EconoMonitor

Nouriel Roubini's Global EconoMonitor

If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system

It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

Let me elaborate in much detail on these issues…

This bail-in of investors is the opposite of a bailout of investors like the one that was done in the case of Bear Stearns and Fannie and Freddie. It is thus akin to the bail-in of investors that was done in the case of LTCM in the summer of 1998 and the bail-in of the interbank creditors of Korean banks in the winter of 1997. I wrote in 2004 with Brad Setser an entire book titled “Bailouts versus Bailins: Responding to Financial Crises in Emerging Markets” that discusses these policy tradeoffs in financial crises where you have runs on the liquid liabilities of either illiquid and/or insolvent countries. Those were the international equivalent of the banks runs and financial crises that we are now seeing in the cases of Bear Stearns, Lehman and Fannie and Freddie.

Since government bailouts put at risk public money and create moral hazard Treasury and the Fed decided that they need to draw a line somewhere after the bailouts of Bear Stearns creditors, of Fannie and Freddie and all the other actions aimed at backstopping the financial system. These actions have included the creation of the TAF, TSLF, PDCF, the use of the FHLBs to provide liquidity to distressed mortgage lenders, the provision of Treasury liquidity to the FHLBs, the outright purchase of agency MBS by the Treasury, the swapping of two thirds of the safe Treasuries of the Fed for toxic illiquid securities of banks and non banks, etc. So after having created the mother of all moral hazard with their actions (including the biggest bailout of all, i.e. the rescue of Fannie and Freddie) the Fed and Treasury are playing a chicken game with the financial system. Tim Geithner told clearly to the heads of all the major Wall Street firms that if they pull the plug on Lehman and Lehman collapses they are next in line for a run on their institutions. So if a buyer for Lehman is not found (or even if it is found and the counterparty lines are still pulled) not only Lehman will collapse but the run will extend to all of the other major broker dealers and banks that are the counterparties of Lehman.

The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: after all Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).

The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.

But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found or put capital into a bad bank that would take the toxic assets off Lehman’s balance sheet. Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman or fork new money to support a bad bank full of junky toxic waste. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case).

Paulson and Bernanke and Geithner (the troika managing this financial crisis) have all made public statements in the last few month to the necessity of finding an orderly way to close down – rather than bailout – a major and systemically important non bank financial institutions: the embarrassment and losses for the Fed that the bailout of the creditors of Bear led made it paramount to avoid another Bear like bailout. That is why they are now playing tough with Lehman and its creditors. But in this game of chicken the Fed and the Treasury may end up being the ones to blink. Faced with the risk of a generalized run on the other broker dealers they may decide that greasing again a deal for the purchase of Lehman may be less costly and less risky than testing whether the system can orderly work out a collapse of Lehman (something that is highly uncertain). Even in the case of the Bank of America
purchase of Countrywide such public subsidy was significant (the FHLB of Atlanta lent to Countrywide over $50 billion and Bank of America has most likely received plenty of tacit forbearance from the Fed to support its takeover of an insolvent Countrywide). So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.

The trouble is that, in spite of all public statements regarding the need to provide an orderly demise of large broker dealers, the Fed and the Treasury have done nothing to create such insolvency regime for such broker dealers. So the only option for Lehman – if a buyer is not found – will be the one of ending up in Chapter 11 and trigger massive losses on its counterparties that will in turn trigger a run on such counterparties.

In February of 2008 I predicted – in my “12 Steps to a Financial Disaster” – that one or two major broker dealers would go bankrupt. A month later Bear Stearns went bust and the collapse of the other ones was avoided for a time by the most radical change in monetary policy since the Great Depression, i.e. the creation of the PDCF that extended the lender of last resort (LOLR) role of the Fed to non-bank systemically important broker dealers (i.e. all of the bank and non bank primary dealers of the Fed).

I next argued in June that such action would not prevent a run on other broker dealers such Lehman as to avoid a run you need both deposit insurance and unlimited and unconditional access to the Fed LOLR support. I also discussed why Lehman was next in line for a collapse and why the PDCF would not prevent a run on Lehman.

I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.

Here is a link to my July interview on Tech Ticker (“They’re All Toast’: Roubini Says Brokers, Even Goldman, Can’t Stay Independent”) where I predicted the demise of all of the independent broker dealers.

(click for video)

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The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.

What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.

This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.

Sunday Evening update: as predicted here in the absence of a government bailout of the toxic assets of Lehman the firm was insolvent and no bidder wanted to buy it for a positive price; thus Lehman is now headed – save for an unlikely last moment miracle buyer – towards bankruptcy filing tonite. And the unraveling and collapse of the other independent broker dealers (Merrill Lynch, Morgan Stanley, Goldman Sachs) that was predicted here a few months ago is occurring even faster than I expected: in March it was Bear Stearns; today is Lehman; now newswires are announcing that Merrill Lynch is in talks with Bank of America for a merger; and in a few months it will be the turn of Morgan Stanley and Goldman Sachs. Frankly the best advice that Bernanke, Geithner and Paulson can give to John Mack of Morgan Stanley and Lloyd Blankfein of Goldman is: “dont wait a single further minute and find a large domestic or international bank you can merge with, a large commercial bank that has a stable base of deposit-insured deposits; otherwise you are bust”. This is the end of the Wall Street of independent investment banks; as predicted months ago the collapse of a structurally flawed shadow banking system is now underway in very rapid order.

Here is a link to my longish interview on Bloomberg TV on Sunday night where I argued that all of the independent broker dealers (Bear in March, Leh
man and Merrill today; and Morgan Stanley and Goldman Sachs soon enough) will disappear as their business model is flawed and as they are all at severe risk of bank-like runs on their extremely short term liabilities
.

(click for video)

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Here is a link to my (shortish as I was cut off while talking) interview on CNBC on Sunday night where I predicted the demise of all of the independent broker dealers (including Morgan Stanley and Goldman Sachs after Bear, Lehman and Merrill).

Here is a link to my July interview on Tech Ticker (“They’re All Toast’: Roubini Says Brokers, Even Goldman, Can’t Stay Independent”) where I predicted the demise of all of the independent broker dealers. As argued at that time in July:

“They are All Toast: Roubini Says Brokers, Even Goldman, Can’t Stay Independent
Posted Jul 22, 2008 05:09pm EDT by Aaron Task in Investing, Newsmakers, Recession, Banking
Related: GS, LEH, MS, MER, JPM, BAC, C

The broker/dealer business model is “inherently unstable” and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU’s Stern School and chairman of RGE Monitor.Embattled Lehman Brothers is likely to seek a buyer “within months,” Roubini says. Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.The problem, he says, is that broker/dealers use the same model as banks — borrow short and lend long — only they borrow on even shorter timeframes, use more leverage, and don’t have the kind of government backstop banks enjoy.In the wake of Bear Stearns’ demise, which showed how brokers are vulnerable to a “run on the bank” if they can’t get overnight funding, the Fed temporarily opened its discount window to brokerage firms. But making that option permanent means submitting to the same kind of regulation and capital requirements as banks; that, in turn, means a very different business model — and much lower profitability — for Wall Street firms, whose current business model is “not viable,” he says.With U.S. financial giants like JPMorgan, Citigroup, and Bank of America dealing with internal issues, the most likely buyers are international financial firms or sovereign wealth funds, Roubini says. But unlike in 2007, foreigners are not going to settle for preferred shares, and non-voting rights next time around.That raises the questions: Is America ready for (true) foreign ownership of major financial institutions? And do we have a choice?”

My recent interview this past week on Bloomberg TV where i predict a severe and systemic financial and banking crisis is available online. (click for video)

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Monday Morning Update:

Now that the collapse of Lehman is leading to the risk of the generalized run on the shadow banking system (the other independent broker dealers, the broker dealers that are part of larger commercial banks such as Citi and JPMorgan, hedge funds, private equity funds, the remaining SIVs and conduits, money market funds, other smaller broker dealers) the policy reaction is to try to build a new set of levies while the financial perfect storm  of the century has destroyed the first sets of levies.  This reaction includes the following steps.

First, the Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities.

Second, the Fed is waving Section 23A of the Federal Reserve Act that restricts how much commercial banks can relend liquidity to their investment banking affiliates; these restrictions are sensible prudential rules aimed at avoiding banks to subsidize their broker dealer affiliates with deposit-insured deposit.  Now these sensible prudential regulations are thrown to the wind; so Citi, JPMorgan and Bank of America can happily use or raid their FDIC-insured deposit to support their bankrupt broker dealer operations. This is reckless as abuse of this new form of subsidization of near insolvent broker dealers with commercial banking deposits may eventually impair the viability and solvency of their commercial banking regulation. This is a form of connected lending that eventually led to the Japanese financial crisis and their severe banking crisis. This process of raiding FDIC insured deposits already started in 2007 when the Fed waived Regulation W for Citigroup and Bank of America when the unraveling of their toxic SIVs and conduits occurred with the roll-off of the ABCP paper. So, now all banks – not just two – can happily raid their deposits to save their broker dealers operations where funding mostly occurs with unstable reckless overnight repos. This desperate policy action shows that even the broker dealers arms of non-independent broker dealers (Citi, JPM, BofA) are now at the risk of a run on their overnight liabilities.

Third, an attempt to bail-in the priv
ate sector and provide a private lender of last resort support of the financial system is at work: ten major global banks will each fork $7 billion to create a $70 billion fund; each of these firms could borrow up to a third of such fund or $23 billion. But this private lender of last resort (LOLR) facility will not work since if any firm were to access this facility in case of a run on its liabilities panic will ensue – as the use of it will signal severe trouble – and the run will continue. The IMF created a similar facility to deal with liquidity runs on sound and solvent but illiquid countries; but no country ever used or even signed up for such facility as it would have been associated with “stigma”.  Also such private LOLR facilities need to come with rules on their use (“conditionality”); otherwise an illiquid and insolvent broker dealer could access the facility with no restrictions and bankrupt the fund and the other members of the fund. But the new facility apparently does not come with any conditionality; so it is flawed in its design.

Fourth, since Lehman is bust the new line of defense was the takeover of Merrill by BofA. After taking over the insolvent Countrywide now Ken Lewis is making another reckless gamble by taking over at a vastly inflated price another distressed broker dealer. This is dangerous behavior for BofA. The lesson for Mack of Morgan Stanley and Blankfein of Goldman is that they should find a buyer today. After the collapse in six months of three major broker dealers Morgan Stanley and Goldman will be next unless they find a large financial institution with a large commercial bank that provides stable FDIC-insured deposits.   As predicted here months ago no independent broker dealer will survive.

Crisis on Wall Street: Roubini Predicts Another 20 Percent Stock Drop, Sale of Goldman, Morgan (Click below for video):

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Big Risk: Surging Debt Makes U.S. More Dependent on China, Russia, Gulf States (click for video):

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Was the Government Right to Let Lehman Fail?(click fon video):

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Top Economist: Americans Should Worry About Bank Deposits if Congress Doesn’t Act (click for link)

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Roubini Says Morgan, Goldman Need Partners to Survive (click for video):

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433 Responses to “If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system”

GuestSeptember 13th, 2008 at 2:30 pm

whttp://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.htmlwow, repo action is picking up. fed is gonna push market up.

GuestHubbsSeptember 13th, 2008 at 2:55 pm

What is Bank of America up to? Dr Roubini predicted no purchase of Countrywide. Also, what about Wachovia?Foreign buyers of the distressed institutions…will they buy even if guaranteed by the US govt? Which is the weaker link: the prospect of “guarantees” with inflated dollars by the US govt or that the institutions themselves are worthless?

artichokeSeptember 13th, 2008 at 2:56 pm

How can anyone think the “shadow financial system” deserves any bailout? They were operating outside the law. (I didn’t say against the law.) They don’t deserve the protection of the law or the governmental system.Treat them all as offshore hedgefunds. We have no jurisdiction over them, they’re on their own, not later, right now. Yes that includes Goldman, Morgan, Merrill and Lehman.

AfASeptember 13th, 2008 at 3:39 pm

Roubini, you mean “game of chicken” like in this:http://en.wikipedia.org/wiki/Game_of_chicken“Strangely enough, an irrational player has the upper hand in chicken.”The winner is the one who has the least to lose? I guess that is what I was looking for talking about a variation of Nash equilibrium that can be a basis to map the moral hazard issue in the short term.Anyway, nice call Professor, as always.

MedicSeptember 13th, 2008 at 3:42 pm

That pit in my stomach is getting bigger. Monday’s are becoming the day TPTB seem to prop things up, but this one should be different.I might have been off by a month…….The road down from here is perilous and will be much faster than what we have seen in the past year.Best of luck to all……

BystanderSeptember 13th, 2008 at 4:33 pm

I’ve had a bad feeling since December; with the ebb and flow of what has been happening it lessens sometimes – but never goes away. It seems to me we are like a quarter in one of those fundraiser “coin whirlpools” where you watch your coin spin downward in ever quickening spirals until it finally goes down the tube. The spirals have been slow enough up to now that many people just don’t seem to see where we are headed. I fear the speed is about to pick up now…

YankeeSeptember 13th, 2008 at 6:54 pm

Medic – I do not feel prepared. I think my company is in trouble!I guess we should just get this over with, however….ot-Anyone else waiting A LONG time for Kitco to fulfill your order?

MedicSeptember 14th, 2008 at 5:09 pm

Yankee -Stay calm. You have a level head and can find your way. Stock up on what you need – be cautious – don’t panic.We are all here together. No one is exempt. Hold you cash and whatever else you have on hand you feel has value. Update your resume. Insurance companies won’t last too long in this mess.It’s time to re-evaluate your real needs. Can you live with a lower paying job? Can you be happy with less? These are questions you will have to answer soon. Be proactive and beat them to the punch – look for a more stable job in a more stable environment. Stay out of finance, insurance and medicine – we are going down with you.Simplicity is in. It can sustain.Good luck my friend.

GuestSeptember 13th, 2008 at 4:23 pm

Germany urges US to find Lehman Brothers solutionSaturday September 13, 9:23 am ETGermany urges US to find solution for Lehman Brothers crisis before Asian markets reopenNICE, France (AP) — Germany called on U.S. authorities Saturday to find a solution for crisis-hit bank Lehman Brothers before Asian markets reopen for trading early Monday.U.S. officials have so far talked

GuestSeptember 13th, 2008 at 4:44 pm

Mr BernankeThis is really a great solution.In this case please find a solution for DB before Asian markets reopen for trading early Monday.A.Merkel

Alessandro - http://castellidicarte.blogspot.com/September 13th, 2008 at 4:43 pm

@Nourielapparently you are not the only one to fear a systemic crisis anymore.

Feds’ Lehman Plan Doesn’t Set Well With Street Execs…On Friday night, after the government finished out what one person with knowledge of the discussion described as the Fed’s “LTCM Plan,” an executive in the room pointedly asked, “What happens when there’s another one?”

http://www.cnbc.com/id/26681709

GuestSeptember 13th, 2008 at 4:51 pm

How about an article or post on what the average small investor should do. If we stay in the market we lose. If we go to all cash we lose – especially when FDIC can’t deliver on promises. Are t-bills really safe when the gov’t will be printing money by the boatload. I feel like I’m being hosed and everything the small guy has saved will disappear unless there is some safe haven. Some info or advice as to a true safe haven would be appreciated even if its a mattress.

Cedric RegulaSeptember 13th, 2008 at 9:41 pm

I did think about getting a teddy bear and stuffing it full of Krugerrands, but then I started worrying that someone might steal my teddy bear.So, there is a gold etf, but if gold prices worry you then there are also foreign bond funds and foreign currency.Bonds funds denominated in major currencies are GIM, BWX, RPIBX, and WIP. GIM is actually hedged with a large euro short right now, which worked the last 2 months, but may not going forward.Then they came out with a bunch of currency ETFs, but I don’t have the symbols handy. Try googling those.

GuestSeptember 13th, 2008 at 10:20 pm

Suggest a few things –(1) Save in “safe” currencies just as CHF or JPY, and offshore. The currency will fluctuate against the USD, but at least you will have safety in that they are likely to go up against all currencies in times of fear. Any HSBC or other non-US global bank (wouldn’t suggest citi just because they may go under too) will be able to open a multi currency account up.(2) Have a stash of cash saved at home “under a mattress” — and make sure you have an emergency food/supply kit just in case.(3) Don’t vote in pseudo “free market” presidents and their ilk who create and fan these messes!

RosenSeptember 14th, 2008 at 5:00 am

I’d add to the smart suggestions here– strongly consider emigrating from the USA entirely. If you’re educated, capable and entrepreneurial, and particularly if you have a tech-ish background, it makes no sense to stay in the USA anymore. This has become a country that celebrates mediocrity, stupidity and incompetence, as the past decade has amply demonstrated (in our culture, our politics, our infrastructure disasters and so forth). Plus the dollar is about to start a plunge, your savings will be erased via the inflation tax, universities here will send you and your kids into bankruptcy paying tuition. Just don’t stay here if you have prospects.As for where to go– Britain and Australia (especially the United Kingdom) are almost as bad as the USA. In fact, Britain has an even higher level of personal indebtedness, hard as that may be to grasp.But I have a number of old friends who’ve emigrated to a variety of places– Continental Europe (especially the German countries), East Asia (nice especially if you have a background there), Dubai, even South America. If you have a tech background and some skills, or even if you’re just a skilled craftsman in some kind of field, then Germany, Switzerland, Austria, as well as the German-speaking “umbrella” in Belgium, Italy and Eastern Europe is a nice place to go. Such training and ability are highly valued there, the schools are great (and provided as a free service, in contrast to the USA’s tendency to piss away our budget on idiotic foreign wars), the cities are beautiful, architecture is inspiring, in general quality of life is much better. I know almost a dozen of my old colleagues and classmates who’ve emigrated to this German-speaking region, and after some tough bumps in the road, they’re all happy with the choice.Otherwise, depending on what you want to do, France, Italy, Denmark, even Spain or Greece have their charms. They’re mostly Eurozone countries, and they’re always interested in young talent. You’ll have to pick up the language (and German seems to be useful throughout Europe) but it’s not that hard when you’re there, it’s mind-expanding and well worth it. Again, taxes are supposedly higher there than in the USA, but inflation is much higher in the United States (not to mention corporate taxes), so if anything, real taxes are higher in the States than overseas.If anything, the “new big destination” for emigres from the USA these days, is South America. It surprised me to hear this, but there’s a lot of opportunity there for the entrepreneurial set, plus (the big draw I guess) a much better quality of life, healthier family life and so forth. Chile, Brazil and even once-scorned Argentina have some wonderful cities to live in, as do Paraguay (Asuncion) and Uruguay (Montevideo). There’s also Panama and Peru. I’ve been on business trips to South America, and I’m always shocked at the number of Americans, Australians and Britons I always run into there. You wouldn’t notice them at first– after being there a couple years, they tend to speak perfect Spanish (or Portuguese, in Brazil) to make it there– but they’re becoming tremendous draws. East Asia’s obviously top-notch if you have some heritage there, and can’t say anything bad about Dubai.But internationalizing yourself and emigrating may be the best thing you can do for your career. And, obviously, make sure to hold on to diverse currency as you travel!

