Matthew Yglesias » Lehman Down

Sep 14th, 2008 at 6:01 pm

Lehman Down

Looks like nobody wants to buy Lehman Brothers so they’re looking at liquidation. Bank of America, which I guess has money, was once considered a likely candidate to buy Lehman, but now it looks like they’re going to buy Merrill Lynch (which was likely to go down after Lehman) instead.

Can someone remind me what it is that all these financial wizards were getting paid so much money to do? Is there some reason you need to pay top dollar to find someone capable of managing an institution into the ground.

Comments
105

Filed under: Economy, Financial Crisis,

105 Responses to “Lehman Down”

El Cid Says:
September 14th, 2008 at 6:05 pm
I thought that’s what top executives were paid to do — run their companies into the ground and get huuuuuge compensation for it. That’s why Carly Fiorina is McCain’s adviser, and it’s why we sort of hired George W. Bush Jr. and may hire John McCain to do the exact same thing to the USA.
Donald A. Coffin Says:
September 14th, 2008 at 6:07 pm
Moral hazard, maybe? They get the gains in good times, but not the losses in bad times, so they have a huge incentive to take huge risks.
kafka Says:
September 14th, 2008 at 6:13 pm
Usually when people engage in an activity that, when done carelessly, can cause harm to others, they are made to indemnify others at their own expense as a condition of pursuing those activities. Thus society requires drivers to buy at least some liability insurance.

The proper way to deal with periodic banking screwups is to require that commercial and investment bankers, as a condition of pursuing their businesses, pay into a pool of funds at their expense, which will then be used as bailout money when they phuck up.

We don’t have such an arrangement. Instead, the taxpayers bear the cost of indemnification. Why?

Because D.C. is filled with republicrats like Chris Dodd and Barney Frank, 2 of Wall Street’s most reliable sock puppets, to pass the cost of indemnification onto the public in exchange for “campaign contributions”.

(And yes, to antipicate the predictable whining, the GOPers have their own flock of sock puppets.)
James Gary Says:
September 14th, 2008 at 6:16 pm
Can someone remind me what it is that all these financial wizards were getting paid so much money to do?

I’m no expert here, so maybe someone can help out: At any time in the last five years or so, did the management at any of the major investment banks say, “these mortgage-backed securities are extremely risky, and we’re not going to get too involved with them?”
John McCain: Serial Liar Says:
September 14th, 2008 at 6:19 pm
The Market Works!
leo Says:
September 14th, 2008 at 6:22 pm
Wow, you’d think these companies were run … were run … gimme a second … were run by republicans!
Joel Says:
September 14th, 2008 at 6:28 pm
Heckofajob, Fuldy!
tomboy Says:
September 14th, 2008 at 6:31 pm
I’m no expert here, so maybe someone can help out: At any time in the last five years or so, did the management at any of the major investment banks say, “these mortgage-backed securities are extremely risky, and we’re not going to get too involved with them?”

Yes. Goldman Sachs.

Management at Goldman has been better, but not perfect. They certainly have had losses at hedge funds, but not nearly on the scale of losses elsewhere. They made oodles of money on this stuff between 2002 and 2007.
Comment Says:
September 14th, 2008 at 6:37 pm
Fiorina did run HP into the ground – She gutted its research and development.
Sam L Says:
September 14th, 2008 at 6:39 pm
James: My impression was that Goldman made a killing doing exactly that… but I could be mistaken.
Ralph Says:
September 14th, 2008 at 6:45 pm
Isn’t it interesting that Republicans who discount reasonable concerns about Sarah Palin’s lack of experience and knowledge argue that CEO must be paid huge salaries to guarantee that the company has the best experience and knowledge that money can buy.
James Gary Says:
September 14th, 2008 at 6:45 pm
Tomboy & Sam L–Thanks. It seems telling that in Tomboy’s attached link, Goldman’s in-retrospect-prudent behavior was described as a “risk” and a “wager.” Odd times we live in.
max Says:
September 14th, 2008 at 6:47 pm
Can someone remind me what it is that all these financial wizards were getting paid so much money to do?

