By William Davis
Or “DAMN! WE’RE IN A TIGHT SPOT!”
On an epic Monday morning ten years ago, Lehman Brothers, until the moment one of Wall Street’s most intrepid investment banks, crashed itself into the rocks. Sinking under the weight of more than $600 billion in debt and a boatload of toxic real estate assets, the firm’s tragic descent into liquidation would devastate financial markets around the world, lead to the biggest economic downturn since the Great Depression, and dislocate millions of lives.
“For six long years I’ve been in trouble…”
On the day of its woeful downfall, Lehman Brothers was the country’s fourth-largest investment bank, with some 25,000 employees worldwide. At the helm of the big brokerage shop was one Dick Fuld. As CEO, the unfortunately-named Mr. Fuld was – rightly or wrongly – immediately branded as one of the villains of his time, blamed for not heeding the warnings about Lehman’s risks and not securing a deal that might have averted disaster. Such is his legend.
“no pleasure here on Earth I’ve found.”
But ten years later, Mr. Fuld is still seething over the government’s refusal to rescue Lehman in the same way it had, and would, other financial firms that suffered great misfortune. Bear Stearns, for example, one of Lehman’s closest rivals, had already run aground but avoided bankruptcy with a Fed-backed sale to J.P. Morgan on March 16th.
But six months later, regulators blocked a similar last-ditch deal for Lehman to sell itself to Barclays of London. As a predictable result, Bank of America, another prospective buyer of the Lehman wreck, shrewdly, and quickly, decided to buy a struggling Merrill Lynch instead.
“For in this world I’m bound to ramble…”
With no remaining suitors, and no champion to be found amongst the Feds, Lehman Brothers Holdings declared bankruptcy first thing September 15 – the nation’s largest Chapter 11 filing. And, at least according to the ill-fated Mr. Fuld, this country’s most colossal failure of financial common sense. He argues that Lehman had ample collateral to justify a U.S. government loan in 2008, and the firm only needed $32 billion to stave off its demise. Wretchedly enough, one week after Lehman’s death the Treasury Department committed $182 billion to save insurer American International Group from the same fate.
“I have no friends to help me out”
At this hour, the Lehman tragedy is close to winding down: The estate that manages the ruined firm’s assets has resolved all but $4.1 billion of the $1.2 trillion in claims brought against it since the filing. And the pundit crowd, including certain Oracles from Omaha, keeps is still churning out masterworks on what went wrong and how to stop it from happening again. The good ones tell us to stay constant with regard to risk. The cynical ones tell us to keep better friends.
”Man of Constant Sorrow” is a traditional American folk song first published in 1913 by Dick Burnett, a partially blind fiddler from Kentucky.
What the numbers are saying…
- $1.23 billion
The amount FranklinTempleton funds lost in the past two weeks on their largest Argentine bond positions
What smart guys who know the big index providers are creating a new Communication-Services sector are saying…
“Around the time this occurs (September 21), there could be some dislocations depending on how investors are rebalancing their own portfolios.”
- Brian Hayes, quantitative analyst at Morgan Stanley
What unhelpful guys who should’ve seen it coming and didn’t are saying…
“Nobody saw how widespread and devastating the crisis itself would be.”
- Ben Bernanke, Federal Reserve Chairman in 2008
“We were behind the curve.”
- Donald Kohn, Federal Reserve Vice Chairman in 2008
What the facts are saying…
- About $5.5 billion flowed out of global stock mutual and exchange-traded funds during the week ended Sept. 12, the largest outflow in 11 weeks.
- The S&P 500 financials sector was the broader index’s only group to fall last week, the first time it has been the only negative sector in a week since February 2008.
- On this day in 2008, the Dow industrials fell 449 points to its lowest level in almost three years. Morgan Stanley fell 24%, while Goldman Sachs shares dropped 14% as investor concern grew about which financial firm would be next to fall.
- Twitter Inc., down 32% since the end of June, is the S&P 500’s worst performer so far this quarter. The stock gained 64% in the first quarter and 23% in the second quarter.
- Shares of Goldman Sachs Group shares fell across 10 straight sessions for the first time ever.
What folks with ears to the Street are saying…
” Apple Inc. pulled off a notable accomplishment at its annual iPhone refresh. The world’s most valuable company managed to raise its prices without seeming to do it.”
— Heard on the Street Columnist Dan Gallagher