GuestSeptember 14th, 2008 at 11:15 pm

Can’t say anything bad about Dubai? Guess you could if you were a poor Pakistani working in Dubai, living in squalid housing, being exploited, underpaid, or not being paid at all. Serfs. But you would be part of the technical class, wouldn’t you? Wouldn’t have to worry about that sort of thing. Do us a favor and emigrate from the United States as soon as possible. You won’t be missed.

GuestSeptember 15th, 2008 at 2:20 am

What a thoughtful observation.I have to say that I invested in a franchise that utilised my core skills in a new discipline.Where I now live is irrelevant.’whos moved my cheese’ ? was the short read that helped my change

jomosSeptember 14th, 2008 at 9:29 pm

Once again, “crazy advice for crazy times”. First, take ownership of assets, stock certificates,home and retirement account where possible.For the possibility of hyper inflation, take possession of gold and silver. For the possibility of deflation, cash in hand, coins preferred in case of currency swap to new currency.Coins are not federal notes but minted by treasury. In deflation everyone loses but they that lose the least will be able to buy at incredible prices at the bottom.”Conquer the crash” by Robert Pretcher recommended.

GuestSeptember 13th, 2008 at 5:03 pm

Market about to crash….really. It is hanging by a “Working Group” thread…which will fail. The “Japanese 1990” style shadow government manipulation is sealing our doom.The dam is taking on massive deflationary damage..and is about to come down. Water (failing FNM, FRE, BSE, Indy, WM, WB, MER, MS, AIG, GM, F, etc. etc. etc.) is puring thru the catastrophic cracks.Mark the post.

AnonymousSeptember 13th, 2008 at 10:05 pm

Is MS in real hot water? Hadn’t heard much about them for a while. They got to design the F&F bailout (so kindly donating their services) so I would be surprised if they came out of it badly.

GuestSeptember 13th, 2008 at 5:15 pm

It is amazing how fast this seems to be moving since I started following this stuff in March . My father (now deceased) used to tell me stories about the Great Depression and warned me that history repeats itself. Now I am vividly hearing him .

GuestSeptember 13th, 2008 at 6:00 pm

Buildings no good without bodies to occupy them. Commodities only as good as the demand for finished goods. Stock certificates and paper trades only as good as the faith and credit backing them. Shelter only worth its transitive value for personal comfort and protection. Agricultural land good for it productive capacity.Suddenly everyone should think 15th century as much of the very esoteric and stratospheric “goofy” goods of the last several decades are about to become laughingstocks. Real value, real goods, real services are going to deflate severely, but the others? Well, they will evaporate completely. Strict baseline survival goods and necessary services will fare fine. People will repudiate the ridiculous variety we now accept as commonplace in “advanced” society. Greater emphasis on well developed minds, culture, and in-home cuisine is coming. Bubble tangibles? Extinct.The new world order is just a return to baseline, regression to the societal mean. Life may return to a simpler, more basic and even more enjoyable model. Especially as the packaged hydrocarbons of the earth’s interior become scarcer or as the need for it diminishes in refocused priorities.

GuestSeptember 13th, 2008 at 6:08 pm

Yeah! A Deal! Again a last minute save! But the body is innoculating itself against the stick-save narcotic. We have grown too used to its influence and have an increasing need for an increasing dose to provide a diminishing effect. No, the dope needed to survive a week that sufficed just a few months ago won’t get us through a day’s trading. No. TPTB, FED, Treas, PPT are just running thin on the volume of dope now required to goose the markets to their objective value. The addict is demanding more and more, but provision is less and less. The rally, flag, slump cycle is intensifying and despite fiat currency, jawboning, artifice–they really do have limited resources. The smart (and entirely underestimated) fence-probing public are about to show them true price discovery…and retribution for their manipulative devices.

Alessandro - http://castellidicarte.blogspot.com/September 13th, 2008 at 6:28 pm

Guest, believe it or not, this is exactly the advice Citi give to its customers (via The Big Picture):”As the market falls aggressively, we find that there are further developments from authorities that act as ST supports for the Dow. But the real concern is that each crisis has been followed by a bigger crisis and this just does not feel like the “capitulation blow out””http://bigpicture.typepad.com/comments/files/dowfed090808.pdfalso some observations from Barry Ritholtz about the Fannie and Freddie nationalization:”Six observations/questions/takeaways from the past of weekend rescues history:1. A strong rally lasts for a while, but it eventually fades and makes a new lower low;2. Each “rescue rally” has been shorter in duration and weaker in intensity than the immediately prior one;3. Friday’s close becomes your new line in the sand; If and when that is breached, look out below.4. The pre-Asian open news pattern reveals the Asset price focus is a large part of these issues; It also speaks to our overseas creditors/Overlords;5. What form of free markets have we evolved into? It is not Capitalism, it is not Socialism, it is not intelligent regulation. WTF is this?!?6. During the prior 5 interventions, the VIX was at cyclical record highs. This time, the VIX was at a much more modest level (22)Lastly, who wants to bet me that this will be the very last bailout? Any takers? Any?”http://bigpicture.typepad.com/comments/2008/09/weekend-bailout.html

Alessandro - http://castellidicarte.blogspot.com/September 13th, 2008 at 6:09 pm

Game of chicken in full swing!Wall Street against the Department of Treasury, place your bet.(I suspect the smart money is on Wall Street.)

AnonymousSeptember 13th, 2008 at 7:19 pm

Let it crash.At least then the real problem in our society will be exposed for all to see. No more distractions with celebrity gossip or 24 hour coverage of hurricanes. Who knows, maybe then real issued will be discussed during the presidential debates instead of lipstick and who can really wear the word ‘change.’ I am so sick of the superficial media coverage and silly opinion gossip mongers who job is simply to shock viewers with their take on inane wedge issues. Let it crash…

AnonymousSeptember 13th, 2008 at 10:07 pm

Well, does an investment bank owe you money? Do you own a lot of stock in one?If not, you’re like most Americans, and would probably stand to benefit from their shrinkage or demise.Don’t worry, be happy!

GuestSeptember 13th, 2008 at 10:30 pm

Be careful what you ask for; what you call distractions (celebrity coverage, hurricane coverage, ‘if-it-bleeds-it-leads’ coverage, frivolous political banter, and wall-2-wall Fall sports) may be the Mask of Comforting Civility that hides the hideous face of a 21st century society comprised of voters, taxpayers, policymakers, elected officials, and financial institutions who are collectively and woefully ill-prepared and as-yet psychologically incapable of processing what is visibly unfolding around them. It’s like an emergency room scene where very wise nurses know to heavily censure what they say [that’s understandable by lay people] when processing a newly-arrived and obviously terminal case that is still alive, possibly aware, and surrounded by burly loved ones who desperately need to hear something good & comforting.If you know how to read the faces of EMS professionals & Triage Nurses, then you know what I mean. It is not like Hollywood movies. They do not force the soon-to-die or their loved ones to ‘Accept Reality’ in these delicate cases, rather they let Reality Arrive to the victim & their family.

AnonymousSeptember 14th, 2008 at 11:12 am

Actually I agree. Your response is quite wise. I work in entertainment and the only money I stand to lose is my 401k. It’s just frustrating that so many don’t even see the real storm that is about to envelope them. It’s much larger than a hurricane and could effect the entire world. I know that civilization is a delicate thing, so you are right. I should be careful what I wish for.

PeterJBSeptember 13th, 2008 at 7:40 pm

“So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.”@ RoubiniExcellent summation Professor and Yes, as ALL is now “Moral Hazard”, the probability that the FedRes will create a lot more public liability for Wall Street is highly likely – as it doesn’t matter any more; its over; its time to pillage selectively and broadly by the few. The hanging will come later.The F&F game has allowed a ‘carte blanche’ to the troika (et al); the Congress is redundant and probably will not look up while feeding on their share and their is little doubt that at present that the GOP will win the coming erections – again.War be their game and the PNAC be their new Constitution er, Bible.A lesson however, should be learnt from the Australia ’80’s scandals, where, when the financial bubble / scams burst, the financial heroes (rascals) of the day mostly fled to all corners of the planet to try to hide in rat holes in the most remote of parts. However, the real guilty Party’s’, namely the Bankers, and Politicians, and Bureaucrats (including a Prime Minister) that made this huge fraud (for tiny Australia) easily possible and achievable, led a vindictive World-wide hunt for these rascals (in order to cover their guilt and enthusiastic collusion); and found them all; today in this World, there is no place to hide; especially for the incompetent and stupid.Ho hum

AfASeptember 13th, 2008 at 8:12 pm

“the GOP will win the coming erections – again.”Is that what was all about? And me thinking it was about a different type of competition based on votes, political project … Now I understand better how they were chosen. How could we blame them?

Da GuestSeptember 13th, 2008 at 7:47 pm

It is unrealistic for someone to buy Lehman without several weeks of due diligence, how do you value all the derivatives, swaps, and real estate without a full review of the books over weeks? If the government wants Lehman not to go belly-up then they will have to step up and provide guarantees.If the consequences are as severe as Dr Roubini thinks then the government will cave and backstop the deal.

AfASeptember 13th, 2008 at 8:18 pm

In my opinion, I think that the main reason why nobody is interested in buying Lehman, is that with or without its asset management arm Neuberger Berman, the bank is worth less than 0.Fuld wants to sell the whole thing, but all bids for now are only for NB, which puts Lehman and its investors in a very difficult spot.So from the buyers’ point of view, time and bankruptcy are beneficial. The longer a deal drugs on the cheaper and easier the terms of the sale will be. If Lehman go to BK, then buyers can snap the best and profitable parts without assuming the bad liabilities of the whole bank.

GuestSeptember 13th, 2008 at 11:58 pm

best way to fix this toxic waste crisis is fire sale aka mark to market. lets start and be done with it. here comes tsunami of writedowns.

Miss ItalySeptember 13th, 2008 at 7:47 pm

Hei guys,Ryskamp is back, posting in other sections of RGE (Would Lehman’s Default Be a Systemic CDS Event?, by Elisa Parisi-Capone).Please help me to persuade him to post also in the main one. We need also is point of view. These are historic times.

AnonymousSeptember 13th, 2008 at 10:12 pm

Yes he says that four senators are proposing a ban on foreclosures now. That his prediction of the Maintenance Regime replacing the Scrutiny Regime is taking hold. Must say he’s not been wrong so far!

GloomySeptember 13th, 2008 at 8:34 pm

MORE TROUBLE BENEATH THE SURFACEMy son has a friend who works at Lehman trading derivatives. He says many of the derivative traders kind of went crazy last week and were trading gigantic positions, much larger than usual. Whoever lands Lehman might end up with some nasty surprises when they start settling trades next week.

artichokeSeptember 13th, 2008 at 10:14 pm

They own equity. Equity is a call option on the assets of the firm. (Modigliani-Miller). Option value goes up with volatility, and anyway their equity is set to go to zero unless something changes.So they swung for the fences!

Da GuestSeptember 13th, 2008 at 8:40 pm

I wonder if Lehman has borrowed much from the Fed? If so I also wonder what the collateral is? Is the Fed looking at a big write-down from a Lehman failure? Is the Fed a disinterested party in these negotiations or are they trying to head-off their own losses?

GuestSeptember 13th, 2008 at 8:53 pm

Can’t you see the degradation trail in collateral? Initially it was cash, cash equivalents, PM paper, US Treasuries. It was debased to any “investment” grade paper, auto loans, student loans, loans to drunks, drug addicts, deadbeats, and the deceased. Now that all those have been pawned (and none redeemed), there is only one next step short of declaring the entire Matrix insolvent. That is print, print, print. Last attempt at subterfuge and dilation of the final judgement. But only slowing the function through time. We allowed through ignorance the hijacking of the driver’s seat, and the drunks at the helm have an absolute death wish.

PeterJBSeptember 13th, 2008 at 8:41 pm

“It is unrealistic for someone to buy Lehman without several weeks of due diligence, how do you value all the derivatives, swaps, and real estate without a full review of the books over weeks? If the government wants Lehman not to go belly-up then they will have to step up and provide guarantees.”@ Da GuestExactly! SO, the weekend cocktail party will only involve the issue of government guarantees that can be hidden from view and will provide in the form and open carte blanche (as for F&F) for any AND ALL unforeseen losses AND;the preparation of PR announcements (lies) for all sides to declare at particular times associated with events. The Tokyo Market open is less than 12 hours time.There is (and has been) NO time for anything else; the whole risk of this transaction will be guaranteed by the public.And not only are the markets still falling with a long way to go, the erections are distorting the dollar, etc, and all those at the table are rapidly deteriorating as well. The deal will be done by that Organization that brings most to those of the troika – it will be placed in a position of, a priori, survival – something that all these organization urgently want and need! The FedRes will guarantee survival at all costs!@ Miss Italy: John Ryskamp: come home.Ho hum

AnonymousSeptember 13th, 2008 at 8:44 pm

Model this market behaviour on any physical anatomical biological model. It is like the response of a weakened immunity to a highly invasive bacteriological assault. It is like a final desperate effort to inhale good clean oxygen in an emphysemic, pneumonic and flagging victim of a lifetime’s poor choices. It is like a rallying strength at deathbed where a few moments of real clarity, peace and calm led to a final frontier.With ubiquitous knowledge and a democratized ability to act as agent in markets, the big players are exposed to their own machinations to more motivated small yeomen. By prolonging IB agony they have further educated their enemies to the weaknesses in their line and gaps in their strategy. And despite their weighty preparations and the numbers of their mercenaries, they are overwhelmed by self directed armies whose purpose is a motivated self-preservation. Like 1907, the system is insolvent, but this time, the great OZ has better perfected his self-inflation and better hidden his truest self. He just doesn’t know when he is beaten. It must be scorched earth. Gentlemanly, queen’s rules, combat has been taken off the table.

GuestSeptember 13th, 2008 at 8:47 pm

All:I really think that Halliburton, KBR, SCI and the other cronies that have siphoned off about a trillion dollars in the last 8 years can step up to the plate and save the systems. It’s theirs to lose anyway.

Average JaneSeptember 13th, 2008 at 9:54 pm

Right on! With their U.S. dollars on which they paid no U.S. taxes because of their convenient relocation to Dubai. I’ve no doubt they’ll be one of the many carrion picking at the choicest parts leaving the dregs for the real U.S. taxpayers.

GuestSeptember 13th, 2008 at 8:48 pm

Weekend committee meeting by the masters of the universe is a much simpler affair. They are merely reading through and deciphering the directions for their several new and exceptionally speedy printing machines. And how to beat a system that might telegraph their intentions and true actions.

PeterJBSeptember 13th, 2008 at 9:00 pm

Speaking of Oil and OPEC:”Saudi Arabia has walked out of OPEC. It said it would not honor the cartel’s production cut.”http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Hyperinflation_Bailouts_and_Moral_HazardOPEC is dead meat! Want to bet that this wasn’t brought about by pressure from the GOP donors?Ho hum

AnonymousSeptember 13th, 2008 at 9:02 pm

What can the “small investor” do? Since last year, the sale of I-Series Bonds has been limited to $5000, which I take to mean that the Treasury realized that they were going to be more expensive to satisfy than was earlier planned. Expensive for them must mean good returns for us! They ride up with inflation (which is good if the presses roll), but they don’t go negative with deflation. The current “fixed-rate” component, though, is 0.00% which shows that they can sell as many as they need to without promising anything more than preserving principal.Other than that? Dig a garden for next spring. Learn to grow things you can eat. Make sure you have everything you need to cook your own meals.

GloomySeptember 13th, 2008 at 9:09 pm

Remember many months ago Geithner had these big meetings with the banks to get them to work together to bailout Ambac and MBIA? Remember how that didn’t work out, despite all the media hype? Here we go again:From CNBC:A deal has been drafted to buy Lehman Brothers’ bad assets and clear the way for an eventual sale of the troubled firm, CNBC has learned.Under the terms of the proposal, which could still blow up, all the major Wall Street firms would pitch in $30 billion total to purchase Lehman’s bad real estate assets and create what’s knows as a “bad bank.”The proposal is being drafted Saturday night and will be discussed Sunday morning, according to sources close to CNBC. If Wall Street agrees on the terms, which would amount to around $3 billion per firm, it would clear the way for the sale of Lehman Brothers itself to one of several suitors, including Bank of America, Barclays Plc and HSBC.

AnonymousSeptember 13th, 2008 at 10:48 pm

That’s fair enough, as long as no liabilities are left over for everyone else, they can have their “bad bank” that they pay for. My understanding is that this would be totally funded by, and all risk would remain with, the Wall Street firms, right?Antitrust implications aside (I mean it really shouldn’t be legal), I guess I don’t mind the Fed organizing this sort of thing, even though it is still unfair to the shorts who expect competitors to compete.

GloomySeptember 14th, 2008 at 11:27 am

My point is that this approach is destined to fail, just as it did before. All the players are cash strapped and their are too many players involved in this approach.

GuestSeptember 13th, 2008 at 9:17 pm

What a complete waste of time and capital. Never, never throw good money after bad. That is the fools choice. We survived 9/11, WW@ and the Great Depression. Take that “backstop” money and do something productive with it. Lets get some high speed trains, dams, bridges, things that employ real Americans. Stop rewarding the filth that made the mess!!!

GloomySeptember 13th, 2008 at 9:17 pm

ENDGAME IN PROGRESSWhen the government ponies up for the bailout on Monday, IMO there is a substantial probability of a dollar weakness as it begins to dawn on investors that the US will be bailing out the entire financial system. The endgame is in progress. Better own a little gold.

GuestSeptember 13th, 2008 at 9:22 pm

@GloomyYa think? Of course, the financial system is now run by dope fiends. Anything to get the next mainline. Steal from mama, hook on the street, sell blood, eat from the garbage pail. No self respect surely none for the fellow man. Dollar weakness? Collapse. Gold? to be confiscated. Yours, to be soon ours. Ring fences are for cowboys and quaint old timers. Our is ours, yours is ours. In fact, you were born for own use and purpose. Soylent green!

StuartSeptember 13th, 2008 at 9:48 pm

“If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). “Yet, word is a draft agreement of various parties each contributing $10 billion to a “bad bank”…… this is another M-LEC variant is in the works. This is pure proof of the extent these entities will go to avoid ….. PRICE DISCOVERY on these assets. That is the only reason they would chip in $3B each. If you ever needed evidence of how bad the core of these markets are, here it is. Shylocks pound of flesh to keep the skeletons in the closet, except this time the world knows where the closet is and is now aware that the skeletons exist. Shameful beyond words.

