it, the complex instruments that they created was used to exploit the masses who only wanted bigger houses and more credit.
The financial sector may not have made good economic or financial investments, but its political investments paid off big time.
Lehman was allowed to fail on many levels because of many reasons that are far too complex even for the most well informed investors and citizens. I have read hundreds perhaps thousands of articles about Lehman in the last year, I have worked in Wall Street for 2 decades and know the ins and outs very well, but I am still trying to figure out what it was all about. Too many people over analyze things because it makes them seem smart. At the end of the day I have come to the conclusion that Lehman was allowed to fail because the Treasury, Government, and Fed needed an excuse to bailout the entire insolvent financial system. They needed to create the mushroom cloud that Bush had lied about 7 years earlier. Lehman was the ultimate "Yellow Cake". They knew that Lehman posed systemic risk, because of its broker dealer arm and massive leverage. They knew it would create a ground swell of emotions and gut reactions that would make it easier to push socialist style bailouts on the American people. Congress would have never approved TARP and back stopping of losses for banks if Lehman was saved.
Everyone knew how the market melted down that Monday when Lehman filed. It was the perfect excuse to get the bankers out of their mess. Create a disaster so that the masses can bailout out the wealthy. Thus the Lehman example became at best a scare tactic, at worst it became an excuse, a tool, to extract as much as possible for the banks and the bankers that brought the world to the brink of economic ruin.
It was the beginning of "Creative Destruction". In the end, The painful truth is that the incomes of taxpayers were put at the disposal of the financial sectors creditors.
This is the easiest way for me to explain and reconcile what happened in reality. In actuality its far beyond complex, and I like Dick Fuld, will go to my grave trying to piece it all together.
The more you know the more cynical you get. This is the ultimate trade off.
Many very smart economists and public policy scholars have made comments that the Lehman debacle should have been handled differently. Yes they are true, there are many ways to look at it, but when capitalism and the general way of life is at stake, the powers that be make brutal decisions.
The idea that "Too Big To Fail" and "Systemic Risk" are new concepts is beyond stupid. It was Wall Streets dirty little secret for 2 decades. They paid a lot of money to lobbyists to protect these concepts. The bailouts we have seen just further protects it. On top of that, the Obama Administration has created a new concept, institutions too big to be resolved, too big for capital markets to provide the necessary discipline for. The perverse incentives for excessive risk taking at taxpayers expense are even worse with the "Too Big To Be Resolved" banks than they are at "The Too Big To Fail" banks. Government has signed over a blank check over to Wall Street. We have not curbed their gambling, told them to deleverage, because the system doesn't work that way. Indeed Wall Street has access to funds from the Fed at close to zero interest rates, not to lend but to re lever back up to catastrophic levels all for trading profits.
I am willing to give Obama the benefit of the doubt here about serious financial reform. He has a lot on his plate from the general economy to health care. He talks a good game, lays out the plan but the devil is in the details.
Too many institutions have started the casino once again. There is no justification other then greed and the implicit guarantee that comes from the government for these actions. It looks like the only counterbalance to all of this is their own incompetence.
After Bear had been sold to JP, the Fed should have figured out how to deal with failing insolvent institutions. How to orderly unwind financial instruments.
tradersutra.blogspot.com/2009/06/orderly-unwinding.html
Instead they told us that Bear was just a one off problem, in fact they knew that the problems were systemic in nature, after all they the Fed helped create it. They just used a band aid approach, calm the masses, keep the peace.
Lehman was a symptom of a terribly dysfunctional financial system that cares only about profits and bonus money. Sprinkle in massive regulatory failure and what do you get?
Housing as well as consumer credit were already in the midst of correcting when Lehman died. Two bubbles since have been deflated, but another credit bubble is already forming, one that will make 2008 look like child's play when it plays out. Maybe we need that as well, maybe the public says no more socialist backstopping of losses, not unless the public gets a bailout this time.
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