They were getting paid for going to the right schools and getting into line so they could get their mouths near the end of the money hose. (Or you could go roughly with DeLong’s formulation: ‘Stand on Wall Street and cover yourself with superglue so the money flying by sticks to you.’)

The problem is, is that somebody goofy wound up in charge of the punch bowl, and then everyone pooled their cash to buy off the regulators and oops. Not so much with the fun.

It’s not like that hasn’t happened before, over and over again. It’s endemic to an industry that can print money and buy things from other people with it.

This would be mostly pretty funny if the US did not have to pay the piper: half the industrial base is trashed, we’re in hock up to our eyeballs to a hostile foreign power, and these assholes want to get into a goddamn hot war with the Russians. Not to forget the many opportunity costs of neglecting R&D for decades.

max
['Ah, well. Stupid is, as stupid does.']
Becca Says:
September 14th, 2008 at 6:47 pm
The sub prime debacle made me realize that either Wall Street financial “wizards” are really just very well-connected morons or the most amoral people on the planet.

Maybe both.
Jack Says:
September 14th, 2008 at 6:47 pm
Well, as long as we’re playing the blame game, let’s not forget the ultimate financial wizard: Former Federal Reserve Chairman Alan Greenspan. He at least bears some responsibility for not tightening monetary policy to give some more cushion for a soft landing down the line.

But both CEOs, Fed Chairmen, and presidents have the weakness in that their leadership is short term, and thus they govern short term. Bigger problems are either pushed back in the schedule, or worse, covered up so the next guy can take the fall.
rapier Says:
September 14th, 2008 at 6:48 pm
BOA doesn’t have any money. None of them do, none of the banks nor none of the investment banks. The Chinese and the oil states including Russia have the money but they aren’t buying, yet.

Remember when they said the balance of trade deficit didn’t make any difference. Hope you didn’t believe it. America is now for sale, when the prices get low enough. it’s important to understand this was always the plan.

People still don’t grasp the extent of the calamity which is now unfolding. A calamity that was made inevitable when the Democratic Party abandoned it’s principals under Clinton and embraced Free Market Fundamentalism and the Wall Street Pardigm of wildcat finance. Without a countervailing force the Pigmen ran wild. (Paulson was there at the creation by the way and is worth perhaps $700 billion)

We will now replay the Great Depression, likely without quite the extent of household poverty, sans any political response against the authors of the problem. Which was always the plan. Let me assure you, Obama doesn’t have a clue.
tomboy Says:
September 14th, 2008 at 6:49 pm
Moral hazard, maybe? They get the gains in good times, but not the losses in bad times, so they have a huge incentive to take huge risks.

All this talk about moral hazard as it relates to Lehman is a bit premature. Lehman stockholders have lost more than 90% of their money over the last 12 months, and Lehman bondholders are losing money as well.

The government has not “bailed them out” yet, and if there is an unwinding of Lehman as an entity, it will involve an immense amount of pain for the vast majority of Lehman employees. There will probably not be a taxpayer assumption of the liabilities, unlike at Bear Stearns.

My best friend’s wife is likely to lose her actuarial job at Lehman tomorrow, which is too bad. They recently had a kid, and Lehman had allowed her to work a couple of days a week from home, even during this mess. They gave employees, including support staff, good benefits, and had consistently provided solid returns for over a century.

Did some at Lehman make lots of money selling crap? Yes. Did most of them actually believe the crap was good? Yes. I can testify to the arguments I have had with structured credit analysts about their products over the last few years. They believed in this stuff, or they are convincing liars, even while drunk.
some dude Says:
September 14th, 2008 at 6:50 pm
This isn’t about Lehman. This is the goddamn apocalypse.
fletc3her Says:
September 14th, 2008 at 6:51 pm
I think the people running these companies are primarily good at negotiating their own compensation packages and golden parachutes. A clear sign of trouble is when the compensation for the officers of the company materially affects its earnings. In a just world these people would be stripped of their ill gotten salaries and go to jail. But, these people are really, really good at negotiating compensation packages! When the companies they run go down in flames and all the investors lose their shirts, their contracts still guarantee that they will get performance bonuses as they are shown the exit door. I mean, the company is bankrupt, yeah, but look at how well the stock performed last quarter.
tomboy Says:
September 14th, 2008 at 7:09 pm
It seems telling that in Tomboy’s attached link, Goldman’s in-retrospect-prudent behavior was described as a “risk” and a “wager.” Odd times we live in.