PhilTSeptember 13th, 2008 at 10:04 pm

Precisely Sir !If those in charge do not come to the rescue here, then what will have been the rational (from their point of view) for having intervened in the failure of Bear Stearns?The Professor also omits the obvious in this post – the Presidential election is swinging into full gear. Does that fact have no influence over what has already happened this year and what has yet to unfold?

AnonymousSeptember 13th, 2008 at 10:54 pm

The election is a saving grace here. If the Republicans want to win, they had better not bail out the banks.Otherwise, the unfairness to taxpayers would be much worse. This collapse actually could not come at a better time. Praise the Creator for this timing, for at just this time the people have a voice. In two months, we won’t any more.We need to push to get this crisis resolved, and the losers identified, before we lose our voice. If the election is “safely” past, the losers for sure will be us!

AnonymousSeptember 13th, 2008 at 10:58 pm

Oh, and don’t rely on promises that politicians make now as to what they will do if elected about this problem. The Democrats won Congress in 2006 on one issue: they would get us out of Iraq. Then once safely in they implemented their social agenda but voted to stay in Iraq.Expect no less cynicism this time around! Resolve uncertainty, now!!

FFSeptember 13th, 2008 at 9:58 pm

From CNBC:”A deal has been drafted to buy Lehman Brothers’ bad assets and clear the way for an eventual sale of the troubled firm, CNBC has learned.Under the terms of the proposal, which could still blow up, all the major Wall Street firms would pitch in $30 billion total to purchase Lehman’s bad real estate assets and create what’s knows as a “bad bank.”Are they kidding? This is their plan. It is more like the result of a drug-induced high school brainstormning session. Maybe I can erase all of my bad investments by off-loading them to my “bad” account.Let’s get serious. Most of the banks are holding bad paper that is getting uglier. Moving the deck chairs isn’t going to save the ship. Everyone knows that the Treasury, I mean Taxpayers, will again have to step in to bail out the banks. Let’s get on with it already.

AnonymousSeptember 13th, 2008 at 10:50 pm

No let’s not get on with it. Not one more penny from taxpayers. The banks lose, they lose, otherwise what we should have is not “moral hazard” but a mass exodus from this rigged financial system.

FFSeptember 14th, 2008 at 12:03 am

I am a taxpayer too. No I don’t want to bailout these institutions formed from years of unregulated greed. But the US Government will ultimately choose inflation rather than face uncontrollable deflation. If that is the end result, I would rather take the medicine now than die of a thousand cuts.

AnonymousSeptember 14th, 2008 at 9:30 am

I don’t see the connection to deflation. If Lehman fails, CDOs might get cheap. Houses, cars, television sets won’t. Let’s not exaggerate how important these broker dealers are to everyone. They are not essential, the commmon man is probably better off without them.Of course there are uncertainties but there is nowhere near enough reason to bail them out! Would they bail you out?

PeterJBSeptember 13th, 2008 at 10:01 pm

Speaking of common sense:”In other words, Mises would point to the bailouts of Fannie, Freddie, and the FDIC as the hint that a general system event had arrived, in which we need a new policy mentality.”http://www.mises.org/story/3095Ho hum

AnnSeptember 13th, 2008 at 10:38 pm

An odd replay of events over 100 years ago. In panic of 1903 (think that it is the right date) and in the pre-Federal Reserve days, it was JP Morgan himself he dragged all the major players into a room and he made the decision as to which banks would be saved and which would be allowed to succumb to a bank run. He then infomred all the other banks of how much they would each ante up to support the ‘saved’ banks by lending them money to meet the run on those banks. He had this rule: Solvent but suffering from a run = saved, inslovent and sufferring from a run = dead.At the urging of, and with the full support of, JP Morgan, the Federal Reserve was created to do what he had orchestrated – be a means to lend money to banks who need cash to meet their obligations.We have come full circle with the shadow system. It is back to the boardroom of the private institutions to try to force some kind of rescue. Unfortunately none of those trying to orchestrate the private resuce have the sheer power and position that JP Morgan did back then.

AnonymousSeptember 13th, 2008 at 11:05 pm

How much difference does it make, that JP Morgan in (I think it was) 1907 could not print our currency, but now the Fed can?I think the Fed is much more powerful. It can lend unlimited sums to its favored ones through the PDCF and similar programs while “sterilizing” that intervention by withdrawing a matching amount of currency from general circulation. A nice trick, newly invented by the Fed, that old James Pierpont could only have dreamed of.

AnnSeptember 14th, 2008 at 9:36 am

When I spoke of JP’s ‘power and position’ it was more than just a reference to who has the money. It also refers to the immense personal power of the original JP Morgan. That is not something that can be measured in terms of just the ‘right to do this or that’. When he spoke, others not only listened, they obeyed since failure to oeby brought consequences far beyond rejecting a business arrangement. And that is what is not present with any of the current players in those meetings in Wall St.

GuestSeptember 14th, 2008 at 1:47 am

why dont they just declare an international bank holiday …. give themsleves more time and chinese takeout to shuffle the cards…mrskeptical

GuestSeptember 13th, 2008 at 11:25 pm

Realistically, is there any way this gets cleaned-up without a meltdown? In all the history of free enterprise, nobody has managed to come-up with anything better than bankruptcy for handling insolvency. I doubt that Paulson and Uncle Ben are going to improve on it over the weekend.

GuestSeptember 14th, 2008 at 12:20 am

time for jokes is over,i dont see any prominent international figure speaking out on current issueseconomy, geopolitics, energy, almost everyone is maintaining status quothis is dangerous timeshttp://www.news.com.au/story/0%2C23599%2C24339330-38200%2C00.htmlRussian submarines to test-fire missiles in PacificFrom correspondents in MoscowSeptember 13, 2008 06:59amArticle from: Agence France-PresseFont size: + -Send this article: Print EmailRUSSIAN submarines armed with intercontinental ballistic missiles will test-fire their rockets in the Pacific Ocean between September 15 and 20, a military official was quoted as saying today.”Some missile launches will be carried out in the Sea of Okhotsk and the Bering Sea” and will hit targets on the Kamchatka peninsula in eastern Russia, said the unidentified official, RIA Novosti news agency reported.A press officer for the governor of Kamchatka, a mountainous region often used for missile tests, told RIA Novosti that local authorities had been forewarned and would inform the local population in due course.Russia’s Pacific Fleet, which will carry out the tests, has Delfin nuclear submarines equipped with RSM-54 intercontinental ballistic missiles that can reach targets as far as 8300 km away

GuestSeptember 14th, 2008 at 12:21 am

Monday prognosis: Lehman simply the next domino to crash and bring system just one more day closer to systemic failure….End game now unavoidable.Add in AIG to sub $5 on Hurricane Ike massive losses…and we’ll see a big day down and potential test of July lows.Sub 10k DOW by Election Day.

StephanSeptember 14th, 2008 at 12:42 am

After reading this very pessemistic article I would like to challenge Dr. Roubini with the idea of a potential hyperinflationary depression scenario down the road. If Investment banks fail due to a systemic financial meltdown the Fed/Government has to eventually step in. If it will be as severe as Dr. Roubini describes, the government would have to absorb a huge amount of debt which as a result would highly reduce the confidence in US treasury bonds. If these bonds will not be renewed/new ones bought by foreigners the US governemt will eventually have to monetize their own debt which would highly devalue the US dollar and would import massive inflation to the US once countries decoupled from the US dollar.I would love to hear Dr. Roubini’s expertice on this matter.

GuestSeptember 14th, 2008 at 1:33 am

stephan,that would make ben bernanke’s phd thesis a pile of toilet-paper (used by someone who had rather adventurous indian-curry)!hyperinflation vs deflation…deflation is the market’s adjustment for all the fake money/credit..hyperinflation is force-feeding the market by counterfeit dollars..imagine a piece of toilet paper worth more than your dollars..i cant believe any central bank (except mugabe’s) would do that..mrskeptical

GuestSeptember 14th, 2008 at 3:17 am

“You cannot believe that a central bank would do that.” If the options are depression or an attempt to inlfate the way out of this mess I believe that central banks will always choose the latter espeially if Bernanke is riding this ship. He fears nothing more than the experience of a great depression and will do everything in his power to avoid such situation.”That would make Ben’s phd thesis a pile of toilet paper”. I think there are quite a few economists out there who would agree with this statement.To believe that an economy can be healthy if is run based on credit and consumption is naive. For every action there will be a consequence. Trillion dollars of debt and treasury bonds that are backed by toxic assets will eventually destroy the investors (China, Russia, etc) confidence in this economy. How will the US finance their debt if no country buys their bonds?

HubbsSeptember 14th, 2008 at 7:50 am

Stephan, I think yours is the pivotal question with ramifications of isolationism. If the dollar becomes worthless, then in theory foreign goods explode in price, leading to a secondary domestic goods price increase follow through. Whatever US still exports instead of borrowing and buying, eg., food and weapons, is too little to offset what is a well established trade imbalance to begin with. Will those US citizens depending on US government payments, eg., Social security recipients or physicians receiving medicare reimbursements, see compensatory increases? I think not. People in private businesses who provide necessary services or goods can increase their prices in nominal terms to play catchup with inflation. Those who are plugged into the govt system either as recipients of entitlements, or civil servants paid by the govt, or physicians who accept medicare and medicaid will see the bottom drop out. Only when you have a centralized banking system can you get a crazy cross current of inflation and deflation all scrambled up in an international soup of finance…a situation I sure as hell can not even begin to figure out, or plan for.

Nick MarshallSeptember 14th, 2008 at 9:41 am

Clearly the dollar is not becoming worthless. Why? because deflation is already happening. Look at property, gold, silver, oil, CRB/Reuters index, equities etc. More or less everything is falling but the dollar is rising. In a deflation cash is king because prices are falling which means the purchasing power of the currency is rising. The best cash is real cash – hard green readies. It may well be that there will be a fiat money crisis later on but for now the paradigm is still the greenback. It is the means of exchange and against other means of exchange, such as the euro, it fell too far. This is the biggest crisis in 79 years for the US but it is not the end of the world. Life goes on but at a reduced level. The economy cannot really collapse – not as long as there are 300 million people needing food and shelter. The quicker these vast financial mis-allocations are written off, the quicker Americans can get back to honest toil again and to begin saving instead of living high on the hog off of everybody else in the world. The dollar as the reserve currency gave the US a seemingly free ride for 60 years. In fact it was not a free ride because somewhere along the way, the US became the policeman of the world and so built a defence/offence programme that was bigger then the defence budgets of the next half a dozen countries or so combined. How could it do that? Simply because the US never had to pay an import bill. Since everything important like oil and other commodities was priced in US dollars – the bill was paid by creating US dollars/bonds/treasuries etc out of thin air. Whether the rest of the world really needs the US as a policeman is another question because it is not really clear whether the US has been a policeman or a self-serving brigand. No doubt a bit of both but it is certainly arguable that it has created more trouble than solved problems – not least to those 4000+ families in the US who have lost a son or daughter.

AnonymousSeptember 14th, 2008 at 9:58 am

Some free ride. We work more hours in a year than anyone else in the world.The bankers do too. They just get paid twice as much (that’s the relative peons) for the same amount of work.

PhilTSeptember 14th, 2008 at 12:43 pm

It is important to distinguish hours engaged in “honest toil” from hours put in by bankers/others in the shadow financial system. Mr. Marshall has eloquently articulated a point of view that more/most of us should engage and foster.

Jason BSeptember 14th, 2008 at 5:36 am

Reports indicate there were few foreign buyers for Fan and Fre ‘s last auction. Looks like the Treasury bought them. How in the world does that work? They back Fan and Fre’s unperforming bonds by selling Treasuries, then buy the bonds too? So they are paying themselves???

PeterJBSeptember 14th, 2008 at 6:12 am

“Speaking of physics and science”Looks like the Treasury bought them. How in the world does that work? They back Fan and Fre’s unperforming bonds by selling Treasuries, then buy the bonds too? So they are paying themselves???@ Jason B on 2008-09-14 05:36:25Incest is the game that only the family plays well. And, biologically speaking, we all know where incest leads.Ho hum

fortififeSeptember 14th, 2008 at 8:53 am

i just drafted a plan how i can save lehman and others from the financial disaster. hope it works.don’t laugh . i’m serious.

AnonymousSeptember 14th, 2008 at 10:00 am

OK, who will the disaster be visited upon if not the broker-dealers? Or will we all have to pay it gradually through taxes for 50 years? Do tell.

The Economic FractalistSeptember 14th, 2008 at 9:03 am

The 150 Year Second Fractal Nonlinear Break for the Equity Class of AssetsAs has been described in The Economic Fractalist, nonlinear breaks or gaps to lower valuations are the hallmarks of second fractal conclusions.For the United States’ composite Wilshire, progeny of primitive1787 New York and Boston stocks and later the canal, and later yet, the railroad stocks, a great 150 year second fractal starting in 1858 reached its first sub fractal apogee in 1929 and second sub fractal apogee on 11 October 2007. These apogees represent peak areas of the money supply, generated by credit expansion through leveraged borrowing. In 1929 it was the forward buying of new washing machines, automobiles, and radios on credit and buying stocks on ten per cent margin. In 2007 it was the colossal unchecked credit expansion via leveraged housing prices with capital via the orchestration of pooled investors and the leveraged credit expansion based on artificially doubled and tripled housing valuations divorced from the reality of wages and via speculative derivatives to the nth degree facilitated by the investment lending industry and their computer software. 150 year second fractal nonlinearity is at hand for the Wilshire. Expect the expected.

gAntonSeptember 14th, 2008 at 9:15 am

Free Advice To The Cuates Ben And Hank, Both Of Whom Are Now In A State Of DenialThe really good thing about free advice is that if you ignore it, it doesn’t cost you anything.The way the Fed and Treasury are acting, it reminds me of a not too intelligent man who was in his house during an earthquake. He was running around trying to hold up the walls, and shouting “This is not happening, this is not happening”. When the earthquake was over, both his arms were broken, and he was unable to repair the damage done to his house by the earthquake. It would have been much better if had left his house for safety, and returned after the earthquake was over to repair the damage (a la FDR).I don’t remember who said the following (it was a year or two ago, and my memory isn’t what it used to be), but it was probably some academically oriented governmental bureaucrat:”The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets.”Since this was said, the Fed and the Treasury have taken various coordinate “actions”, and things continue getting worse, and not better. What “liquidity”, and what “orderly function”? But these “actions” have had several unintended effects, such as raising inflation. weakening the dollar, and promoting instability in the marketplace.I quote myself (a comment I made some time ago and before the fall):”How bad is it? Some would say “We can’t say how bad it is because we don’t have any data”. Others would say “We don’t need more data, it’s difficult to imagine how things could be any worse”. And finally there are those out there that say “I’ll tell you how bad it is. It’s three trillion dollars bad–that’s how bad it is”.I like to look on the bright side of things. It’s so bad that, at this point, no matter what they do, the FED can’t possibly make it worse or screw it up any more than they have already done (perhaps I’m under-estimating them). Anyway, after all these years of FED watching BS and the FED leading us down the primrose path, it’s now obvious that, in this present situation, the highly revered FED is irrelevant:Somewhere bands are playingAnd somewhere people laugh and shoutBut there is no joy on Wall StreetThe mighty FED has struck out”Boy, was I wrong about the Fed not being able to make matters worse!And so what is my free advice to these bureaucrats? Forget about manipulating the stock market, the price of gold, and the dollar exchange rate. Protect the dollar and control inflation, and don’t say that we don’t have to worry about inflation due to the recession. Leave the propaganda to the public relations politicians. Do everything you can to force transparency in the market place. Let the market work, and posture yourselves to pick up the pieces after it’s all over.

mammonSeptember 14th, 2008 at 9:43 am

Professor!It seems(according to dealbreaker) that the “bad bank structure” to give Bank of America the Lehman Assets without the toxic debt is successfully being arranged.We all know that JPMORGAN received a 30 billion backstop to take Bear Stearns.I am starting to see a possible endgame. JPMORGAN AND BANK OF AMERICA are two of the banks with the highest derivative exposures. Is it possible that what we are seeing is the “killing of two birds with one shot”. Each time there is a bailout or bad bank package, there will be a beneficiary that has high derivative positions. These will be the survivors, because they are truly “too big in derivative positions to fail.” Under this theory, JPMorgan will be the biggest survivor, since they will have to be fed many “assets” to counterbalance their huge derivative positions. This is a two barrel rescuescenario. I would be elated to know your take on my outrageous theory.Everybody else please show me where I am going wrong!

GuestSeptember 14th, 2008 at 9:47 am

Lehman Set For Three – Way Break Up: PaperLONDON (Reuters) – Bank of America , Barclays and Goldman Sachs are expected to agree a deal as early as Sunday to buy stricken U.S. investment bank Lehman Brothers , Britain’s Sunday Express reported.The newspaper, without citing sources, said Bank of America would acquire the bulk of Lehman Brothers, including its mortgage assets.Barclays, Britain’s third-biggest bank, would take a smaller parcel including Lehman’s asset management and fixed income businesses, while Goldman would take the rest, it said.Barclays declined to comment. Goldman, Bank of America and Lehman Brothers could not immediately be reached.The Sunday Express said the success of the plan depended on U.S. Treasury Secretary Hank Paulson hammering out a deal to get funding from wall Street’s financial institutions.

mammonSeptember 14th, 2008 at 9:56 am

@guest”The newspaper, without citing sources, said Bank of America would acquire the bulk of Lehman Brothers, including its mortgage assets.”Bank of America is not suicidal! They want the toxics ring fenced in a bad bank or a Fed backstop!Sunday Times must be in charge of muddling the info pool!

GuestSeptember 14th, 2008 at 10:20 am

Can someone explain to this non-finance person why JP Morgan and CITI are not included in the group of “indendent broker-dealers” (MS, GS, MER and LEH)? In what way are JPM and CITI different?

GuestSeptember 14th, 2008 at 10:36 am

This is the financial singularity. The fear of the creators that they have lost control of the financial monster they created with derivatives, abs’s, trading programs, hedge funds etc.

mammonSeptember 14th, 2008 at 10:49 am

The professor said it best!”You cannot have a financial system without regulations, this is the law of the jungle”. “The system of self regulation has failed.”Then as soon as the Bloomberg Interviewer said the heretical words ” are you suggesting a managed financial system?” Bloomberg cut to advertising. Please correct me if my memory serves me badly!I was very proud of the Professor in lasering in on the ROOT CAUSE!After the Depression, Congress tried valiantly, but the banks were able to influence legislation to be based on Self Regulation by the Industry itself.The Glass Steagall legislation and others were great, but keeping the self regulation door open allowed the banks to open it widely later in the 80s.The securitization without regulation caused a monster to be built.They are trying to put the Monster Genie back in the bottle! Not easy!PROFESSOR FOR TREASURY SECRETARY!!!

rapidravSeptember 14th, 2008 at 10:40 am

Either the gov’t lets Lehman fail, in which case there’s an immediate systemic financial meltdown OR Paulson eats crow and bails out Lehman – and basically admits the gov’t will bail out everyone. I betting they go with option #2 since the effects from that choice, while equally catastrophic, will take a little longer to manifest.If there was ever any doubt that “the free market”, and democracy, is fiction, this should wake people up to reality.

mammonSeptember 14th, 2008 at 10:59 am

@rapidravAs you so eloquently stated “the free market,and democracy are fictions”, and we better wake up! It is very possible that this is a kabuki dance to stick the taxpayer. However their is an election comming, and they are creative enough to finesse a interim solution that is not brazen “socialism for the rich”. These gentlemen are very intelligent, machiavelic and tricky. The last thing they want is to have the rabble understand their game. God forbid!They have to “dress up the pig somehow”. They will need more than lipstick!They will come up with reconstructive surgery that is undecipherable!

