Monday, September 15, 2008

Lehman 2

The important point in Gapper's article on Lehman Brothers is this: 'By doing so he (Dick Fuld) would tacitly have admitted that Lehman was worth merely the sum of its parts. In other words, all the effort he had invested over his career in making Lehman a match to Goldman Sachs, Morgan Stanley and Merrill Lynch would have come to naught.' Gapper is, perhaps wisely, keeping a very narrow focus here. He is writing about Lehman as a specific failure. Fair enough, but, in view of the fact, also overnight, that Merrill Lynch was sold to the Bank of America, AIG begged for support and everybody is now waiting for the next big failure, Fuld's incompetence is merely an acute form of the chronic incompetence of the financial system as a whole. City boosters like Guido claim this is all part of the same old game. It isn't. Lehman lost everything it ever made - except salaries and bonuses -  but all the banks have now lost the investment profits they made in recent years. They have done so knowing they are, in practical terms, one big bank and, as such, their risks will be underwritten by governments. This market wasn't free, it was ineptly rigged. Governments will now have to use regulation to make banks as boring and safe as possible. If they want ultimate state support - and they always do when the chips are down - then that is the price they must pay.


  1. Did anyone see Greenspan (the architect) looking surprised about all this on Bloomberg last night? Phrases such as snake oil salesmen and Emperor's new clothes sprang to mind.

  2. These are the days of rejoicing, retribution is at hand, let them all go to hell in a handcart, the entire obscene balloon sinking into the swamp, hopefully as many of the perpetrators as possible will end up stacking shelves, although most will not have the required skills. A nice bonus would be the Goldman greed factorys honcho's washing dishes in the local Chinese restaurant.
    Oh, and that mob with the black horse, rotting in hell, have a nice day now.

  3. yeah, everyone is talking, hindsight, 20-20!

    they talk about the need for a ''new architecture'' but I bet they'll commission the same old architects.

  4. Lets not mix up the mistakes of capitalism with failure of the markets.

    "Banks should be more like New York restaurants. They come and go but the restaurant business as a whole survives and thrives and the food gets better." Nassim Nicholas Taleb

  5. That restaurant analogy is pretty ropey. When a local restaurant goes bust it doesn't also remove half the contents of your fridge for the next ten years. Which is what can happen to savings and investments when a bank goes down. I think the saintly Anatole Kaletsky has a good point: let's slash the enormous casino of interbank trading whereby £10 of debt can be shuffled between the banks in such a Byzantine fashion that it ends up adding £100 of debt to the whole system. The whole thing is parasitic. If people cannot save with reasonable security - your wages in your bank account for your family and your future - then it's game over. Spend it all today and take up burglary as an interesting retirement occupation.

    I guess most of us would like these bankers set fire to. But we know the reality is that the 1 per cent who are responsible for this mess will retire to enjoy their tens of millions, the only damage being to their pride. The other 99 per cent will be in the unemployment queue.

  6. British business used to consist of an amalgam of industries.. manufacturing, retail, farming, wholesale and services (lawyers, accountants, banks, hairdressers etc) These industries required money (finance) to operate. Some of the more fortunate ones were cash rich, for a variety of reasons. The rest looked to the banks or investors for their requirements. On balance this system worked, there were greedy crooks as there will always be but the majority of players could live with the system. Genuine businesses led, the services followed.
    Then in the early to mid eighties the balance began to shift, banks would have in any case undergone a seed change because of the computer but this was a different sort of change, the finely tuned relationships disappeared to be replaced with inexperience and theory, many owners, myself included watched with growing disquiet as the banks and bloodsucking takeover thugs elbowed their way in. It goes without saying that much of British industry was poorly led and in need of change, but not garroting. The growth in the takeover market is an abomination, nothing wrong with the takeover in those instances where it is best solution for the business. This again was different, most takeovers now are about short term greed and asset stripping. Many good, solid businesses, who had ran into short term difficulties, have been totally ruined like this.
    German business has had none of this, their relationships with their financiers, even today, is one of the long term view. I will say again, the market capitalisation of one German manufacturing company, Seimans, is far greater than the entire UK manufacturing base. The talk by the EEU of a German recession is partially correct, they will hardly feel theirs. The talk, by the moron Brown of the UK being strongly placed to withstand the recession is a lie.

    We find ourselves today in a situation where the arse is wagging the dog, shareholder satisfaction overrides all.
    I don't need to be told about our pensions, a properly regulated and managed stock market is essential, we used to have one, remember.

    We are slowly reaching the point where capitalism is as bad for us as Communism was, it ain't well working and needs drastically overhauling.
    The problem is that no current or future government has the balls to do it. It will take a revolution.

  7. The Taleb quote is taken for a certain Mr Appleyard interview.

    I think what Taleb is saying that is where we need to be.

    The securitization system came about not just because it was profitable to bankers, as they could spread risk (which most businesses do one way or another) it was also profitable for borrowers, (less risk = cheaper money) but also politicos, who could get banks to lend to poor people (happy voters)and get builders to build hospitals (pfi anyone?)...and so one

    there is two questions I would like an answer too.

    1, when the risk models told the bankers that these risks needed them to recapitalize to a higher amount, why did they ignore it. that was about 2 years ago.

    2, Why did not the regulators not also pick up on the coming problem with bank capitalisation.

    My guess is that the party was just too good for everyone to let it end. There is very few without clean hands in this mess

  8. We can thank John McCain's pal, Phil Gramm who was co-sponsor of the 1999 law that allowed commercial banks to get into investment banking. Plus he was a prime architect of a 2000 bill that removed regulators from what ultimately became the crap mortgage bonds being swapped around until they magically became good bonds. If any politician deserves to be dragged through the streets it is Phil Gramm.

  9. Things seem to have changed: The article explains AIG's current situation pretty well.