The same was true for those who bet against the Nasdaq bubble in 1999 and 2000. I graduated from a fancy school in 1999, took a job with a trading firm, and was quickly advised after a very rough day that shoring tech stocks was an easy way to find yourself looking for a new career. And that was very good advice.

The number of people who lost millions betting against Nasdaq at 3000, 4000, and 4500 in 1999 and 2000 is larger than you think. Were they right? Yes. Did they go broke? Most of them. The market works in the long term. Sometimes only the very long term.

Markets can remain “wrong” a lot longer than a trader or a firm can remain solvent. Thus, betting against the system is very hard. There are lots of powerful interests perpetuating the system. The system creates guys like Jack Grubman telling people to buy stocks they know are bad because of pressure from superiors. And we get people creating newer and crazier mortgages with lower and lower underwriting criteria. Because the market “demands” it.

This is why we need regulation. Because the consequences of an unregulated market are catastrophic.
rapier Says:
September 14th, 2008 at 7:10 pm
Doug Noland, who has chronicled the Credit Bubble, which is the proper name for the age, in his Credit Bubble Bulletin for 9 years comments this week about the inevitable end.

http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10111

To Big to Suffer a Loss:

This will be another captivating weekend, with focus on both Ike and Lehman. The experts are anticipating that Ike may be the worst hurricane to hit Texas in 50 years. Today’s financial storm is a once-in-a-lifetime, ongoing event. Indeed, it is my sense this evening that this financial maelstrom has now reached a new erratic and highly uncertain stage. That the Fed would respond to the collapsing U.S. Credit Bubble with a string of rapid rate cuts was no surprise. That the Fed would step up and bail out Bear Stearns, while at the same time providing liquidity facilities to the Wall Street firms, was similarly predictable. It was like clockwork when the GSEs responded to market tumult and the mortgage collapse by heedlessly expanding their obligations. And while I was surprised that the likes of OFHEO’s Lockhart and the gents at Pimco proved key enablers for the GSE’s last gasp of recklessness, that the federal government would be forced to step up and nationalize Fannie and Freddie should have been anything but a bombshell development. Only the timing of the “bazooka” blast was up in the air.

Washington has certainly brought out the big guns – resorting to them so early in the crisis but to alarmingly limited avail. Negative real interest rates and even unprecedented bailouts do little to address the deep structural deficiencies that have developed over many years. Sustaining inflated U.S. asset markets requires massive ongoing growth in Credit and speculative trading. The deeply maladjusted U.S. “services” Bubble economy is sustained only through ongoing Credit excess. To be sure, the heart of today’s predicament lies in the reality that a heavily impaired U.S. financial sector is simply incapable of partaking in the degree of Credit excess required to sustain inflated assets prices, incomes, corporate profits, government receipts and much needed (restructuring-related) investment spending. The problem is systemic. Bailouts and other government measures have minimal impact because they are not inciting heightened Credit expansion.

And while the media directed its attention to Lehman, the pricing of AIG Credit Default Swaps (CDS) exploded this week. This is a company with a Trillion dollar balance sheet and enormous exposure to the CDS market and other derivatives. And although its balance sheet is only about a third the size of AIG’s, Washington Mutual also saw its CDS blow out. And while most holders of Fannie and Freddie obligations have come out of the GSE fiasco unscathed (or better), one can see how this crisis going forward will see more pain meted out to the corporate bondholder – not just the poor lowly equity owner. Perhaps the prospect of Lehman debt holders suffering losses has pushed the acutely vulnerable CDS market to the edge.