Hong Kong fun managerSeptember 14th, 2008 at 11:05 am

no solid actions to be taken before Asia’s markets open?It will be interesting…But China and Hong Kong are off Monday.

mammonSeptember 14th, 2008 at 11:47 am

@GloomyThese are projected economic results in a geopolitical vacuum! They should be mathematicallycorrect, unless there are geopolitical external factors that impinge on Economics.We should all remember that there is also the Geopolical Dimension to Economics that weare excluding. Venezuela officials are being accused of abetting Columbian rebels. Pakistanisovereignty is at issue in the Special Ops attacks in Waziristan. Georgia still in flux.Russians are going into military defensive overdrive. I agree with everything economic you post!If all hell breaks lose in the world, we as americans are geographically sitting in a veryisolated and defensible continent with enough natural resources to maintain status quo.This is the variable that must be factored!Everyday I have to falsify my presumptions to keep a scientific as opposed to a dogmatic analysis.Everytime I do this, the geopolitical scenario seems to be getting worse.Global Political Instability trumps economics!Mathematical projections of the economic future are subject to a Geopolitical Black Swan!

GloomySeptember 14th, 2008 at 12:36 pm

I agree with you that geopolitical risks are present and may worsen the situation. I just don’t have any insight into the likelihood of these events.

PhilTSeptember 14th, 2008 at 8:31 pm

As EU foreign ministers prepare to discuss on Mondaythe accord brokered last week by Nicolas Sarkozy, the French president,Jaap de Hoop Scheffer, Nato’s secretary-general, said the agreement providedno grounds for the revival of the Nato-Russia relationship.

Entire Article==> Nato head attacks EU’s Georgia deal

GuestSeptember 14th, 2008 at 12:07 pm

Watch for rising gold (weakening $USD) along ith rising interest rates, imo…as eventually are foreign creditors friends are going to say “sayonara” to financing the current USA way of life (including our bailouts, wars, and subsidies).This day is coming a lot faster than many might think.

GuestSeptember 14th, 2008 at 12:22 pm

United States has a volatile, financially unstable economy.Absolutely something that foreign investors should avoid like pestilence.

tutterfrutSeptember 14th, 2008 at 12:29 pm

Barclays has walked away because it was unable to obtain guarantees – from either the Treasury/Fed or other commercial organisations involved in the rescue attempt – in relation to financial commitments faced by Lehman when markets open tomorow.”It was impossible to find a solution to the problem of Lehman’s immediate financial obligations in the time available,” said the executive.http://www.bbc.co.uk/blogs/ there…lays_walks.htmlBBC News 14 Sep 08, 06:11 PM (GMT)

Alessandro - http://castellidicarte.blogspot.com/September 14th, 2008 at 12:32 pm

Let the run begin.Do you get it how big this is? Those who screw the system up are not bailed out at the expense of the prudent ones. This is the beginning of the end game for Wall Street.I was not expecting that.@Miss Americahow do you feel the force? are they still in control?

AnonymousSeptember 14th, 2008 at 2:11 pm

Yes this is hopeful so far, right may prevail. Innocent taxpayers won’t be on the hook to bail out profit-seeking bondholders.I pray.

Miss AmericaSeptember 15th, 2008 at 9:41 am

Alles-solo…At some point you just gotta sit back in your chair and say…. WOW!“in control”…Yes! They have never been more in control. Can you believe the controls they’ve wielded so far??? Had all these event been allowed to play out (without their control) we’d be be sitting at DOW 8,000 already. Maybe worse?The next 2 weeks will be telling whether they lose “confidence”, which is what they can’t control. It’s a variable no one can control.All’s fair in love and financial war!I’ll post a more substantive post later… but right now I got some work to do.Miss America

MattSeptember 14th, 2008 at 12:52 pm

Hardly surprising if the rescue squad walks away, if they had even the briefest glance into the black box. If I was a shareholder of any of these companies, I’d be asking when and how the shareholder base allowed them to redefine “due diligence” to 48 hours of officially-brokered panic.Anyway, can someone explain Table V is the last NY Fed filing, on Tsy fails to receive, fails to deliver, and weekly change? It looks like a problem:http://www.newyorkfed.org/markets/statistics/deal.txtIs another Black Monday coming?

GuestSeptember 14th, 2008 at 12:56 pm

So it’s now up to BoA to take this thing. I don’t think there will be anyone foolish enought to finance the “bad” bank assets. The real value in the MBS and CDO portfolio is probably under 30 cents on the dollar. No banks can afford to throw away billions of equity from their already distressed balance sheets. The Fed will have to buy these assets and backstop any losses for BoA in the Lehman deal. This will end up being the mirror image of Chase – Bear. They will never let Lehman go into bankruptcy simply because of the fact that no one can gauge the repercussions of systemic failure that will result. After this bail out, the shorts will get Merril within a week or two and then look out. I truly believe that at this point every major financial institution, from large cap banks to the regional players is insolvent. The FDIC will not even have enough funds to handle the soon to happen WAMU fiasco. We should all prepare for a major nationwide bank run as depositors quickly realize that the FDIC insurance is only good as long as there are no claims. It would not be a stretch to stipulate the unwinding of our entire financial system as the massive deleveraging brings severe deflation to all asset classes resulting in vicious destruction of global wealth.

PhilTSeptember 14th, 2008 at 1:03 pm

U.S. government officials were adamant that no public money be used — a big point of contention,because many of the top Wall Street executives believe that their banks,which have each written down tens of billions of dollars in assets,do not have the capacity to lead the rescue on their own.

Entire Article==> Barclays backs away as Lehman’s options dwindle

GuestSeptember 14th, 2008 at 1:09 pm

NY Fed should bid for Lehman. They are the only US bank who have the luxury to not care about suffering losses.

RedCreekSeptember 14th, 2008 at 1:10 pm

They will let it fail because if they bail out LEH they will have to do the same very soon for ML, MS and GS.LEH into Chapter 11. Game over. Fasten seat belts. ML, GS, MS stocks to get hammered tomorrow.Then organize an orderly non-panic sale of the asset management business and whatever other pieces that can gather interest.The major problem with selling the insititution is that many of these businesses are people driven businesses. Just count on entire teams going out and marketing themselves.Why would Barclays buy LEH if next week they can cherry pick half of Lehman’s global M&A and Equities people for no money at all???

JacobSeptember 14th, 2008 at 1:12 pm

Crash me now…or crash me later.It is inevitable, as terminal markets will find fair value given the severe turmoil, both on Wall Street as well as Main Street.

Alessandro - http://castellidicarte.blogspot.com/September 14th, 2008 at 1:14 pm

For some reason Lehman completely disappeared from the first page of Boomberg after keeping top three article a week-end long. Weired.

RedCreekSeptember 14th, 2008 at 1:17 pm

?? Both my “normal internet” bloomberg as well as my professional bloomberg still have LEH stories on the top…” ?? Am looking at them from London though.

AfASeptember 14th, 2008 at 1:20 pm

This is a bad sign. At the same time why would Barclays take the risk of absorbing the whole Lehman (valued at less than 0 for sure) when they are not a major counterparty and without government financing or guarantees? On the other hand, no other bank would let Barclays (or any other buyer) take the best parts while they assume financing the bad ones.This shows how bad Lehman’s books must look and how cash-strapped other banks are. This ain’t a replay of LTCM rescue as then it was only LTCM who had problems.The really amazing thing in this “game of chicken” is that the Fed/Treasury did not flinch (yet) in front of a suicidal driver and we are past the last meters to the crash.

RedCreekSeptember 14th, 2008 at 1:31 pm

Provided you are interested in the investment bankers and the equities people: why would it? you just wait for all those people to become unemployed (= tomorrow) and then you pick them up from the street for no money. and on top of that you dont have to pay expensive remuneration packages to the people you dont want.

AfASeptember 14th, 2008 at 2:05 pm

Exactly, that should have been the main negotiation argument to try to get some gov guarantees. Given that teams/analysts/managers are the most valuable assets in an investment bank.

RedCreekSeptember 14th, 2008 at 2:07 pm

can the fed / treasury really afford to make guarantee to barclays, a foreign bank? all of redneck america would march on them and lynch them for this…i believe that bofa is still in there – if the fed makes any guarantees then it will be to bofa not “those foreigners”.

GuestSeptember 14th, 2008 at 2:46 pm

If this is the beginning of the end of the shadow banking system, why would any of the competitors even want or need these people. What will the IB model for making billions be going forward when this all collapses?

RedCreekSeptember 14th, 2008 at 3:38 pm

because investment banking services will always be needed – especially while armageddon is developing: then you just switch to restructuring advice, take privates etc. and you shift your bankers from ny and london to dubai and hong kong.re barclays: barclays is a very strong fixed income and asset management house but is hardly present in equities and m&a. so here they have a very good and cheap opportunity to complement their own product offering and geographic presence and still they don’t bite. why? because of the bottomless pit of off balance sheet liabilities. so, again, they will be better off by letting leh go bankrupt and picking up the unemployed bankers from the street the following day.

AfASeptember 14th, 2008 at 2:07 pm

I am wondering how a bank run against an investment bank by other investment banks would look like.Limousines in front of LEH’s headquarters?

RedCreekSeptember 14th, 2008 at 2:10 pm

Would have been like that in pre-crunch times. now, i rather see them handing out one-way metro tokens at the LEH turnstiles… with a black and white mapquest itinerary printout …

AnonymousSeptember 14th, 2008 at 2:23 pm

If it goes to Chapter 11, I saw an estimate that things would be frozen for two to three months. That puts us past the elections.If other banks are forced to revalue their assets after that time, an immediate government bailout can be provided without political risk.Is there a way to force a remarking of Lehman’s books faster than that? After the election, there will be massive moral-hazard from the government. Better get these things resolved now while the people still have a voice.

No BarbieSeptember 14th, 2008 at 2:14 pm

Everyone and I mean everyone in the entire world has learned to expect a bailout by now. Hence the (almost) complete lack of fear inthe markets. Yet Gold’s jump and the softening of the treasury bond yields was a very ominous sign this Friday.There had better be a solution by European market opening tomorrow.

GloomySeptember 14th, 2008 at 2:41 pm

Sept. 14 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year “is probably a once in a century event” that will lead to the failure of more firms.He ought to know, since he precipitated it.

AfASeptember 14th, 2008 at 2:53 pm

The hour of reckoning is approaching:”Wall Street Prepares for Potential Lehman Bankruptcy (Update1)By Craig TorresSept. 14 (Bloomberg) — Wall Street prepared for a potential Lehman Brothers Holdings Inc. bankruptcy after Barclays Plc said it pulled out of talks to buy the firm and the government indicated it wouldn’t provide funds in a resolution.Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.”How much will NY firm be able to net before midnight??

GloomySeptember 14th, 2008 at 2:56 pm

LOLSept. 14 (Bloomberg) — Washington Mutual Inc., the country’s biggest savings and loan, may cost taxpayers as much as $24 billion in the event of a U.S. government bailout, according to Richard Bove, an analyst at Ladenburg Thalmann & Co.The Lutz, Florida-based analyst estimates the bank will face $32.5 billion in mortgage defaults over the next five quarters. That would force the federal government to guarantee as much as $24 billion in losses on defaulted option adjustable-rate mortgages, subprime mortgages and home-equity lines of credit.

GloomySeptember 14th, 2008 at 3:27 pm

Come on now, I’m just thinking about who is on deck. I really want to see what happens when that slugger AIG goes down on fastballs.

The DaneSeptember 14th, 2008 at 3:19 pm

Just got this info:LEHMAN NETTING TRADING SESSION PROTOCOLISDA confirms a netting trading session is taking place between 2 pm and 4 pm New York time today for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and return to Mark New at ISDA (mnew@isda.org) with LEHMAN PROTOCOL in the subject line.

Aahu ShuklaSeptember 14th, 2008 at 3:23 pm

Bank of America, Merrill Lynch in merger discussions: WSJ…………….and we thought BOA was going to buy Lehman’s IB.I recently took Prof. Roubini;s class on International Macroeconomics @ Stern and am a big fan of him. I adore his clarity of thinking and wish I can develop the same.

Little SaverSeptember 14th, 2008 at 3:26 pm

Bank of America Corp. abandoned talks to buy Lehman Brothers Holdings Inc., according to a person with knowledgehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aW2k6NiDhqJ0&refer=homeNo government guarantees means banks not interested. Says something about the 26 billion of “equity” at Lehman.

AnonymousSeptember 14th, 2008 at 3:36 pm

I am thrilled that Fuld, who should change his name to Fold, has succeeded in completely ruining his company while maintaining a straight face. The alleged wild, desperate trading activity of a few of its traders on Friday could not have helped the negotiations either.

AnonymousSeptember 14th, 2008 at 3:41 pm

Explanations for wild Lehman trading activity on Friday.Nice explanation: there is none.Less bad explanation: traders held equity, equity is an option on firm’s assets, options love volatility, so maximize option value.Really bad explanation: giving away the store to their next hoped-for employer.

Alessandro - http://castellidicarte.blogspot.com/September 14th, 2008 at 3:45 pm

Who’s going to merge with Morgan Stanley, now?Looks like Nouriel’s prediction of no independent broker-dealer surviving in a few years time is going to materialize quite faster than anticipated.BTW, no need to ask the same question for Goldman Sachs, as they are already effectively merged with the US Treasury.

AfASeptember 14th, 2008 at 4:18 pm

It’s quite obvious. BoA merges with MER which will merge with Citi which will merge with JPM which will merge with Treasury+GS+MS which will merge to form … oh wait a minute, isn’t that what we commonly name the Federal Reserves Bank?

AnonymousSeptember 14th, 2008 at 3:58 pm

Amazing: Bloomberg pulled the two stories that Barclays and BoA walked. That’s why they call Prof. Roubini Dr. Doom: their advertisers minimize Roubini with this epithet, because they stand to lose their commissions if investors flee the stock market (which is a good idea, incidentally).

GuestSeptember 14th, 2008 at 3:59 pm

Get this,If the dollar goes down and oil back up, the drill baby drill crowd republicans can take advantage of the masses who think drilling is the answer to our woes, ushering in the wrong person IMO. Thanks Rosen on 2008-09-14 05:00:19 for talking about our moving options.hlowe

GuestSeptember 14th, 2008 at 4:00 pm

The credit crisis in the US economy has reached a new level – with no easy bailout of Lehman apparently in sight. Maybe they’ll engineer something at the very last second and call it a “victory”. But those kinds of ad-hoc arrangements are usally the worst disasters. So the bottom line is … we’re approaching major forced deleveraging in US assets. This is exactly the scenario that has terrified Wall St and the Fed, and up till now they have fought this possibility tooth and nail.IMHO, it’s getting more and more probable that we will see some sort of blowout in the Credit Default Swap markets. They almost can’t prevent this now.Meanwhile, the “ides of October” are rapidly approaching the US stock market. All those levitation games by Paulson & Co. were only a delaying action. Nothing more.Finally, Hurricane Ike has caused the third largest $$ damages in US history, and has (temporarily) crippled almost 20% of the US oil refining capability. No respite for the tired and beleaguered US consumer.PeteCA

artichokeSeptember 14th, 2008 at 4:05 pm

I think the refineries were down (or at least on reduced operations) for regular turnarounds anyway. This work is planned well in advance, but they shut down a bit early for Gustav and are still performing the work. Conclusion: it’s not as bad as it may look.

MedicSeptember 14th, 2008 at 4:23 pm

No. But it will effectively represent all their efforts since the early 1970’s.Bravo you greedy bastards!Changes can come orderly – or at the end of a gun. They have managed to piss off a large number of not too bright and heavily armed people. Good luck with that.

AnonymousSeptember 14th, 2008 at 4:50 pm

Actually among most voters it might look good, that they stood back and did not commit (more) taxpayer money to fatcats. It’s a close Presidential election and the Reps thing they can maybe win it, but not if they alienate the votes that Sarah Palin brings in and contradict John McCain’s “straight talk” message.What would look very bad is a bailout, and with the internet now we know when a bailout happens. That is probably the reason the government is showing some morals right now.Things should get wound up before the election. (Please!) Anything left til after the election will rape the taxpayer.

RedCreekSeptember 14th, 2008 at 4:14 pm

I don’t see Goldman Sachs selling itself to a Wachovia or worse to a foreign owner like Barclays or HSBC.What are the alternatives?Can they take themselves private; return to being a private partnership? With the help of private (unlisted) private equity and hedge funds like TPG, JC Flowers, etc.?Would that help the funding problems? It would definitely take public market pressure and scrutiny away from them.

RedCreekSeptember 14th, 2008 at 4:38 pm

Thain’s predecessor at Merrill started to get into trouble when he had allegedly approached Wachovia’s board about a merger.As Prof Roubini describes, any large size bank that has depositors (i.e. cheap and reliable long term funding) will do.But, professor Roubini, what if the pressure on the banking system increases, leading to a loss of retail investor confidence and potentially leading to bankruns? What if the deposits turn out to be much less long-term and a much less reliable source of funding than originally assumed? Is this possible?

PhilTSeptember 14th, 2008 at 4:46 pm

Yes, I understand Professor Roubini’s position,but I do not understand yours and would like to.Originally, you mentioned Goldman/Wachovia, not Merrill.If you’ve got something there about Goldman/Wachoviaplease clue me in.I have read something abotu BofA/Goldman.Perhaps you meant that?

RedCreekSeptember 14th, 2008 at 4:40 pm

I did not mean a takeover of GS by Wachovia. I meant a merger, where GS could get funding stability from the Wachovia deposits.

PhilTSeptember 14th, 2008 at 4:50 pm

Again, I understand the position of combiningcommercial bank deposit bases with broker-dealers,Can you point me to any source that talks aboutthat happening between Wachovia and Goldman?

RedCreekSeptember 14th, 2008 at 5:02 pm

I gave Wachovia as an example because they are one of the larger commercial banks with deposits.I have not read anything about Wachovia/GS. I gave the Wachovia / GS merger example because Stan O Neil, Thain’s predecessor at Merrill, had started to explore the option. If Merrill/Wachovia made sense one year ago, would GS/Wachovia be such an impossible idea now? Pure technically, I think not. Culturally, this would be very difficult I believe. Which is why I believe that GS is more likely to come up with something special like engineering its own delisting and reversal to being a private partnership.

