As Lehman Brothers (LEH) became a single digit midget, on its way to zero, as Washington Mutual (WM) works its way towards a dollar, as Wachovia (WB) drops 80% over the past year, and as Fannie Mae (FNM) and Freddie Mac (FRE) — returning as divisions of the United States of America, priced now in pennies — we have to reflect on the ongoing lessons learned from the interventions by Treasury and Federal Reserve activity.
The lesson from the Bear Stearns’ bailout — $29 Billion in Federal Reserve bad paper guarantees — are quite stark:
• Don’t just risk your company, risk the entire financial world. If you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system. The fear and disruption caused by a Bear collapse is why it was saved.
• Be the first to Implode! If Lehman collapsed first, the same fear and loathing of the impact to the system might have worked to their advantage. But having been through this once before, the sting is somewhat lessened — especially for a smaller, lets interconnected firm.
• Engage in systemic risk so as your counter-parties are also threatened: Bear Stearns had about 9 trillion in its derivatives book, of which 40% was held by JPMorgan (JPM). Some people have argued that the Bear bailout was actually a preventative rescue of JPMorgan.
• Threaten an important part of the economy: If your book of derivatives is limited to some obscure and irrelevant portion of the economy, you will not get saved. On the other hand, if Mortgages are important, credit cards and auto loans are too. Securitized widget inventory is not.
• Your Balance Sheet is the only thing that matters: Running to the media, whining about short sellers, focusing on PR, is a meaningless waste of time. The only thing that matters is the firm’s balance sheet. Lehman’s liabilities exceed its assets, and they are now toast. Merrill Lynch got much of the junk off of its books, and got a takeover at 70% premium to its closing price. And Credit Suisse, who dumped much of its bad paper several quarters ago, is in a better tactical position than most of its peers.
These are the terrible lessons of 2008 — via Bear Stearns (BSC), Lehman (LEH), Fannie Mae (FNM) and Freddie Mac (FRE).
Originally published at the Big Picture and reproduced here with the author’s permission.