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by Jerome a Paris
After weeks of agony, Lehman's fate appeared sealed by the end of last week, as its stock market value dropped 74% in a few days, after having lost more than 80% since the beginning of the year. That the Fed and Treasury have called an emergency meeting over the week-end ensures that things are over for the bank and it will either be bought over the week-end (with someone taking over its liabilities) or go bankrupt.
And the very reason the government took action over the week-end is also the one that ensures that it will not go bankrupt: it is considered too big to fall. As the WSJ notes:
The reason is that in a liquidation, all the liabilities become immediately due, whereas the assets need to be sold to willing buyers. So the "loss" in such a collapse is not, as it would be in normal times, the difference between the liabilities and the assets, it is the difference between the liabilities and what money can be realised fast with the assets. It's the difference between the value for you of a mobile phone, and its value for a junkie that needs to raise cash quick to get its cash. In normal times, or for non-financial companies, such a loss could be tolerated, but in today's context, this would have a number of nasty consequences:
In other words, a Lehman collapse could cause chaos in the markets, and bring other banks down. So far, the solution pushed by the Treasury is not unreasonable, as the NYT describes it (link above):
Saving Lehman would avoid massive problems for Wall St's other banks, and thus it would be appropriate to get them to contribute the (much smaller) amounts that would allow for an orderly closing down of Lehman. The problem is, of course, that each has an incentive to put up as little money as possible, as long as others put something. And none want to help the buyer of the good bits to get a good deal at their expense. But of course, no buyer has any reason to do any deal and put any money on the table unless it makes sense for it to do so. A classic "freerider" problem, which can only be solved if there is an outside force to coordinate contributions and, if necessary, impose them. This is the function that the Treasury and the Fed can play. But - they are themselves against the wall: if no solution is found before the markets open on Monday (and that's only a few hours away in Asia now), then there is a good chance of a total financial meltdown, something that the Treasury is desperate to avoid. Thus it is likely that the Wall St banks are holding their own commitments to the last minute to push for public money to help make the deal. Given the precedents that have been set first with Bear Stearns in March, and only last week with Freddie Mac and Fannie Mae, it is not surprising that they expect the same to happen again. So my bet is that we'll see another bailout of Wall Street and the financial investors it serves, with large amounts of public cash committed in a way that looks painless today (ie, no money upfront, but large liabilities into the future, likely to cost hapless taxpayers billions later - after the election). Has this administration ever behaved otherwise? The mores and havemores have fucked up on a massive scale, but their are "the base", and they cannot be let down. They gorged in the good times, and they are letting taxpayers deal with the hangover. A sweet deal if you can get it (all you need is a few billions). |
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Lehman: more socialising the losses of the rich | 200 comments (200 topical, 0 editorial, 0 hidden)
Lehman: more socialising the losses of the rich | 200 comments (200 topical, 0 editorial, 0 hidden)
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