PhilTSeptember 14th, 2008 at 4:57 pm

The reason I am so interested to knowwhat info. you have on WB/Goldman relatesto the recent appointment of the new Pres/CEO Mr. Steel.Initially, I was quite shocked to find out that he gotthat job. But then when it became known that his recentexperience included positions with the Tresauryand Goldman Sachs I looked at it differently.

GuestSeptember 14th, 2008 at 4:17 pm

The folks at Lehman knew their business, so if Lehman was not doing well I am sure others are suffering the same. Could it be that the other institutions are getting more financial support from the government, “under the table”?

RedCreekSeptember 14th, 2008 at 4:24 pm

No, the guys at LEH did obviously not know their business.The guys at Goldman and JPMorgan know their business.

AfASeptember 14th, 2008 at 4:27 pm

$25-30 bid for MER? oh my mistake, I though they have been serious. Is this all what the masters of the universe found to try to pop up the markets?There is no fireball chance in heaven this deal could be for real.

AnonymousSeptember 14th, 2008 at 4:37 pm

Bloomberg headline (no story yet)”Lehman Nears Bankruptcy as Buyers Back Away; Merrill Said to Weigh Merger”Yes! Go Lehman! (Go away that is.)

GirafSeptember 14th, 2008 at 4:37 pm

It’s been my understanding that Ken Lewis, CEO of BoA, has not been a fan of the IB business and had been reducing the bank’s exposure to that area. So what’s with all the talk of buying Lehman and now Merrill? Is it all just a matter of price?

GirafSeptember 14th, 2008 at 4:37 pm

It’s been my understanding that Ken Lewis, CEO of BoA, has not been a fan of the IB business and had been reducing the bank’s exposure to that area. So what’s with all the talk of buying Lehman and now Merrill? Is it all just a matter of price?

GuestSeptember 14th, 2008 at 4:53 pm

If he’s as smart as he seems, he might just not have been a fan of it when it was too expensive. Of course price matters on Wall Street!

RedCreekSeptember 14th, 2008 at 4:55 pm

Bank of America has been failing miserably at building a solid investment banking business for many years.Didn’t they buy [Montgmery Securities] in the US, upon which most of those “acquired” bankers fled the BofA mammoth as soon as their contracts allowed them to do so?In Europe, they have always tried to build the business organically, so by recruiting some solid bankers out of top i-banks, but never got far. While the market boomed, there was simply no investment bank available at a reasonable valuation/price. So Lewis wisely decided to not continue trying to build a subpar business.Now, however, he has the chance to buy one of the world’s pre-eminent investment banking franchises on the cheap and leapfrog many of his competitors who have been looking down on him for many years (Rothschild, Lazard, BNP, RBS/ABN…).In addition, Lewis could retain the Merrill Lynch name which would resolve one of BofA’s major problems in Europe: as long as you carry the Bank of ***AMERICA*** name there is no way you will be able to break through in M&A in France or Germany.In addition, keeping the Merrill Lynch name alive will also reduce the pain to the egos of the posh investment bankers at Merrill – the worst that could happen to many of them is to work for a “common” bank like BofA. I know the culture at Merrill, I used to work there.

GloomySeptember 14th, 2008 at 4:51 pm

MISGUIDED THINKINGThe whole idea of strong banks taking over weak banks is totally misguided, as such an outcome merely weakens the larger player. I think Bear did substantial damage to JP and Countrywide damaged B of A and that both of these banks are now damaged goods following their shotgun weddings.Look at what a disaster the banks have become. Now understand that the real estate meltdown is maybe half over and that the serious part of the recession is just beginning and you can see the future disaster unfolding. Even JP Morgan and B of A are going to go under.

PhilTSeptember 14th, 2008 at 5:04 pm

I echo your sentiment and also believe that thetemplate/mantra is severely flawed and only afurther measure of delay by a quick and dirtymethod of counterbalancing shadow toxicity.Simply put, its a bad mix – the real AND the shadow.I would withdraw my demand deposit account moniesif any of these IB’s are merged with my commercial bank.

snsSeptember 14th, 2008 at 4:54 pm

Bank of America in Talks to Buy Merrill Lynchhttp://dealbook.blogs.nytimes.com/2008/09/14/bank-of-america-in-talks-to-buy-merrill-lynch/index.html?hpYIPEEEEEE!

AshuSeptember 14th, 2008 at 5:45 pm

26$ for MER ………..is it the right price??I think its expensive………..at 26 the deal is difficult to get thru.

Average JaneSeptember 14th, 2008 at 5:45 pm

@ All: I continue to believe that the Fed (Bernanke) will do that which is unthinkable: bail out Lehman, bail out Merrill, bail out Big Auto, all with my shrinking Middle Class taxpayer dollars, which apparently are available ad infinitum. These people do not care about Moral Hazard. And ninety-nine point nine percent of we the hoi polloi have no clue what’s really going on; ergo, no outrage. We are much more interested in Palin’s lipstick. Right?

RedCreekSeptember 14th, 2008 at 5:54 pm

MER would have been the next one to fall after LEH, but the apparent BofA acquisition of MER prevents this from happening.So I believe that the Fed will indeed let LEH fail given that the systemic risk has been “backstopped” by BofA’s acquisition of MER.If Ben and Paul engineered this themselves, then they deserve a lot of credit. This is really smart…(1) Avoid moral hazard (i.e. LEH fails),(2) ringfence systemic risk (the problem does not go beyond LEH given that the weakest link after LEH i.e. MER is now going to be part of BofA) and(3) prevent further damage to the Fed’s balance sheet (i.e. no LEH nor MER bailout, buy more time to find a solution for MS and GS).Darn smart guys.

AshuSeptember 14th, 2008 at 6:05 pm

Market sees some bad news on Citi’s front too……..look at the major puts on Citi this thursday n friday……..SEP 19th expiry. Its a commercial bank, it is under major regulations, has major deposit support + FDIC insurance; but we never know its exposure to LEH, MER etc

Yung Keun ParkSeptember 14th, 2008 at 5:48 pm

The former Fed chairman Greenspan also predicts systematic meltdown in financial industry. He, however, thinks that it won’t be as bad.Greenspan: Other big U.S. finance firms may failSunday, Sep 14, 2008 5:44PM UTCWASHINGTON (Reuters) – Former U.S. Federal Reserve Chairman Alan Greenspan on Sunday said he suspected “we will see other major financial firms fail,” but it did not need to be a problem.”It depends on how it is handled and how the liquidations take place,” Greenspan said on the ABC program, “This Week.” “And indeed we shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers.”Greenspan also said it was a very bad idea to get rid of short selling even though stock in major financial institutions such as Lehman Brothers and American International Group have been beaten down in recent days.In July, the U.S. Securities and Exchange Commission issued a temporary emergency rule to curb illegal short selling in 19 major finance stocks including Lehman and mortgage finance giants Fannie Mae and Freddie Mac, which have since been taken over by the government.The SEC’s emergency order ended in mid-August and the agency is not expected to reinstate the rule for those 19 firms or the rest of the market.When asked whether the government should help Lehman the same way it helped Bear Stearns, Greenspan said the government is trying to do it in a different manner.”When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance,” he said.”Now if you generalize that, it is very clear that that is an unsustainable situation in the financial markets and in the markets.”The Fed and Treasury Secretary Henry Paulson helped orchestrate JP Morgan’s takeover of Bear Stearns, complete with a $29 billion promise to absorb losses.Greenspan also said the chances of escaping a recession was “less than 50 percent.””I can’t believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.(Reporting by Rachelle Younglai with additional reporting by James Vicini: Editing by Maureen Bavdek)

AshuSeptember 14th, 2008 at 5:54 pm

The wild card in this game is Mr. Paulson………..he & his counter part Mr. Bernanke has been making calls all day to Europe & Japanese banks to buy Lehman’s toxic debt…………they still have got some credibility in the international market, so………guys lets keep our fingers crossed.Tamasek holds 14% stake in MER. They are generally not sellers but at 26-30 they might sell.

AnonymousSeptember 14th, 2008 at 5:58 pm

If Eur & Japanese banks are inclined to purchase the toxic debt, they can buy it out of the bankruptcy estate- it’s a cleaner deal since certain liabilities will be washed in bnakruptcy. No need to rush in and buy it now.

AshuSeptember 14th, 2008 at 6:10 pm

Makes sense. BTW I wonder how/why NY times says Lehman is filing Chapter 11 today evening……….is that an anticipation or a reality.There are some-talks on creation of an 50-75 B$ international rescue fund………with ECB support.Anyone buying LEH below 2$ 2mrw??

AnonymousSeptember 14th, 2008 at 6:18 pm

Keep our fingers crossed? Mine are crossed that Lehman goes belly up, with no support; that the CDS market ends badly; and that Wall Street never recovers. [Disclaimer: I have no bets on the market.]

GuestSeptember 14th, 2008 at 6:21 pm

There is no return Like the Tacoma Narrows, this sets in motion a resonance that cannot be stopped. Its simply a case of the value of the notionals, there is no way to cover the leverage. Game over I’m afraid regardless of what is done. Any deal that pops the market is the fool’s 2nd chance to salvage some value.

AnonymousSeptember 14th, 2008 at 6:27 pm

To all my friends/brothers at Lehman, Merrill ………. Indian & Chinese banks are hiring……….RUSH!!!!!!!

AnonymousSeptember 14th, 2008 at 6:39 pm

Too bad the evangelical Republican base is wallowing in penury equal to its profound ignorance. Their primitive fears and black-and-white cognitive styles can be manipulated for votes, but the very lack of cognitive ability leaves them at the bottom of the socio-economic ladder, without the financial means to bail out the rich elites who tricked them into voting against their economic interests.I pray that this cosmic irony, and the timing of this collapse before the election, is not lost on the poor evangelicals, who unwittingly voted to support a system of corruption and greed unraveling before our eyes.

MedicSeptember 14th, 2008 at 8:12 pm

Don’t worry. As soon as tomorrow the right wing voices will all be talking about how this is the fault of the Dems, the liberal elites and anyone else they can blame.Fear has not failed them yet – they are their own religion and they stand on the backs of those who are afraid and need something or more accurately, anything to believe in. They prey upon the ignorant, uninquizative and the followers of the world. Jonestown can still happen in this day and age – people still have the need to belong and to feel like they are a part of something.The folks who have learned how best to manipulate the above are the ones who hold power now and who will do anything to keep it. Irony will most definately be lost on their followers.

GuestSeptember 14th, 2008 at 8:40 pm

Not bad Anonymous, but I would suggest that the evangelicals were never really part of the “base.” I agree that they were told they were part of the “base.” And that was good enough for the evangelicals who’s first priority was to impose their value system onto America. Meanwhile, the very wealthy, uncharitable, disingenuous, mafia called body politic republican used the evangelical numbers to win an edge over the disorganized, in-fighting, un-sure, stumbling body politic called democratic.The more I see of Obama’s background, I see a consistent, well defined motivation that beats the republican mafia hands down. If he wins, he has no clue how deep in do-do he will be, but nonetheless, he seems to be built from the right stuff to attack the job at hand.In the interest of full disclosure, I am a Ron Paul devotee, but Ron, like Jimmy Carter, has the potential to do as more damage as good. Barry Obama seems more clever and flexible than Ron. Barry would not have to be beholden to TPTB. Thus, there is a reasonable chance he could really slash Federal spending. Not that he would want to, but that it’s the only solution. Is it not weird how the Democrats seem to be more fiscally responsible than Republicans?

GuestSeptember 14th, 2008 at 11:56 pm

If you’re talking about the Hagge-Robertson led Christians who helped elect Bush, yes. If these people cause McCain to be elected, it’s because they are so hungry for a candidate that they’re willing to go in and elect a war monger who’s as bad as they get, just so they can vote for someone who’s pro-life (which I am), but obviously Palin’s pro-war also. If this is the cause of your concern — these Christians who suddenly now are interested in politics and are going to vote for a vice president (not a president) and will have zero influence if McCain is elected – then, yes, but this is not an accurate description of evangelical Christians in general or people who have faith in general.Keep in mind that morality-conscious Republicans were the primary voters for Ron Paul, Mitt Romney and Mike Huckabee because of McCain’s long and clear record opposing their issues. In my opinion, the numbers of evangelicals who will be swayed to the McCain-Palin ticket are much smaller than the news media would have you believe.I am a Christian, an evangelical meaning I believe in the inerrancy of the Bible; I am pro-life and always have been. I have never hated anything more in my life than the immorality in this country, this immoral war and the loss of our civil liberties. I would like to have a pro-life president: I would like a president that would fight for the return to the moral standards that this country was built on. But I would never consider voting for the McCain-Palin ticket because a true pro-life candidate and a true moral standard bearer are not on the ticket. A vote for McCain-Palin is a vote for McCain. Period.Christians and pro-lifers that support this ticket because of an attractive vice presidential candidate do not represent the kind of informed political views that most Christians in the country possess. A true evangelical believes in sharing the good news, not in arming fighter aircraft and destroying villages and burning, in their homes, women and children. No true Christian can support the war and torture policies of the Bush Administration. So don’t blame or confuse all people of faith in the Republican base with these people of misplaced faith.Agnostics must remember that there are many Christians who abhor what Clinton/Bush/Cheney/Paulson/Bernanke/Wolfowitz have done.Nor do I believe it’s incorrect to discuss religion in this campaign in a constructive way; McCain picked Sarah Palin to draw in politically low-informed Christians – even Democrats.

AnonymousSeptember 15th, 2008 at 8:34 am

If the evangelicals are determined to vote for a pro-war candidate and they manage to elect McCain/Palin (hereinafter referred to as “McPain”), when McPain starts World War III, I hope that the Russians display a sense of humor and nuke the red states first.

GuestSeptember 15th, 2008 at 11:24 am

Well, at least I won’t have to leave the country as I was prepared to do if H. Clinton had been elected by faith-based evolutionist Democrats who want to bottom feed off the work and labors of others while they “manage” production from their government swivel chairs, never having produced anything in their lives. Sadly, to do so, Communist evolutionals must corral and rule “human resources” by a whip under a malevolent machine of totalitarianism and to do so, they must outlaw Christianity and its concept that all men are individual and equal in the eyes of God, whether slave or master. That concept revolutionized the world and unchained mankind: it created Western Civilization. Now, you mock and misrepresent it on the basis of a few misguided adherents who have been misled by false teachers. You say that these sheeple will be responsible for WWIII. Does not the Democrat Party have its “useful idiots,” too, as foreseen by Vladimir Lenin?I believe it is the ideologue Norman Podhoretz who has propagandized for WWIII these past many years. He was a member of your Party until he and his ilk commandeered the Republican Party by their deceptively-named neoconservative political faction. They now rule both parties. Which is why I am an Independent looking for a third party.Unfortunately, “there are none so blind as those who will not see,” on both sides of the aisle.

samSeptember 14th, 2008 at 6:42 pm

September 15, 2008In Frantic Day, Wall Street Banks TeeterBy ANDREW ROSS SORKIN, BEN WHITE and JENNY ANDERSONIn one the most extraordinary days in Wall Street’s in history, Merrill Lynch is near an 11th-hour deal to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.The weekend’s once unthinkable outcome came after a series of emergency meetings at the Federal Reserve building in downtown Manhattan in which the fate of Lehman hung in the balance. In the meeting Federal Reserve officials and the leaders of major financial institutions were trying to complete a plan to rescue the stricken investment bank.But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, as its subsidiaries remain solvent while the parent firm liquidates, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.Lehman has retained the law firm Weil, Gotshal & Manges. The firm’s restructuring head, Harvey Miller, also spearheaded Drexel’s bankruptcy filing in February 1990.As efforts to acquire Lehman faltered, Bank of America turned to Merrill Lynch and offered at least $38.25 billion in stock for that investment bank, people briefed on the negotiations said. The deal, valued at $25 to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.Merrill’s chief executive, John A. Thain, and Kenneth D. Lewis, Bank of America’s chief executive, initiated talks on Saturday, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, people briefed on the negotiations said.Merrill’s 15,000 brokers will be combined with Bank of America’s smaller group of wealth advisers. The entity will be run by Robert McCann, the head of Merrill’s global wealth management business.Mr. Fleming, Merrill’s president, will be president of the combined bank’s corporate and investment bank while Thomas Montag, a former Goldman executive who started at Merrill in August, will head all the merged company’s all risk, trading and institutional sales.The leading proposal to rescue Lehman had been to divide the bank into two entities, a “good bank” and a “bad bank.” Under that last scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.But that plan fell apart on Sunday, all but assuring that Lehman would be forced to liquidate.The overarching goal of the weekend talks had been prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, which have come under mounting pressure in the markets.Even as Lehman and Merrill played out, the insurance company, the American International Group, was planning a major reorganization and a sale of its aircraft leasing business and other units to stabilize its finances, a person briefed on the company’s strategy said on Sunday.A.I.G. became one of the focuses at an emergency gathering of Wall Street executives over the weekend, and was trying to arrange a capital infusion in the face of possible credit downgrades.It was unclear whether A.I.G. would succeed in its capital search, but a person briefed on the discussions said it was seeking more than $40 billion even as it tried to sell assets to shore up its financial footing.Among the businesses likely to be sold is A.I.G.’s aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet.Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company’s shares in recent days. The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.

AshuSeptember 14th, 2008 at 6:53 pm

I would just like to comment that a “good” merger is just not possible with 1 or 2 days of due diligence. No, can;t digest it!

DavePSeptember 14th, 2008 at 7:51 pm

It takes about two minutes to digest Merrill’s balance sheet. 32:1 leverage, $809 bn level2 & 3 “assets”Question is, what’s the office furniture worth?

samSeptember 14th, 2008 at 6:46 pm

Lehman Brothers Plans to File for Bankruptcy ShortlyCNBC has confirmed press reports that Lehman Brothers is likely to file for bankruptcy protection as soon as Sunday eveninghttp://www.cnbc.com/id/26708143

GloomySeptember 14th, 2008 at 7:04 pm

Dow futures down 259 points tonight. I’m sure the Dow will be up by the close tomorrow as it will be spun that the system has been saved somehow.

