(2008-09-15) Lehman Merrill Fall

Fresh Credit Crisis 2008 news

• LehmanBrothers declared bankruptcy

  • sliding loss of credibility

  • David Einhorn has been shorting Lehman Brothers since at least November 2007 when the stock was trading around $60 per share and routinely challenged Lehman's management to come clean about the true liability of its mortgage-related holdings.

• Merrill Lynch is selling out to Bank Of America

Sept4 prequel: Mark Thornton sees a big cause of the crisis as the Financial Services Modernization Act Of 1999 (Gramm Leach Bliley), which undid a chunk of Glass Steagall - it would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance; but in the world as it is, this "deregulation" amounts to corporate welfare for financial institutions and a Moral Hazard that will make taxpayers pay dearly.

AIG is considered to be at risk.

• Sept17: added to the Bail-Out list. What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but AIG's role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars' worth of risky securities that were once considered safe. If A.I.G. had collapsed - and been unable to pay all of its insurance claims - institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt... At Tuesday night's meeting. lawmakers asked if there was any way of knowing if this would be the final major government intervention. Mr. Bernanke and Mr. Paulson said there was not. Indeed, the markets remain worried about the financial condition of major regional banks as well as that of Washington Mutual, the nation's largest thrift.

Doug Diamond and Anil Kashyap give a summary of the downfall of these firms.

Fred Wilson quotes Andy Kessler's position that these Investment Bank-s have been living on borrowed time ever since they were deregulated (in 1975) and then disrupted by technology: lacking their old sources of profits, they played a new game which seemed to work for awhile. 2008-09-16-TalebLimitsOfStatistics

The people who ran the financial firms chose to program their Risk Management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.

The FBI is involved.

• Jan28'2009 update: they were aware for years of "pervasive and growing" fraud in the mortgage industry that eventually contributed to America's financial meltdown... But the agents with the expertise had been diverted to counterterrorism... Both retired FBI officials asserted that the Bush administration was thoroughly briefed on the mortgage fraud crisis and its potential to cascade out of control with devastating financial consequences, but made the decision not to give back to the FBI the agents it needed to address the problem. After the terrorist attacks of 2001, about 2,400 agents were reassigned to counterterrorism duties. (Dealing With Terrorism)