Horrible News: Lehman Brothers Bankrupt and Merrill Lynch bought by BAC

[Mangudai]

Regular investors like you and me are protected by SIPC insurance. So the little guy shouldn't lose his retirement account if his broker goes bankrupt.

If AIG went bankrupt many people think a bunch of other banks around the world would be pulled down by it.

AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.

The banks have bought this insurance to protect themselves against the risk that these loans would go bad, that borrowers would default.

Their motive for doing so was to reassure their respective regulators - such as the FSA for UK banks - that these loans are of minimal risk.

And the benefit of doing that was that they could lend considerably more relative to their capital resources.

But if AIG is in trouble, then doubts arise about whether it would be able to honour the financial commitments it has made through these insurance contracts (which, for those of you who like to learn the lingo, are called super senior credit default swaps).

In fact, in a wholly mechanistic way, the downgrades of AIG's credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.

Which means those banks' balance sheets become weaker - and that could mean that they'll be forced by their regulators to raise additional capital.

So there's a widespread view among bankers that the US Treasury and the Federal Reserve simply can't allow AIG to fail, in the way that they felt that they could allow Lehman to collapse into insolvency.

If AIG went down, a number of banks' balance sheets would be mullered - there would a dangerous risk to the stability of the global financial system.

[Oleander Ardens]

There is a huge run on Treasury Bills, the largest since 1955 even if the yields are nearing zero. This means more money to spend for the US.

[SwordsMaster]

There is a huge run on Treasury Bills, the largest since 1955 even if the yields are nearing zero. This means more money to spend for the US.

... Yeah, on foreign debt and bailing out banks. Plus there are 5.6 million more unemployed people than this time last year. Or put another way, 2.6 people per job opening. And the USD is starting to fall.

You might find this informative

PS: Can a mod please spell Lehman right in the title?
Edit2: Thanks!

[drone]

On Morgan Stanley and Goldman Sachs, the theory is that their stock prices got hammered yesterday by short sellers. A little schadenfreude profiteering going on, consequences be damned. While still profitable, they are so leveraged that they can't afford bad perceptions.

[HoreTore]

To quote Dilbert;

Let's leverage our synergies by forming a pro-active task force to re-engineer our core processes!

[Adrian II]

Thats what they say every time, yet every time they don't learn and its the taxpayer who gets shafted.

Agreed. That's why I opened the other thread about what could and should be done in the way of regulation of markets. Panzerjaeger is right that mismanagement is not a crime. And Crazed Rabbit is right that under a favouritist regime mismanagement is actually 'good' (profitable) management. Structural change is needed, but social structures are not that pliable. Outside police states, that is.

[Vladimir]

Looks like Russia is having the same problem:

http://www.russiatoday.com/business/news/30650

[Hosakawa Tito]

Could be nothing to it, but the New York State AG is starting an investigation into short-selling activity with these companies. CLICKY

Panzerjaeger is right that mismanagement is not a crime.

Perhaps, but being richly rewarded for it should be. Management has the right to manage, but that doesn't infer the right to mis-manage.

[Strike For The South]

hmmmmm. The more I think it about it the more I think publicly traded companies are a bad investment

[yesdachi]

hmmmmm. The more I think it about it the more I think publicly traded companies are a bad investment

I think it depends entirely upon the company.

[yesdachi]

Well the market took a big upward swing this afternoon after hearing that the Treasury Department has a plan to bail out financial institutions by buying their bad assets. Clicky

The bank rescue concept, as reported by CNBC, would involve creating a federally-chartered company that would buy the bad assets of banks, investment banks and others. The financial institutions would then be able to raise new capital and lend money and finance new ventures.

Sounds like a great deal if you are a bank, I wonder if the banks will offer a similar deal to their credit card holders. The banks could take back some of the “bad assts” that were purchased with credit and allow me card holders to borrow more money and finance new bad assets ventures.

[SwordsMaster]

Yeah. So what? That's a whole lot of optimism.

[KukriKhan]

Yeah. So what? That's a whole lot of optimism.

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn.

$2,000bn = $2,000,000,000,000. That's a lot of zero's. No wonder they don't wanna say "2 Trillion", being charged on the gov't credit card.

"A Million here, a Million there... pretty soon we're talking real money."

Thank St. Jude that the Chinese have sold enough trinkets to the US consumer, to finance the US taxpayer's "obligations", for which they, nor their elected representatives, never voted.

[ICantSpellDawg]

There is no free market, only a freer market. I'm surprised to hear ideological indignation from fiscal conservatives about regulation. It is disgusting that the Federal government is doing all of these bailouts. It is disgusting that the corruption has run so deep for so long. I support discussions about a solution to this stuff that won't result in another insane bailout putting all of the risk on taxpayers and all of the payout to the mis-management.

Anti-trust and monopoly laws were a good thing from what I know about them - these were'nt "free-market" moves, but they sure were sensible ones. People who believe the government should have nothing to do with anything are anarchists. Markets are tools for good when you keep fraudsters to a minimum - when they run rampant, markets tear peace and stability apart.