AnonymousSeptember 14th, 2008 at 7:14 pm

Have been gratefully reading shared ideas here for over a year..thanks to everyone for your contributions..I have a radical suggestion for the American financial system:Sustainable Banking…

GuestSeptember 14th, 2008 at 7:17 pm

Here are my new odds for the American economy:Chance of a Depression = 60%Chance of a Bad Recession = 40%There’s nothing that Paulson or the Fed can do about it.PeteCA

GuestSeptember 14th, 2008 at 7:40 pm

AshuIt’s a personal viewpoint.I am effectively saying that the chance of a depression now exceeds that of a recession. Before on this blog, I had tended to feel that the opposite was true. But no longer.In my view, three main regions of the US economy are now headed for a depression. Florida and the SouthEast cannot escape one. They have been dragged into an imploding economic mess by the housing downturn and the subsequent banking downturn. That is very clear if you follow Mike Morgan’s on-going commentaries. Meanwhile, the mid-West region (esp. Michigan, Ohio) is severaly affected by the auto downturn. I doubt they can escape real on-going trouble. Figures not dicsused on this blog show that consumer delinquencies on auto loans are soaring in the US, and demand for auto’s is continuing to sink. Finally, western states such as California and Nevada have huge budget issues that are completely unresolved. Current attempts to deal with these shortfalls don’t even count as “myopic”. When California does face, I see no way to escape a depression in this state either. Sum total: Three major geographic regions flashing warning signs of much worse to come. I doubt that the rest of the country can pull the USA out of the morass that results from this.These are just my opinions.I don’t offer them for investing advice or information.PeteCA

GuestSeptember 14th, 2008 at 8:09 pm

@Ashu on 2008-09-14 19:43:58BOA buys MER @ 29 fixed — WSJat first i HATED it when they provide stoopid solutions like this at crucial time,but now i am Excited, let them provide solutions, let them come up with stick and saves, let them fire those bazzokass, let them save aig,wamu,merr,Boa,GM,Ford, Airlines co’s, let them try to save emm all,untill finally they sit down on their knees,come on!! show all your moves brruuthhaa, there’s more to come

AshuSeptember 14th, 2008 at 8:26 pm

The world has to come together to save these firms………if FED supports all the above mentioned, the FED will surely fail (their balance sheet has only 800 B$ with major liabilities)In the longer run………..I’m big time short on the dollar (with short term hedges)

GuestSeptember 14th, 2008 at 8:11 pm

from usagold.com:Lehman Brothers has fallen…Just saw this on MSNBC, and Bank Of America buys Merrill Lynch. DOW futures down 300 points right now. Looks like a 3-4% hair cut for those 401K’s and retirement plans.any confirmation of this?

GuestSeptember 14th, 2008 at 8:14 pm

Report: Bank of America buys Merrill LynchBoards approve acquisition for $44 billion that will create financal gianthttp://www.msnbc.msn.com/id/26708958

MartinSeptember 14th, 2008 at 8:15 pm

Alrightie folks, listen up.I can say BK procedures are being carried out for LEH. We are in the unknown territory now w.r.to LEH.I have to say…its too early to call MER BAC deal. Its not a done deal yet. Hold your breath, pls.

MartinSeptember 14th, 2008 at 8:43 pm

I can’t say they would the “next” ones to go but we have been working on them last week. they sure look dismal.Meetings are cross border now, we dont have time for “W”s now. they are too small in this context. So the light is on the big names now.

MartinSeptember 14th, 2008 at 8:51 pm

“In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses,”Just abt sums up work. 🙁 Sleep forgone for the last 52 hours now.

MedicSeptember 14th, 2008 at 9:02 pm

Best of luck to you. Thank you for all your information. Do get some rest – I fear you will need some as this will be a very busy period for you over the next several months.

AfASeptember 14th, 2008 at 10:26 pm

Thanks Martin.I still think the BoA-MER deal is a no-deal. Otherwise, BoA got a promise from Fed/Tres to provide guarantees. A lot of it.

Alessandro - http://castellidicarte.blogspot.com/September 15th, 2008 at 1:15 am

“cross border” has a terrible sound to it. You mean Fannie and Freddie, right?

HubbsSeptember 14th, 2008 at 8:16 pm

Good straight to the point interview by Dr Roubini on CNBC tonight. Looks like firms are going to have to huddle together thru mergers or sales to weather the aftershocks of Lehman, MER.

GuestSeptember 14th, 2008 at 9:15 pm

LONDON (MarketWatch) — The International Swaps and Derivatives Association Sunday said it had organized a “netting trading session” to reduce risk from a potential Lehman Brothers bankruptcy. it opened from 2 to 4 pm

MattSeptember 14th, 2008 at 8:49 pm

ASX catching cold, down 2.8% in first couple of hours of trading.NZX either somnolent, or doing the math still, at 9:40 Eastern. I don’t like this. NZX has less structural herd than many, but once they start concluding, they go. I’d keep an eye on ASX and NZX at least till London opens.Then, ignore NZX after 11:59pm Eastern, and see what ASX makes of possible LEH BK filing. That’ll tell you what London is going to wake up to, though by the sounds of it, no one is getting any sleep at the moment. Could be useful to gauge the ripple though.

StuartSeptember 14th, 2008 at 9:24 pm

In shock. BofA paid a 70% premium to buy MER!!!! 70%! Is Ken Lewis out of his MIND??????????????? Now the FED is accepting equities for collateral!!! Is Ben Bernanke out of his MIND???????????????? AIG now begging for a bail out…. loaded to the hilt with the CDS sword of Damocles hanging above it… bye bye greenback.

AshuSeptember 14th, 2008 at 9:38 pm

2mrw I’m shorting the following: -Bank of AmericaGreenbackFEDMorgan StanleyWill Book profits on Citi (shorted them last week)HAve fun guys!

SHORT MSSeptember 14th, 2008 at 9:57 pm

Of the list, the biggest profit could come from short MS Morgan Stanley’s exposure to level 2 and level 3 assets (this is about more than subprime) stands at $226 bn and $74 bn . Morgan Stanley has the highest ‘Level 3 assets-to-equity’ of 236% after Bear Stearns .Its the next ibank to go down (assuming LEH and MER are already bust/acquired)

GuestSeptember 14th, 2008 at 9:35 pm

Dr. Roubini was making his point that by accepting equities at the discount window the Fed had effectively nationalized 6 trillion securities.But he was cut off. If you are reading this though, you know the implications and the implications of purchasing a company at a 70% premium that you could have acquired on Monday for at least a 10% discount.When Wall Street stops making shrewd, skinflint deals–you know they are playing with your money and they no longer have normal incentives in place.The core has melted through containment…

Resident M. TurdstileSeptember 14th, 2008 at 10:38 pm

I love it: it’s fine for consumer credit and education loan lenders to raise interest rates on customers who fall behind, even on unrelated loans from other lenders, but if the FDIC does the same thing, it gets called for what it is–kicking the banking system in the balls when it’s down: “You don’t need me to tell you the banking industry is on the ropes. The last thing it needs (or the economy needs, for that matter) is an expense hike that will inhibit banks’ ability to rebuild capital, extend new loans, or both. If the FDIC wants to raise its bank tax once the industry has recovered, I suppose that’s fine. But to raise taxes on the industry now is perhaps the dumbest thing the agency can possibly do. At the margin, the FDIC will be helping bring about more of the failures it says it wants to prevent.”But it’s OK to shaft the consumer, even though there are more of us, because we don’t have a lobby. Or else, as one anonymous points out, we’re feeble-minded busybodies who would rather be out of a job than permit homosexual marriage between persons we’ll never meet.

Xlp ThlplylpSeptember 14th, 2008 at 10:54 pm

Turdstile, you’re onto something. I’d buy gold if I were you. The dollar is in big trouble. In fact, my model of the economy predicts troops in the street. I expect lines to form around Washington Mutual tomorrow morning as depositors begin to panic as the news of the spreading collapse becomes increasingly more difficult to suppress. Maybe Governor Palin has the answer. Not!

AshuSeptember 14th, 2008 at 9:42 pm

Can some1 answer me the following:How will the system raise some 200 B$ to survive?What potential effects of writing down 500 B$ more of toxic debts?

Resident M. TurdstileSeptember 14th, 2008 at 10:41 pm

You mean the color of the grass over their coffins will be green. Or do you mean the pallor of their bloodless visages?

MS SHORTSeptember 14th, 2008 at 10:02 pm

Bank Level 2 Assets Level 3 Assets Shareholder Equity Total Assets Level 2 Assets-to-Equity Level 3 Assets-to-Equity Leverage (X)Citigroup $934 $133 $114 $2,183 822% 117% 19.21Merrill Lynch $768 $41 $32 $1,020 2405% 130% 31.94Lehman Brothers $177 $39 $26 $786 687% 152% 30.59Goldman Sachs $277 $72 $47 $1,120 586% 153% 23.71 Morgan Stanley $226 $74 $31 $1,045 723% 236% 33.43 Bear Stearns 227 $28 $12 $96 1926% 239% 8.15SHORT IT TO DEATH , FOLKS. ITS AT 37 NOW. 300% GAINS ARE POSSIBLE IF YOU SHORT TODAY (assuming it opens at 29$)

GuestSeptember 14th, 2008 at 10:04 pm

Who cares what the public chatters?Love’s the only thing that matters!Who caresIf the sky cares to fall in the sea?Who cares what banks fail in YonkersLong as you’ve got a kiss that conquers?Why should I care?Life is one long jubilee,So long as I care for youAnd You care for me!Let it rain and thunder!Let a million firms go under!I am not concerned withStocks and bonds that I’ve been burned with.I love you and you love me,And that’s how it will always be.And nothing else can ever mean a thing.Who cares what the public chatters?Love’s the only thing that matters!Ira Gershwin 1931Of Thee I Sing

GuestSeptember 14th, 2008 at 10:31 pm

WASHINGTON, (AFP) – A consortium of 10 global commercial and investment banks announced plans Sunday to provide 70 billion dollars to help offset a credit squeeze amid an anticipated collapse of Wall Street giant Lehman Brothers.Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement they “initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”They agreed to create a “collateralized borrowing facility” of 70 billion dollars, with each bank contributing seven billion dollars, to help ease access to credit.They also said they would work together “to help facilitate an orderly resolution” of the derivatives exposures between Lehman Brothers and its counterparties.”These actions reflect the extraordinary market environment,” the statement said.”The banks are committed to continuing to work closely with one another as well as the US Treasury Department, the Federal Reserve, the Securities and Exchange Commission, governments and regulators around the world, and other market participants, to ensure the industry is doing everything it can to provide additional liquidity and assurance to our capital markets and banking system.”The 10 banks would be able to tap this facility, with any bank eligible for up to one-third of the fund. The amount may be expanded if more banks join the program.The announcement came moments after the Federal Reserve announced new steps to ease access to emergency credit for struggling financial companies, by broadening the collateral to be used for central bank loans.The unusual Sunday moves came as financial markets braced for a possible collapse of Lehman Brothers, a Wall Street giant whose failure could have wide-ranging implications for the financial system.While there was no official news on Lehman’s fate, analysts expected a bankruptcy filing that could affect a range of companies dealing with the Wall Street giant, with a potential to worsen the global credit crunch.

GuestSeptember 14th, 2008 at 10:45 pm

only 70 billion?? and where they get the money from?? yeah from the FEDs, here take my worthless shares, owwh love the smell of moneyi was expecting a bad recession, now i know we are heading for a depression, nothing less

AfASeptember 14th, 2008 at 10:47 pm

@ RedCreek”If Ben and Paul engineered this themselves, then they deserve a lot of credit. This is really smart…(1) Avoid moral hazard (i.e. LEH fails),(2) ringfence systemic risk (the problem does not go beyond LEH given that the weakest link after LEH i.e. MER is now going to be part of BofA) and(3) prevent further damage to the Fed’s balance sheet (i.e. no LEH nor MER bailout, buy more time to find a solution for MS and GS).Darn smart guys.”Talking about short term fix. Sorry, but I do not quite agree. I still believe that the BoA-MER shotgun marriage as attempt to stop the bloodbath from reaching MER (and then others) is either a maneuver or was forced/suggested by FED/Tres with a lot of guarantees to BoA. But none of this really matters, even if it works. In a matter of few weeks/months we will be back here again (cf Gloomy – “MISGUIDED THINKING”) or if you wish Agent Smith taking over the Oracle (with the good/bad roles reversed).On a different note, I suggest that responses to a specific post be posted under the appropriate thread only when there are less than 5 posts subsequent to it. Past that, we operate as we used to do before (ie. my present post). Otherwise, we should create a limited number of threads (i.e. 5) under which all remotely related responses/addition will be posted (i.e. one about Lehman/AIG/MER, one about actuality, one about Professor’s post, one about geo-politics, one about some economic topic (depression, inflation vs deflation ..) …)

FRIEND 0F WASHINGTON MUTUALSeptember 14th, 2008 at 10:53 pm

Washington Mutual presents fresh testBy Krishna Guha in Washington and Joanna Chung in New,YorkPublished: September 15 2008 03:00 | Last updated: September 15 2008 03:00Attention has focused on the danger presented by the failure of Lehman Brothers. But as the UK discovered during the Northern Rock crisis, the fall of a commercial bank can have systemic consequences if it threatens a run on other weak lenders.In the US, Washington Mutual – the sixth largest bank – has lost more than a third of its market value in the past week as investors fear it lacks liquidity and capital to survive the credit crisis.The failure of a bank of WaMu’s size would test the strength of the US deposit insurance system and its ability to maintain the confidence of the nation’s savers, particularly if it is seen as part of a wave of bank failures.As of June 30, 64 per cent of deposits in the US banking system were insured – a much larger proportion than in the UK at the time of Northern Rock’s collapse. Nonetheless, a high-profile failure may cause the $2,500bn (€1,690bn, £1,400bn) in uninsured deposits to shift abruptly in a flight to safety, which could be highly destabilising.At the limit, the US could be forced to adopt a de facto blanket guarantee on all bank deposits, as the UK did on a temporary basis during the Northern Rock crisis and many Asian nations did during the regional turmoil.A formal blanket guarantee would require legislation. But the Federal Deposit Insurance Corporation could seek a systemic risk exemption to cover all the deposits of a failing institution, subject to the approval of its board, the Federal Reserve and Treasury secretary.The FDIC has no desire to invoke this authority, which has never been used, as it would be unpopular with taxpayers and fuel moral hazard. It is focused on fostering confidence by swiftly making good on the existing guarantee.The FDIC is respected for its operational effectiveness. Still, its $45bn deposit insurance scheme is underfunded at 1.01 per cent of insured deposits. The corporation is preparing a capital replenishment plan but analysts fear it may need to draw on its $70bn Treasury credit lines.WaMu had $143bn in insured deposits on June 30 – three times the deposit insurance fund but less than half of its $307bn assets.If a bank like WaMu did fail, the FDIC would try to pay another bank to take the insured deposits. The acquirer would in turn pay some fee for the deposits and would probably take some matching assets, reducing the upfront cost to the FDIC. If no buyer was available, the FDIC would manage the deposits itself and provide backstop liquidity.Copyright The Financial Times Limited 2008I AM SINGING IN THE HELL, OH I AM SINGING IN THE HELL, BECAUSE I AM SINGING IN THE HELL,IF I DON’T SING IN THE HELL, WHO ELSE WILL SING FOR ME,

AfASeptember 14th, 2008 at 11:09 pm

I believe that the Bernanke and Paulson learned during this weekend more than they have wished to.LET’S BURN SOME CDS!

AnonymousSeptember 14th, 2008 at 11:16 pm

I guess Fuld (pronounced “Fooled”) decided not to file before 11:59PM, knowing that the trades conducted during the Lehman risk reduction trading session of the ISDA would be nullified. He wants to go down in flames and take the whole system with him.

GuestSeptember 14th, 2008 at 11:25 pm

Remember that the $29/share purchase of MER is also introducing a new dimension of risk to short sellers. Many will be burned very hard tomorrow as they struggle to buy cover. This will counteract much of the hard downselling and reduce the plunge. It will also serve as severe warning of how the FED/TREAS collaborating with Wall Street Players can easily manipulate stock prices. Over the weekend, many traders working fundamentals were ruined/hurt by an irrational purchase at severe premium. But there will still be worse and more egregious examples of pure larceny coming as the pigmen whose true nature has been cloaked with backroom deals and silent manipulations must move into the pure light to display their special arts of purloinery.

InNoSiNzSeptember 14th, 2008 at 11:29 pm

I don’t understand how BofA will weather the storm when Leh goes down. I understand BofA acquires Mer, but when Leh goes down, all those lvl 3-2 assets become mark-to-market; hence more writedowns for Mer (as this will flow thru BofA’s books) and additional write-downs on BofA current books (double whamy)? Do they have such capital (apart from the discount windows) to withstand the upcoming storm (category 4 most likely)?Who was it that mentioned it here first, Evapor-flation? Miss America? I guess that theory may be coming true. *poof*!

GuestSeptember 14th, 2008 at 11:46 pm

From Reuters: Lehman Brothers Holdings Inc says filing for Chapter 11 bankruptcy; says no subsidiaries will be included in filing 12:34am EDT

PhilTSeptember 15th, 2008 at 12:01 am

“I think Dick was pathologically incapable ofselling,” says one banker. Even while Lehman shares werefalling and uncertainty was starting to engulf the bank,he refused to countenance any capital infusion – the mostlikely being from Korea Development Bank – valuing Lehmanat less than its book value. By doing so, he would tacitlyhave admitted that Lehman was worth merely the sum of its parts.In other words, all the effort he had invested over his careerin making Lehman a name to match Goldman Sachs, Morgan Stanleyand Merrill Lynch would have come to naught. That was a tradetoo far for Mr Fuld.

Entire Article==> A tragedy of hubris and nemesis

GuestSeptember 15th, 2008 at 12:08 am

Fuld is trying to bring the whole system down!!!i am used to see this kind of drama on DVD, Cinemascant believe im one of the supporting actors..