The last thing the crippled leveraged speculating community needs right now is dislocation in the CDS marketplace. Again, the attention this week was on Lehman, while I believe a much more unwieldy facet of today’s crisis mounts with the bursting of the historic hedge fund Bubble. Perhaps Sunday we’ll read news of BofA acquiring Lehman – and perhaps the markets will rally big on such news. But such a transaction would have little if any impact on crisis dynamics that have engulfed the leveraged speculating community. The various markets – global equities, real estate, mortgages, energy and commodities, currencies, CDS and risk assets generally – have all become an absolute and unmitigated mess. Money is being lost in waves; scores of favorite trades are being unwound; redemptions are gathering pace; and the ugly side of Ponzi Finance Dynamics has taken firm control.

Importantly, there is today no magical cure – no government bailout – that is going to rejuvenate robust speculator returns. The Credit Bubble burst, and now the speculator Bubble is bursting. As we have been witnessing of late, stock market rallies tend to show their greatest force in the sectors where the speculators are short. Meanwhile, stock market declines tend to see the favored sectors lead on the downside. Worse yet, astonishing volatility throughout the markets has created a backdrop where it has become too easy to “get your face ripped off.” Repeated government interventions have only exacerbated market instability and vulnerability.

I find it rather odd that Secretary Paulson and the Administration were keen to boast that Fannie and Freddie shareholders would not benefit at the expense of the U.S. taxpayer. Yet it’s not as if there were moral hazard issues that had incentivized these shareholders into risky speculative activities at the expense of systemic stability. On the other hand, moral hazard played a fundamental role in Pimco’s and others’ speculative endeavors in agency debt and MBS obligations (enabling the GSEs’ reckless expansion of risk). And, what do you know, The Enablers came out the big winners.

There’s a lot of talk these days about institutions that are Too Big to Fail. But this misses the more important point. The heart of the problem is systemic throughout the Credit system, and I’ll refer to it as Too Big to Suffer a Loss. The entire financial system would have come unglued if agency debt and MBS holders suffered losses – losses that could have triggered another round of speculative deleveraging – that could have triggered outflows from “bond” funds – that could have triggered losses in “money” funds and/or a flight from the dollar.

“Moneyness of Credit” remains an invaluable analytical concept. Despite acute vulnerability, the U.S. Credit system – hence the American economy – has resisted implosion specifically because the heart of the monetary system has retained its “Moneyness.” Indeed, nationalizing Fannie and Freddie was seen as necessary to retain confidence in the core of contemporary “money” – agency obligations, “repos” and money fund assets. This highly inflated supply of “money” has become so large as to almost on its own shoulder the entire U.S. (global?) financial system and economy. “Money” has become Too Big and Consequential to Suffer a Loss.

Pimco and others savvy players appreciated this dynamic and exploited it for all it was worth. Ironically, with all the losses being suffered throughout the markets, the moral hazard issue has never been as precarious. The government “printing press” now includes agency debt and MBS. The incentives to enable the continued rampant inflation of contemporary “money” have never been stronger, with the consequences of these obligations losing their “Moneyness” never even remotely as consequential. Perhaps Treasury and the Administration will stick to their word and not provide taxpayer funds to save Lehman and others. Yet why do I feel the next step of government intervention will be to bolster the “repo” market. Looks like the days of easy government interventions have run their course.
gregor Says:
September 14th, 2008 at 7:28 pm
I can neither explain the exact mechanism nor describe the exact sequence of events that have led to this melt down, but if you consider the fact that a lot of baby boomers are about to retire with billions of dollars in their retirement funds and assume that the financial markets always move in a direction that leads to the major screwing of the average person, it is not very surprising or shocking that this has happened.

A lot of money has been transferred from the 401Ks to the pockets of the CEOs of the financial institutions and other individuals who are financially savy.