I'm for what works both in the short and long term. Capitalism has nothing to do with my moral code unless it is a tool to strengthen it. When it becomes an impediment or it becomes more useful to degenerates we should all take another look.

[PanzerJaeger]

Perhaps, but being richly rewarded for it should be. Management has the right to manage, but that doesn't infer the right to mis-manage.

Thats just populism.

A company can hire a monkey as CEO if it so desires. The responsibility to ensure that a business is managed correctly lies with the board and the investors, not the government.

Somewhere along the line, these golden parachutes had to be disclosed to, if not approved by, shareholders. They certainly weren't on the first page of the annual report, but the information was acessible. If a shareholder didn't believe in that sort of compensation, it was his responsibility to sell the stock or lobby to get it changed.

I remember an older gentleman who invested that I used to help after school for required service hours. He watched his stocks every day and took an active interest in the companies he "owned". He could recite business plans, past and present variables, and even bios on important people in management.

Nowadays, you're lucky to find someone who checks their investments more than quarterly - more often than not its annually. 401ks and the like have thrown a huge number of people in the market who don't really know how it works or even care as long as they make money; then when things go bad, they're all looking for someone to blame. In general, the market has become a far more impersonal atmosphere with more and more power put in the hands of brokers who more than likely all go to the same country club.

If people dont have the time to educate themselves on what they are buying into, maybe they should invest in something less risky. /endrant

[HoreTore]

A company can hire a monkey as CEO if it so desires. The responsibility to ensure that a business is managed correctly lies with the board and the investors, not the government.

The problems starts when the company gets so big that what they do affect pretty much every single business in the country.

It's not a lot of fun to see the company you built for yourself get bankrupt because some idiot did something you had absolutely zero control over. It's not very capitalist either.

[Strike For The South]

Thats just populism.

A company can hire a monkey as CEO if it so desires. The responsibility to ensure that a business is managed correctly lies with the board and the investors, not the government.

Somewhere along the line, these golden parachutes had to be disclosed to, if not approved by, shareholders. They certainly weren't on the first page of the annual report, but the information was acessible. If a shareholder didn't believe in that sort of compensation, it was his responsibility to sell the stock or lobby to get it changed.

I remember an older gentleman who invested that I used to help after school for required service hours. He watched his stocks every day and took an active interest in the companies he "owned". He could recite business plans, past and present variables, and even bios on important people in management.

Nowadays, you're lucky to find someone who checks their investments more than quarterly - more often than not its annually. 401ks and the like have thrown a huge number of people in the market who don't really know how it works or even care as long as they make money; then when things go bad, they're all looking for someone to blame. In general, the market has become a far more impersonal atmosphere with more and more power put in the hands of brokers who more than likely all go to the same country club.

If people dont have the time to educate themselves on what they are buying into, maybe they should invest in something less risky. /endrant

Agreed.

[PanzerJaeger]

The problems starts when the company gets so big that what they do affect pretty much every single business in the country.

It's not a lot of fun to see the company you built for yourself get bankrupt because some idiot did something you had absolutely zero control over. It's not very capitalist either.

Thats part of the market, with or without the current credit crisis. If WalMart tanked for whatever reason, how many dozens of suppliers would they take down with them?

The problem is that people think, through regulation, we can change the fundamentals. You cannot remove risk from the market.

[Crazed Rabbit]

Well the stock markets have done pretty well.

CR

[Caius]

Indeed. Here the market reacted VERY well. But you never know. Now, what will happen if the thing goes out of control?

[Tribesman]

Indeed. Here the market reacted VERY well.

Its amazing how well a market can react when you throw a trillion dollars to it .

[Hosakawa Tito]

Thats just populism.

A company can hire a monkey as CEO if it so desires. The responsibility to ensure that a business is managed correctly lies with the board and the investors, not the government.

Somewhere along the line, these golden parachutes had to be disclosed to, if not approved by, shareholders. They certainly weren't on the first page of the annual report, but the information was acessible. If a shareholder didn't believe in that sort of compensation, it was his responsibility to sell the stock or lobby to get it changed.

I remember an older gentleman who invested that I used to help after school for required service hours. He watched his stocks every day and took an active interest in the companies he "owned". He could recite business plans, past and present variables, and even bios on important people in management.

Nowadays, you're lucky to find someone who checks their investments more than quarterly - more often than not its annually. 401ks and the like have thrown a huge number of people in the market who don't really know how it works or even care as long as they make money; then when things go bad, they're all looking for someone to blame. In general, the market has become a far more impersonal atmosphere with more and more power put in the hands of brokers who more than likely all go to the same country club.

If people dont have the time to educate themselves on what they are buying into, maybe they should invest in something less risky. /endrant

The traditional public bulwark against such galloping greed is deligent government regulation, but the dozing watchdogs of Congress and the Bush administration weren't much interested in ensuring that investment banks offering mortgages had enough reserves to cover bad loans.