AfASeptember 15th, 2008 at 12:17 am

DJ Shadow feat. Mos Def – Six Days:[Mos Def]I get a feeling there’s gonna be a riotI don’t read the newspaper is because they all have…ugly printsBring it ON!Bring it ON!Bring it on cuz therez gon be shit tonight![DJ Shadow]At the starting of the weekAt summit talks you’ll hear them speakIt’s only MondayNegotiations breaking downSee those leaders start to frownIt’s sword and gun dayTomorrow never comes until it’s too lateYou could be sitting taking lunchThe news will hit you like a punchIt’s only Tuesday(What time is it?)You never thought we’d go to warAfter all the things we sawIt’s April Fools’ day(What time is it?)Tomorrow never comes until it’s too lateTomorrow never comes until it’s too late[Mos Def]Tomorrow is another dayToday is another boomTomorrow is another dayToday is another…boomSHOT!EscalationNever StationGenerationSeparationSituationDissipationShot!Another shot another shot the tender is to(?)The heart is cold the gun is hot(Shot)Im not sure if they feeling thatIm not sure if they wanna stopThe gun is cold the blood is hot(Shot)The hearts are weak the guns are not[DJ Shadow]You hear a whistling overheadAre you alive or are you dead?It’s only Thursday(What time is it?)You feel the shaking on the groundA million candles burn aroundIs it your birthday?(What time is it?)Tomorrow never comes until it’s too late(Get tomorr’ on the phone…Tryna be smart…Get tomorr’ on the phone)Tomorrow never comes until it’s too late(I need to see tomorr’…Tryna reach tomorr’)Think tomorrows come I think it’s too late[Mos Def]ANOTHER DAY!!!!!!!

aleister perduraboSeptember 15th, 2008 at 12:19 am

Sustain our firm solitude, thou who thou wellstrokest! Hear, Hairy ones! We have sued thee but late. Beautyparlous!) when suddenly (how like a woman!), swifter asmercury he wheels right round starnly on the Rizzies suddenly, withhis gimlets blazing rather sternish (how black like thunder!), tosee what’s loose. So they stood still and wondered. Till first hesighed (and how ill soufered!) and they nearly cried (the salt ofthe earth!) after which he pondered and finally he replied:– There is some thing more. A word apparting and shall theheart’s tone be silent. Engagements, I’ll beseal you! Fare theewell, fairy well! All I can tell you is this, my sorellies. It’s prayersin layers all the thumping time, begor, the young gloria’s gangvoices the old doxologers, in the suburrs of the heavenly gardens,once we shall have passed, after surceases, all serene throughneck and necklike Derby and June to our snug eternalretribution’s reward (the scorchhouse). Shunt us! shunt us! shut us!If you want to be felixed come and be parked. Sacred ease there!The seanad and pobbel queue’s remainder. To it, to it! Seekitheadup! No petty family squabbles Up There nor homemade

ErandaSeptember 15th, 2008 at 1:12 am

Yeah, I’d say. Morgan Stanley and Goldman-Sachs in quick succession– they’re just playing a shell game, and their own toxic waste will come out.Then it’ll be the non-IB banks’ turn. JPMorganChase is hosed– they already had problems before they took on those of Bear Stearns (and you just know that BS’s BS was well-hidden, even today they don’t know the true extent of it). Then Citi. Probably BoA. Maybe WaMu. Wells-Fargo. Then AIG and the insurance industry. Then the whole US economy, as the credit markets shrivel up and business grinds to a halt.Bernanke can’t save this by tossing bills out of helicopters anymore, it’s far too late. Pushing down the prime rate would only foster hyperinflation a la Robert Mugabe, the dollar would tank, foreign and domestic investors would bail.

GuestSeptember 15th, 2008 at 1:24 am

Dr. Roubini – your prescience in tracing the course of economic events that are now unfolding in America and throughout the world, coupled with your warnings of cause and effect these many long months, has to be an intellectual achievement in micro and macroeconomics not yet seen at this breadth in the history of modern economics. The significance of your achievements as an economist, I have no doubt, will become an important study in the field of economic thought and surely, for its sheer human achievement, recognized internationally in Guinness World Records. Incidentally, I greatly enjoy Roubini Live and am simply awe struck by your recent appearances. Thanks for everything.

AfASeptember 15th, 2008 at 1:26 am

Unbelievable!Not even 2hours past and Bloomberg found 2 stupid guys to talk markets up:Mobius Says Merrill Deal Signals Bottom for MarketsAMP’s Oliver Says Financial Shares Are `Extremely Cheap’

AussieRobSeptember 15th, 2008 at 6:16 am

AMP’s Oliver has been trying to stem AMP’s reduced inflow of money into their funds for some time. Much like the brokers he has to say something remotely possitive every time he is quoted. Cynical aussies like me have not invested with AMP for a very very long time. However, like America we are full of apathetic and ignorant punters who keep throwing their money away. This week you will see all of the wankers say this is the bottom which is about as real as father christmas. When we get to 1.5 trillion in write-off’s and US house prices rise there may be a chance it is turning. However, I wonder if that will happen in the medium term. We may have to wait until the real economic power “China” decides to let other economies expand again

FlandersSeptember 15th, 2008 at 2:13 am

Mobius hasn’t been right about anything the past six months. How is this fool making money for his clients?

stevemacSeptember 15th, 2008 at 4:58 am

A possible scenario?BAC gives 50B worth of stock to mer, then bac takes mer equity and dumps it off to the fed’s discount window?

prismaticSeptember 15th, 2008 at 5:33 am

Just a couple of points that I believe can ensure that this type of situation can never happen again:1. Change the law so you can not walk away from personal debt and the debt follows you for the rest of your life. That should stop the “jingle mail” phenomenon. This actually the norm in most countries.2. Change the law so shareholders are liable for any debt held by the company they own shares in. That should change the attitude of mindless, clueless private and public shareholders.Anyway I believe the above is a lot cheaper then the mess created by Paulson & Bernanke.

Alessandro - http://castellidicarte.blogspot.com/September 15th, 2008 at 6:05 am

“Change the law so you can not walk away from personal debt and the debt follows you for the rest of your life”Wrong solution. The lender is the one who has the capacity to asses a borrower ability to repay and it is his duty to assess it. We have tough BK law in Italy and all you get is more black work and illegal economy.

GuestSeptember 15th, 2008 at 12:05 pm

So, is it the right solution to have the bankruptcies of reckless homebuyers and reckless investors “follow the taxpayer” for the rest of his life, while the new “homeowner” gets to stay in his “adjusted-cost” home and the “investor” takes cover under a “too-big-to-fail” bank that has direct access to public money that will pay his gambling losses while he keeps the winnings? Looks like the golden goose that lays the gold is beomg fleeced alive.

kilgoresSeptember 15th, 2008 at 6:31 am

1. Basically, you’re advocating the elimination of bankruptcy. Ain’t gonna happen. As Alessandro suggests, debtors are not always entirely to blame for their own situation. For example, if you’re one of 40 million Americans who can’t afford health care coverage and you or a dependent wind up with a catastrophic illness or in an accident that causes you to incur hundreds of thousands of dollars in medical expenses, do you think there should be no relief for that personal debt? That’s just one of many, many examples. Debtor’s prisons were eliminated when this country was founded. Not all prisons require physical bars and walls.2. Again, this won’t happen. You’re suggesting that the shield of protection from personal liability for corporate debt be eliminated, which would completely obviate the principle reason corporations exist in the first place, i.e., to enhance capital formation by shielding investors. Moreover, most investors have no real say in the management of a corporation, so why the heck should they be held liable for its actions?SWK

Alessandro - http://castellidicarte.blogspot.com/September 15th, 2008 at 7:29 am

SWK: “Moreover, most investors have no real say in the management of a corporation, so why the heck should they be held liable for its actions?”Exactly, keeping the executives responsible for (at least, part of) the debt looks more appealing to me. It sure is a better policy than today’s golden parachutes.

kilgoresSeptember 15th, 2008 at 6:23 am

@ 7:01 E.D.T., DJIA Futures down 378 points, S&P down 49.80, and Nasdaq down 52.75. Should make for an interesting day.SWK

Guest_ARM_dealerSeptember 15th, 2008 at 6:31 am

I think we should be stock specific here.MS, WM, JPM are the ones to be toast today (down more than 40%)Indices will be fine. Down 5% will not do them much harm.

kilgoresSeptember 15th, 2008 at 6:43 am

Perhaps. I fail to see, though, how the deep financial crisis now manifesting itself will not ultimately begin to infect every other sector of the economy. There may never be a spectacular market crash in all this, but a slow grinding down of the economy as the financial sector implodes and restructures itself seems every bit as painful to watch. In the meantime, it seems to me that the markets may just keep bouncing back and forth like a spring between a pseudo-recovery ceiling and a bear market floor.SWK

GloomySeptember 15th, 2008 at 6:31 am

GROW AT ANY COSTThe greedy largest bank in America has seen fit to swallow 2 rotting carcases Countrywide and Merrill. B of A’s “grow at any cost” mentality which was so successful for so long will now do it in. Watch the stock price over the coming months. Unfortunately when this baby goes it will really cost the taxpayer bigtime.

ErasmusSeptember 15th, 2008 at 6:42 am

don’t u get it? the trick here is to become BIG on purpose. that’s an implicit guarantee that “they” won’t let you fail. BofA is ding the right thing. Get big, get in trouble, get bailed out.

AnonymousSeptember 15th, 2008 at 6:46 am

Thank you Dr. Roubini.Who’s next ? What industry is after the investment banks ( Autos ? ) . Tip of the iceberg ? Effect on declining US RE prices (accelerate and more severe) ?

GuestSeptember 15th, 2008 at 6:53 am

we are only at the beginning of this schlammassell unwinding and deleveraging…this will likely spread to all sectors of the economy, not just financial – just think of squeezed and diminishing corporate profits due to relatively high commodity prices, rising cost of borrowing, decreasing consumer demand, etc…

AussieRobSeptember 15th, 2008 at 7:34 am

Just wait and see today’s market response. Initial fall of about 4% by 11am and then lots of crap chatter about bottoms will see it end at less than 2.5% ie in total denial. What we need is a 10-15% crunch and then there will be some value in the companies that actually produce something as distinct from those that just shovel paper.

GuestSeptember 15th, 2008 at 7:48 am

main problem is solvency and capital, not liquidity – reducing interest rates only addresses liquidyt, not solvency/capital…SWF could help with solvency/capital but it looks like they are backing off now…

mammonSeptember 15th, 2008 at 7:53 am

The Professor points out the END GAME in his “Monday Update”. “The Federal Reserve is waiving 23A of the Federal ReserveAct that restricts how much commercial banks can relend liquidity to their investment bank affiliates”. The FDIC and theTaxpayers are the long term fall guys. They are bringing all the toxics under the FDIC umbrella into future mammothinstitutions that will corner the market and are Way too big to Fail! The taxpayer is getting drilled!!!Professor is this the end game?????????

GuestSeptember 15th, 2008 at 8:36 am

I don’t see this as the end game. I see this as the beginning of the end. And the end is a depression (if we are lucky) or hyperinflation and then a depression. Just depends on how the government plays it. At the moment it appears they are playing for hyperinflation.

ErnstSeptember 15th, 2008 at 8:01 am

Now the FOMC should lower the Fed funds rate by 25 or 50 basis points. They must try to enhance the potential profitability of banks as much as they can. Or at least try to offset some of the losses. If they don’t do it in tomorrow’s meeting it will be in the next one. Unless they try to preempt and do it before any meeting.

AfASeptember 15th, 2008 at 8:34 am

I don’t see how this helps beyond a 24 hour rally. How banks could enhance their profitability if they do not lend? Even if the FFR goes to 0 it won’t help.However, that will lead us closer to the END GAME for the FED.

ErnstSeptember 15th, 2008 at 8:54 am

Oh, but they do lend at the right rates. Merrill Lynch borrows at 2.5% and lends at 9% for margin accounts. If everybody (banks) borrows at 1.5% now, they get a nicer spread.

GuestSeptember 15th, 2008 at 8:26 am

as of late last year, the solvency figures were as follows – note the worst are Morgan Stanley and Goldman Sachs, not the others that have been having difficulties…Here is the Level 3 assets to equity ratio summary:Morgan Stanley 251%Goldman Sachs 185%Lehman Brothers 159%Bear Stearns 154%Citigroup 105%Merrill Lynch 38%

mammonSeptember 15th, 2008 at 8:41 am

For whatever it is worth! I am putting my chips on (shit) Fertilizer!Everybody must eat! Go back to food, the August to September attack onAgriculture will be over! The only danger is that the powers that bedecide that it is time to starve half the planet, then I am screwed.Huhhhh!!!!!!!

London BankerSeptember 15th, 2008 at 8:50 am

Paulson is going to give a speech from the White House at 1:30pm east coast time. What do you want to bet that the markets close green on his sage reassurances that the system is coping just fine, and that the plan he has implemented with the Fed is in the best interests of the markets and all Americans? We’ve seen this play so many times before, haven’t we?Lehman being taken down overnight is bear bait. The trap will be sprung with the announcement of further liqudity arrangements/interest rate cuts/etc. which will shear the shorts.The elimination of the restrictions of 23A really have me scared. There is now no firewall between Treasury credit and speculative lending to investment bank affiliates by FDIC-insured banks. That means that if the system does fail, all the losses will be fully socialised onto the FDIC and the taxpayer. You can bet that all the bonuses and huge payouts are being off-shored to Lichtenstein and Grand Cayman by those in change in the interim so that they won’t be making any contributions to the huge tax burdens they leave behind.

philSeptember 15th, 2008 at 9:10 am

LB, like you I’m British. Why should we (as Brits) be scared about the elimination of 23A restrictions? How will this affect the rest of the world?

London BankerSeptember 15th, 2008 at 9:21 am

It’s the utter criminal lawlessness of it that scares me. That statute is very black-and-white plain that deposit taking institutions insured by the FDIC are not supposed to use depositors’ funds to prop up their insolvent securities affiliates. The law goes back to 1933 and is a fundamental protection of the US system.Bernanke and Paulson are doing to banking in the US what Bush did for the police and military – saying the law does not matter and that there will be no law or court recognised that can interfere with executive expedience.Instead of consulting on the change in law or regulation, even going to Congress for repeal of the law, they are just using administrative authority to overturn a statute which provides a fundamental protection against abuse of the FDIC and the taxpayer.The rule of law doesn’t constrain executive action in respect of banking or markets in America any more than it applies to civil liberties or warfare. We should all be scared by that.

GuestSeptember 15th, 2008 at 5:55 pm

LB, you are so right about this. It is the OPPOSITE of what should be done and what WAS done in 1933 as a RESULT of what unregulated Timbuktu bond-pushing, margin-dwelling Wall Street has done that peaked in 1929. We certainly don’t want to be headed in the wrong direction at this point. We need to “get back Jo-Jo.” Terrifying, it is.

mammonSeptember 15th, 2008 at 9:59 am

The Professor has to do the taxpayer a favor and highlight this as soon as possiblein his conversations with Bloomberg interviewers! The professor may beour only avenue for change, now that we have been mugged by the Fed!He is respected and everyone now knows he just states “the facts”.The financiers are robbing us blind!!!!!

GuestSeptember 15th, 2008 at 8:56 am

Now that oil has killed the US and World economy, it is sinking like a rock down in the $90s. Did it really have to go to $147 this summer? unreal.

AfASeptember 15th, 2008 at 9:12 am

This is weird. BoA accepted to buy MER for $29 and the stock is now refusing to go above $22.Or am I missing something?LET’S BURN SOME CDS!

Little SaverSeptember 15th, 2008 at 9:34 am

Under terms of the transaction, BofA would exchange 0.8595 shares of its common stock for each Merrill Lynch common share.Nobody interested in BofA shares?

AfASeptember 15th, 2008 at 9:58 am

Still, using the all in stock ratio, MER should be valued at about $24.8 (taking into consideration the 15% down in BoA stock this morning). MER is still around $21.5That unless BoA is worth in fact $25 (instead of $29 right now.

Gabriel CooperSeptember 15th, 2008 at 10:01 am

You could probably think of the difference as the spread created by the risk that the deal will fall apart. You always see this kind of thing in pending deals, but they just aren’t as big and noticeable.It’s normal… well, as normal as you can expect right now.

Little SaverSeptember 15th, 2008 at 10:25 am

Yes, I guess, what if the deal falls apart for some reason that’s not clear to the market? Holding the next candidate to go down not such an attractive prospect.

Gabriel CooperSeptember 15th, 2008 at 10:37 am

Exactly. Even with the boards of both companies having agreed over the weekend, the market knows there are probably a dozen provisos that could break things up or force a repricing. Any deal of the sort would include these.Also, the valuation of the deal was ridiculous. There has to be strong suspicion that the deal was brokered by the government and if this is the case there are probably all manner of hidden gimicks that could revalue it.

AfASeptember 15th, 2008 at 1:05 pm

Exactly!My point is how could the market have figured out this so quickly. Did they learn from the Countrywide episode?

GuestSeptember 15th, 2008 at 9:23 am

The United States is mired in a “once-in-a century” financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday.The talismanic ex-central banker said that the crisis was the worst he had seen in his career, still had a long way to go and would continue to effect home prices in the United States.“First of all, let’s recognize that this is a once-in-a-half-century, probably once-in-a-century type of event,” Greenspan said on ABC’s “This Week.”Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied “Oh, by far.”“There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go,” Greenspan said.The former Federal Reserve chairman also predicted that the financial crisis would see the failure of more major financial institutions, even as embattled Wall Street investment giant Lehman Brothers scrambled to find a buyer.

Little SaverSeptember 15th, 2008 at 9:32 am

S&P downgrades BofA to AA- from AA and places the ratings on CreditWatch with negative implications, reflecting the risks of acquiring Merrill Lynch in the present turbulent market environment.Wow, so fast! What has changed during the weekend?

randySeptember 15th, 2008 at 9:42 am

What happened to the financial meltdown everyone has been talking about all weekend! LEH goes belly up, MER bought by BAC presumably because they has to due to CDS issues? most financials falling…..but the PPT is holding it together again!I asked LB the question the other day….I’m going to assume the answer is unknown.HOW LONG CAN THIS GO ON????????CAN TPTB AND THE PPTCONTINUE THIS CHARADE FOREVER???????????????I’m so pissed I’m going to sell all my shorts and get out of this rigged BS market!!!!!!!!!!!!!!

Gabriel CooperSeptember 15th, 2008 at 10:09 am

You’ve got to recognize three things:1. The market isn’t so weak that it will just free fall. We are shakey in America… but we aren’t Pakistan.2. The market does what it wants, regardless of what anybody thinks it ought to do. It’s a complex system containing both logical and irrational variables. It WILL NOT do just what you think it ought to… ever.3. In a general collapse assets which are normally negatively correlated to one another, for instance oil and the S&P 500, start moving together. This is happening across the board as many commodities fall based on cooling demand, but the companies that use them as falling based on cooling prospects. This slows any fall because it is an awkward situation where values “grind” against one another, trying to push each other up as they both fall.

mammonSeptember 15th, 2008 at 10:12 am

@randyFederal Reserve Act Section 23A(per professor)waiver!!!!The financiers are slowly passing their debt to the taxpayers, andnobody is stopping them. This is seen as a positive by a cynicalinvestor. A cynical investor is betting on their power to slowlypass it all to the Taxpayers. There is a financial meltdown of thecurrency that will eventually happen, barring the US controlling allthe oil fields in the world. This is not a simple game, if it was wewould all be billionaires!There will be unknown unknowns coming down the pike, never assumeyou know everything and your shorts should pay!Think of this a fourth dimensional chess and you have never seen thefourth dimension, you just have to guess!!!

randySeptember 15th, 2008 at 10:52 am

@ mammon:Thanks. I’ve calmed down a bit from my rant a few minutes ago. However, I’m still considering getting out. I’m up on most of my shorts anyhow. I just thought with all that happening….I might get a large return. I usually short the S&P because I feel it is going down long term. Thanks again all!

Gabriel CooperSeptember 15th, 2008 at 11:12 am

Calm is a good place to be while trading. The reason I don’t do it that often is that I tend to get worked up in the same way.I think it’s worth mentioning that the “inevitability” of this collapse is not necessarily an indicator that there are quick profits to be made. When short term moves happen all the time it is the worst time to trade them. They are just too unpredictable.This is a time for disciplined, diversified shorting… not short term speculation. The opportunity given us here is to see a huge, long term trend… not to predict which stock will collapse or to expect the indices to make us rich overnight. Smart money is on taking advantage of the overwhelming trend, in a disciplined fashion that ignores the variables of individual bailouts, the market as a whole, or the periodic relief rallies.

GuestSeptember 15th, 2008 at 9:59 am

PPT! PPT! Dow transports are now actually up! This market is crash proof thanks to the new socialist regime. GLobal markets can drop 5%, 6%, 7% but not the goodol USSRA!!!

AnonymousSeptember 15th, 2008 at 10:01 am

This is ridiculous! Unbelievable! How corrupt a system can be? If the markets won’t crash despite all bad news, then why worry with the bailouts?

Alex GreySeptember 15th, 2008 at 10:24 am

The source of the problem is declining asset values. The broker-dealers have been the most affected so far because leverage ratios in the shadaow banking system were extremely high. However, the more asset values fall the more at risk will the regulated banking system become. I am not sure the approach of the Fed will be more successful than that of Japan. Japan managed to hold its financial system together though a huge fall in asset prices. Looks like the U.S. finacial system is starting to come off the rails. The probelm with relying on the market to solve the problem e.g. hoping for an orderly wind-up of Lehman is the risk of panic.

Alessandro - http://castellidicarte.blogspot.com/September 15th, 2008 at 10:28 am

Alex Grey: “The probelm with relying on the market to solve the problem e.g. hoping for an orderly wind-up of Lehman is the risk of panic.”Market? What market?Ah! You still call ‘market’ all the credit and now equity securities with the Fed and Treasury imposed prices?

NoviceSeptember 15th, 2008 at 10:25 am

Watching the video- I am amazed at how calm all the participants are as they agree that”yes Chicken little- the sky is indeed, really falling” They are so nonchalant, like yeah, it’s all gonna come crashing down-it’s no big deal, nothing to write home about. I would like to hear from Nouriel how heremains so calm in the face of this financial disaster,I know he has to remain professional. But hearing his continued warning of impending crisis- I cannot help but feel that we are very likely seeing the end of our culture as we know it, this is extremely scary and I wonder if these guys feel that same extreme sense of urgency- that I do, and just put on a good face so as to remain professional and not add to any panic? What was said behind the cameras?What does your average Joe do in light of all that is happening? The chicken littles of the world- who see what is coming and yet are fairly powerless to change any of it.

AnonymousSeptember 15th, 2008 at 10:27 am

http://biz.yahoo.com/ap/080915/economy.html“Industrial output plunges by largest amount in 3 years as auto production falls sharply”Good news for a rally. Interesting how European Markets rallied towards the closure. I don’t think market irrationality has anything to do with what has been happening today. Enough information has been revealed for a crash to happen up until now. I believe that the markets are being simply manipulated as they did for the last 14 months.

Gabriel CooperSeptember 15th, 2008 at 10:44 am

A lot of these sort of things are discounted nowadays… because they aren’t a big surprise. Bad news that everyone expects is priced in well before the event.Maybe there was a manipulation of some sort that caused the market to move… maybe not. It’s not like anybody is hiding the fact thet central banks are making moves today. The thing is though, we can’t keep blaming the PPT for this sort of thing… especially when there are perfectly natural explanations.It’s called day trading. Anybody with any reasonable level of risk aversion closes their positions before close in these sort of conditions. You have to when there are constantly secret late night events that send securities off in random gaps the next morning. If a day is bad and going down, a lot of folks are going to close short positions near to close. That’s a good part of why it happens every day… maybe the only part.

AnonymousSeptember 15th, 2008 at 11:00 am

I am doing a PhD in mathematical finance area. I contend you that “pricing before the event idea” (Expectation operator) doesn’t work! There is no such thing! Unfortunately, utiliterian theory, CAPMs, APT, No Arbitrage Pricing, First and Second Fundamental Theorems of Asset Pricing, Efficient Market Hypothesis ideas don’t work either, and they are the main reasons behind this crisis. If markets were efficient and all prices were discounted correctly, then you shouldn’t see a single profit making company out there. I am sorry but enough with the street jargon and its current academic basis. They were good enough to ride the whole system into this mess. The claim that MARKETS KNOW EVERYTHING is simply ridiculous and has been shown to be incorrect under many cicumstances.If you really would like to understand what is going on read some papers about bubbles. These papers will show you that markets are incomplete and also give you the hint about how it’s easy to manipulate them!

Gabriel CooperSeptember 15th, 2008 at 11:23 am

I think you misunderstand… I’m not contending that the market truly knows anything. I am merely stating that when it believes that it knows something, there is an adjustment in valuation made prior to the date where this belief will be confirmed or denied.I expect that you have a great chance to do good work if your thesis could demonstrate to what degree the market does or does not develop accurate information, but if you contend that the market does not revalue based on expectation I think you are going to have a little problem finding data to support it.It’s just not logical to hold to this. It’s something of a tautology. The same contention you have to make in supporting that the market does not know the truth behind an event is also a contention that the market is pricing based on expectation that what they believe they know will eventually be confirmed.

AnonymousSeptember 15th, 2008 at 12:16 pm

I am sorry if I didn’t make my point clear in the previous post. There is of course an expectation operator (conditional expectation operator) however the filtration used is not fully driven by information (or some random process – i.e. A Brownian Motion). This has already been shown, however, I don’t want to give the names in here. People who did this are very prominent in their area. You don’t need data to for the proof of this work. This is a theoretical work rather than empirical.From what I understood in your argument in the third paragraph, I think you are wrong because this is not a tautology. Showing that the markets don’t know the truth behind an event doesn’t base on the same contention that it does. If, everyone in the markets knows the truth, prices would reflect this and there wouldn’t be any arbitrage. However, in a system with no arbitrage there wouldn’t be anyone making a profit. Thus, you wouldn’t have a single financial firm operating out there. Of course everything gets revealed eventually (You may use uniformly integrable martingales here). However, till it gets revealed you may have trading strategies that are strict local martingales or local martingales that are not uniformly integrable. These arise due to the restriction of trading strategies in your functional space. This means that not everyone is endowed with a trading strategy with which one can benefit from arbitrage opportunities. Prices remain irrational not only longer than one expects, but also remain irrational as long as one would have enough monetary resources. Money creation is not hard if you have the collateral to do it.

Hong Kong fun managerSeptember 15th, 2008 at 10:30 am

喬 治 布 殊 指 美 國 經 濟 仍 然 健 康2008-09-15 HKT 23:07美 國 總 統 喬 治 布 殊 回 應 雷 曼 破 產 事 件 , 強 調 長 線 來 說 , 美 國 經 濟 可 以 應 付 這 問 題 。他 表 示 , 美 國 經 濟 仍 然 健 康 , 足 以 應 付 市 場 的 調 整 。

GuestSeptember 15th, 2008 at 10:46 am

Thought of the Day

The man most responsible for the financial services and banking deregulation that made today possible, fmr. Sen. Phil Gramm, is the man John McCain wants to put in charge of the whole economy.–Josh Marshall

mammonSeptember 15th, 2008 at 11:25 am

Don’t Forget that wife Wendy Graham was playing her role in the Commodities Futures Trading Commissionto facilitate Enron’s OTC derivatives game!John Mccain is surrounded by the most cynical characters and the story is not being told!Also! Obama must perceive that he needs to get visceral when he creates a narrative!1)He has to tell the wage earners that Greenspan and Reagan in 1982 raised their payroll taxes to secure social securitywithout putting this money in trust, and then Reagan took it to spend on the military. He has to be visceral!2)He has to tell the wage earners that they have been conned by Greenspan’s easy money intentional asset inflation,specifically to make them feel secure even though they were not making more money. They saw their houses go up, and theydidn’t pay attention when the Taxes on the Rich and Corporate were lowered placing the burden on them. Say it visceral!3)He has to lay out the END GAME of the GOP. The wage earners pay 100% of all taxes and the SUPER RICH NONE!!!Say it visceral!!4)Et cetera, (I have pages to put here)I HAVE A WHOLE NARRATIVE THAT OBVIOUSLY IS TOO HERETICAL FOR AMERICAN VIRGIN EARS!!!WORKING PEOPLE, YOU ARE BEING SCREWED!PAULSON THE RAPIST IS SLOWLY INSTITUTING PENURY FOR ALL WAGE EARNERS! THE RICH WILL BE IN AN OFFSHORE TAX HAVEN!ARE AMERICANS STUPID????

MedicSeptember 15th, 2008 at 2:28 pm

Mammon – I can answer your question:YES!! THE VAST MAJORITY OF PEOPLE IN THE COUNTRY ARE DUMB AND ASLEEP AT THE TV!!!!!!!I now return you to your regular programing………

Forensic economistSeptember 15th, 2008 at 11:02 am

HOT TIPS FROM A SHOE SHINE BOYFor the first time I am hearing chatter at my gym (Oakland CA) in the locker room about how shorting stocks and buying puts is a good thing. This suggests to me that when the financially unsophisticated have finally noticed that we are in a bear market we are close to the end of it. This may not be the proverbial hot tip from a shoe shine boy in October 1929, but it’s getting close to it.Haven’t covered my shorts yet, but preparing to. Don’t panic.

AnonymousSeptember 15th, 2008 at 11:05 am

I guess Lehman made two mistakes: they supported the Obama campaign and Fuld was insulting to government officials. Otherwise the Fed would have been delighted to absorb another 613 billion dollars of debt.

GuestSeptember 15th, 2008 at 11:12 am

LOLOL!! Another miraculous save at teh low of the day on the S&P500 rioght before hanks speech! What a rigged game! You gotta beleive they are going to engineer the mother of all confidence rallys after hitlers, er , um I maena hanks talk, and close this green today to say “see, no worries mate”…

GuestSeptember 15th, 2008 at 11:15 am

The industrial production number this morning was devistating in that it now predicts the 52 week forward earnings growth fot the S&P500 at 4.52%!!! Wall street is looking for over 20% still!!!! If stocks rally green today, it is proof positive that we no longer have “free markets” in the US….

GuestSeptember 15th, 2008 at 11:20 am

HAHAHAHA, when laws and regulations become uncomfortable, we’ll just ignore ’em…good ‘ol hand and ben (new ice cream name HankNBenny!)12:17 p.m. [AIG] Move will allow AIG to post collateral in return for cash12:16 p.m. [AIG] AIG allowed to access $20 bln in assets from subsidiaries

PeterJBSeptember 15th, 2008 at 11:25 am

Stop a moment and consider:”In the name of the best within you, do not sacrifice this world to those who are its worst. In the name of the values that keep you alive, do not let your vision of man be distorted by the ugly, the cowardly, the mindless in those who have never achieved his title.”-Ayn RandRemain cool: it is a time to watch; the greatest fear should be the adoption of the full fascist state which will indicate and be followed by, nuclear war. Look for military (all types)uniforms, gold braid, medals and shiny black boots being displayed at meetings and military aides scurrying around carrying attache cases. It is a natural condition for the incompetent and stupid.Ho hum

PhilTSeptember 15th, 2008 at 12:13 pm

Sage advice indeed, Sir.Curious as to your appraisal of thebody language of the new King of Wall Streetas dubbed by CNBC, Mr. Lewuis during the televisedpress conference/interviews if you have seen them.

PeterJBSeptember 15th, 2008 at 5:11 pm

Apologies but no time to view movies today – perhaps tonight, but I can tell you that some people are reporting that military uniforms in public are now becoming more the norm throughout the USA where before they were not. I suggest that this is significant and predictable human socio-economic behaviour. A trend that is damned dangerous as it scream of nationalism and patriotism tendencies which can only escalate.Ho hum

GuestSeptember 15th, 2008 at 1:02 pm

Fascist state is not an exaggeration PeterJB. If you, dear reader, think this is so much drama, then watch this video and ask yourself why does the administration needs these facilities? I predict that if we go into a depression and if McCain wins, these facilities will be used in conjunction with Martial law to contain American citizens.FEMA Camp Footage (Concentrations Camps in USA) http://www.youtube.com/watch?v=0P-hvPJPTi4

AnonymousSeptember 15th, 2008 at 11:30 am

Gee if the markets don’t crash, maybe the financial industry isn’t that important. They don’t put any nuts on any bolts. Instead they piss their time away hoping for a breakthrough in the theory of optimal stopping.

mammonSeptember 15th, 2008 at 11:33 am

Just saw breaking news on the CNNMoney site! Governor(NY) Patterson is going to lend 20 billion to AIG, encouragesthe Fed to do the same. I thought New York was broke! Are they going to float AIG BONDS??Are they going to charge 20%? What the hell is going on?

AnonymousSeptember 15th, 2008 at 11:37 am

Can somebody explain why Berkshire shares are not falling today, considering Berkshire’s major position in AIG? Can’t understand it.

GuestSeptember 15th, 2008 at 11:55 am

I think it is because last week when he stopped providing excess deposit insurance through Kansas City Surity to banks, it was a move to free up capital to buy out the rest of AIG.

AnonymousSeptember 15th, 2008 at 11:38 am

One reason that the markets haven’t plummeted as fast as we’d like is the state of denial the industry is in. They’re swallowing the mainstream business media kool-aid (that damned mainstream business LIBERAL media!!#!$!#) that this is only a sub-prime mortgage credit crisis, when in fact it’s a systemic crisis affecting near-prime, prime mortgages, mortgage backed securities, consumer credit, auto loans, student loans, corporate bonds, and so on. Also they aren’t mentioning the drop in the dollar.

GuestSeptember 15th, 2008 at 11:59 am

Here they come!!! Trying to get stocks to vault above 11,200 on the Dow to force a massive short-covering rally!!! PPT! PPT! PPT!

GuestSeptember 15th, 2008 at 12:17 pm

See why the PPT does what it does at critical lows, cause people fall for it!!! From BeSpoke:”With all this talk of imminent doom for our financial system, one would think that the Financial sector and the overall equity market would be making simultaneous lows. As shown below, however, both are still above their July lows, and the S&P 500 Financial sector is even above its August lows.”

GuestSeptember 15th, 2008 at 1:44 pm

“Fire, Fire in the theater”Ushers will escort you from your seat as we casually make our exits.BTW, it is a real fire and some of you will get really burned. But an orderly unwinding of seating arrangements takes precedence over fast escape.

GuestSeptember 15th, 2008 at 2:26 pm

Few economic observers can sift through government jargon and find the lies faster than president of The Ludwig von Mises Institute, Lew Rockwell. Here are a few grafs from his post this morning on Freddie and Fannie:Let me state this very plainly: I do not believe for one second that if the government fails to nationalize Freddie and Fannie that the world as we know it will come to an end. Those who are saying that are trying to scare the population, the same as with every other major demand by the regime. It was the same with Nafta, the WTO, the war on terror, the war on bird flu, the nationalization of airport security, and everything else…Contrary to what the blogging heads say, there is nothing that makes this nationalization inevitable. If we had leaders who had courage, who understood economics, who could think about the long run, we would let the market handle the entire process, come what may. I guarantee that this solution is a better one than creating another trillion or so to bail out failing enterprises.And yet this is not just another longing for courageous leaders. We can’t hope for that. We need a guarantee. We need a system that would make it impossible for government to do these things even if it wants to. That system is called sound money. Think about the preconditions that made it possible for the Bush administration to decide one evening to dump a trillion plus to guarantee three-quarters of the home mortgages in this country. It is a system that is premised on the government’s capacity to print unlimited amounts of money.If it could not do that, no one would be talking about conservatorship. No one would be talking about guaranteeing the liabilities of the automotive industry either. War on Afghanistan, on Iraq, on Russia, and troops in another 100 plus countries, would be out of the question. These wouldn’t be issues. If government had to tax people directly for all its spending priorities, we would see Washington’s ambitions in every area scaled back dramatically. Every suggestion of a new program would be met with the demand as to how it would be funded.Fiat money with central banking, on the other hand, tempts corrupt politicians and bureaucrats, and it also further corrupts them. It is the great occasion of sin of our public life. The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles…All of these relate in some degree to the need for sound money and condemn the act of fraud and monetary debasement. The consequences of monetary sin cannot be contained to the sinners only. They are spread out all over the whole of society, destroying its economic basis and corrupting the morals of society. They foster crazed illusions that we can magically generate wealth through the act of printing money, and the attempt to do so has catastrophic consequences. As Mises wrote: “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism…”http://www.lewrockwell.com/rockwell/imperative-sound-money.html

GuestSeptember 15th, 2008 at 2:37 pm

U.S. economy is now collapsing even faster…Americans should take their dollars out of the banks and keep them at home insteadAnd while the economy is tanking, the government is finding excuses with aggressive posturing with more and more countries: Russia, Bolivia, Venezuela, Pakistan……and of course at the same time selling more and more arms!With White House Push, U.S. Arms Sales Jumphttp://www.nytimes.com/2008/09/14/washington/14arms.htmlSo while the actual business and investment economy gets tinier and tinier, the war economy grows larger and larger.

GuestSeptember 15th, 2008 at 2:57 pm

Sept. 15 (Bloomberg) — Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern that the $62 trillion credit-derivatives market will unravel.

GuestSeptember 15th, 2008 at 2:57 pm

So when U.S.A. is no longer a world power (thanks to W and this current crisis), I guess the western world gets together and makes UN a real power (to balance the power vacuum)…

AnonymousSeptember 15th, 2008 at 4:19 pm

new world order. everything is in place. go to you tube and put in NWO. you will see speeches by presidents, etc.

ze100September 15th, 2008 at 4:36 pm

Somehow I doubt Russia, China, India and Brazil will let that happen. The balance of power and wealth is shifting towards emerging markets, and at the moment alot of international institutions need to change the way they operate in order to be more relevant in the coming multi-polar world.

GuestSeptember 15th, 2008 at 3:01 pm

I am soooo sick of pundits calling bailouts of certain financial institutions “inevitable”!! And now one of my favorite economic writers has joined this sorry crowd.Bill Fleckenstein today claims “the Treasury chief did what he could with Fannie and Freddie” although huge problems remain, and that Paulson “has actually crafted a pretty good plan for Fannie Mae and Freddie Mac, aka “Franron” – “given the bad hand he was dealt.” LOL, “the hand he was dealt”!Says Fleckensten, “We’ve all known for a long time that the government would stand behind the mortgage giants when push came to shove…”Reallly? Is that why Freddie and Fannie’s stock fell to the basement, because “we’ve all known” they were going to be bailed out by Joe Average? Ha! Fleckenstein didn’t know This is sad commentary by Fleck.Personally, I think the economy is going to trump Wall Street.Fleckenstein’s column is at:http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/franron-bailout-good-plan-bad-news.aspx

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