The repeal of the Glass-Steagall Act in 1999 should be reversed. This law seperated commercial banks from investment banks, whose investments tend to be riskier. Investment banks aren't subject to regulation by the Federal Reserve, and after the 1999 repeal, whenever investment banks bought out commercial banks and then dived into the subprime mortgage game, customers of commercial banks were put at unsought risk through financial instruments whose increasing complexity has made them all but impossible to understand.

Now that taxpayers "own these companies" I demand that my government representatives ensure that we (through our government) are ceded a 75 percent stake in these companies affairs with the right to change (fire without recompense) senior management. Members of the Board should be barred from ever serving on another, and be subject to civil lawsuits from shareholders for their negligence. This might help restore investor confidence in the market.

[Ice]

There is no free market, only a freer market. I'm surprised to hear ideological indignation from fiscal conservatives about regulation. It is disgusting that the Federal government is doing all of these bailouts. It is disgusting that the corruption has run so deep for so long. I support discussions about a solution to this stuff that won't result in another insane bailout putting all of the risk on taxpayers and all of the payout to the mis-management.

Anti-trust and monopoly laws were a good thing from what I know about them - these were'nt "free-market" moves, but they sure were sensible ones. People who believe the government should have nothing to do with anything are anarchists. Markets are tools for good when you keep fraudsters to a minimum - when they run rampant, markets tear peace and stability apart.

I'm for what works both in the short and long term. Capitalism has nothing to do with my moral code unless it is a tool to strengthen it. When it becomes an impediment or it becomes more useful to degenerates we should all take another look.

It's not disgusting at all, Tuff. It's easy to speak of theory. What's difficult is actually sticking to that theory and watching the economy go in the crap hole for a long time.

[Strike For The South]

It's not disgusting at all, Tuff. It's easy to speak of theory. What's difficult is actually sticking to that theory and watching the economy go in the crap hole for a long time.

agreed SOmetimes you have to know when to cash your chips and stuff theory for the sake of the nation, It was one of those times and Im really glad the goverment did what they did. It could've been worse much worse

[Lemur]

We didn't need that trillion dollars, anyway.

[Strike For The South]

We didn't need that trillion dollars, anyway.

I dont like it either but what is the alternative?

[Lemur]

I don't know, Strike. And if this bailout goes through we'll never know. I'm going to wait and read what people who do nothing but sit around and study economics have to say about it before I get really depressed.

But I tell ya, between the trillion dollars we sunk into Iraq and the trillion we're going to throw into propping up the financial markets and the other three trillion that somehow got frittered away in debt spending over the last eight years, I'm going to occupy a lot of my later life apologizing to my son and daughter.

Sucks to be them.

-edit-

I see someone already made a film about this.

[Strike For The South]

I don't know, Strike. And if this bailout goes through we'll never know. I'm going to wait and read what people who do nothing but sit around and study economics have to say about it before I get really depressed.

But I tell ya, between the trillion dollars we sunk into Iraq and the trillion we're going to throw into propping up the financial markets and the other three trillion that somehow got frittered away in debt spending over the last eight years, I'm going to occupy a lot of my later life apologizing to my son and daughter.

Sucks to be them.

-edit-

I see someone already made a film about this.

I agree.

[KukriKhan]

Its amazing how well a market can react when you throw a trillion dollars to it .

Or 2 or 3. Hey, what's a buncha zero's among friends anyway, right?

I am stunned. When President George W. Bush said in early 2001 that he'd "looked into the eyes, and seen the soul" of Comrade Putin - I admit, I never for a nano-second imagined that he meant anything like: "...and he's right, we should collective-ize all our resources in the name of the people".

Wow. Soviets ftw.

Welcome to the USAR (Union of Soviet American Republics).

Resistence is futile.

[Mangudai]

Wow, a lot of credible people are saying we just stood at the abyss of another Great Depression. When money markets broke the buck and T bills sold at a discount, we were looking at financial armageddon. It looks like the new Fed plan might work. But, I don't believe the rally of 9/18, 9/19. I'm selling a crap load of stock first thing monday morning.

On the subject of regulation; ideology and oversimplification are not helpful. The lassiez faire, caveman capitalism view is naive. Modern markets exist in a complicated legal framework, the system requires lots of lawyers and centuries of legal case history. The assets that a share of stock represents have no analog in the caveman world.

On the socialism side; there are many criticisms I don't have time to go into all of them. My main critique is that economics involves fundamental uncertainty, subjective valuation, and lots of decision making that is arbitrary and capricious.

In a nutshell, I believe the proper approach to regulation is to regulate in the interest of preventing really bad things from happening. We should not regulate in the interest of planning a specific course of improvement. Note that Fannie and Freddie were the most highly regulated financial institutions in the US with a government defined mission to promote home ownership.

The traditional right-left distinctions are fading in importance (individual liberty-collective responsibility, equality). A new distinction is gaining in importance. Those who welcome uncertainty and unpredictability vs those who wish to plan a specific course of change.