The free market at work for you.
ferd Says:
September 14th, 2008 at 7:48 pm
Why are there only five Google hits for ‘Lehmanade’?
sherry Says:
September 14th, 2008 at 8:16 pm
It is more than subprime mortgages. Most bankers are playing with other peoples money. They get fees for doing deals and then they sell off the risk. It the assets lose value or They can’t sell off the risk then the house of cards crumbles.
E. O'Neal Says:
September 14th, 2008 at 8:25 pm
Gregor, the heads of these firms are losing their jobs, deservedly. The problem is that all these big financial institutions hold each others’ paper, so that when one defaults, it puts pressure on all the others. If their credit rating is then reduced, they have to pay more and everybody gets wary of them, so it can spiral out of control. The capital of so many of these banks is impaired because of the bursting of the housing bubble, but we won’t know how badly until housing prices bottom out.
right Says:
September 14th, 2008 at 8:45 pm
The proper way to deal with periodic banking screwups is to require that commercial and investment bankers, as a condition of pursuing their businesses, pay into a pool of funds at their expense, which will then be used as bailout money when they phuck up….We don’t have such an arrangement. Instead, the taxpayers bear the cost of indemnification. Why?

Well, the wealthy and their corporations pay the vast majority of taxes to begin with, so, you know, same difference.
bill Says:
September 14th, 2008 at 8:50 pm
It’s very easy to assign blame and call people privileged morons, but that criticism would have a lot more credibility if those who made the criticism appeared to have a reasonable understanding of the problem. There actually are a great number of very smart people on Wall Street who didn’t see the danger of these structures and when people post that these individuals held their jobs merely because they went to the right schools or were well connected, it sounds an awful lot like when Republicans the Republicans use the term “expert” as a pejorative.

Obviously, major miscalculations were made, but stupidity is rarely tolerated on Wall Street because it generally costs people money much more quickly than it makes anybody money. Positing that the problem could have been solved if only there were a few smart people who were a bit less privileged and a bit less greedy actually undersells the magnitude of the situation. I understand that it can be comforting to assign blame and Democrats can be quick to attribute moral failure to those on Wall Street, but occasionally a number of factors interact in a way that very, very few people anticipate. Even those on Wall Street that saw the problem didn’t see it until there were a few warning signs – nobody was smart enough to understand the potential risks of these structures beforehand. There are real issues that need to be dealt with, but we would be better served by trying to understand those issues and fix them rather than vilify all of Wall Street.
Mary Says:
September 14th, 2008 at 9:00 pm
For Obama’s sake, I’m loving that the Washington Post published a piece today called “Nation of Exaggerators: The Economy Is Not That Bad” by McCain advisor Donald Lufkin. Meanwhile, Greenspan warns of a deep recession today in the hopes that he will look prophetic.

As for the rest of us, we are about to get hosed.
E. O'Neal Says:
September 14th, 2008 at 9:13 pm
bill, you’re right. That’s the nature of bubbles. At the top, there’s tremendous confidence, as previous naysayers have all been crushed. Everyone knows prices are too high, but they decide it’s different this time and that there will always be greater fools available to buy what they’re paying too much for.

The mortgage companies were issuing all these inflated, ridiculous mortgages and selling them to Fannie and Freddie, who in turn sold them to the Chinese, Russians and Arabs, as well as banks and pension plans. The politicians were cheering it on and celebrating high rates of home ownership and rising home prices. Now that the party’s over, the taxpayers have to pick up the tab.
Jersey Says:
September 14th, 2008 at 9:14 pm
So what does this mean for my 401K that’s handled by Merril Lynch?
E. O'Neal Says:
September 14th, 2008 at 9:22 pm
Mary, the economy grew 3.3% last quarter. The problem is the over-hang of this credit crisis that Greenspan calls a “once a century event”. The Democrats are playing with fire when they try to talk the economy into a depression, or what used to be called a “panic”. A modern economy is a confidence game — once confidence is lost, economic activity stops. There’s no credit and no investment. Consumers stop spending except on essentials.

As Roosevelt said, “We have nothing to fear but fear itself”. Those promoting fear are trying to ruin us financially.
A Simple Question Says:
September 14th, 2008 at 9:27 pm
Someone needs to ask Sarah Palin if Lehman got “too big and expensive to the taxpayers”.
right Says:
September 14th, 2008 at 9:28 pm
So what does this mean for my 401K that’s handled by Merril Lynch?

You’ll be fine. They are being bought by Bank of America, but it shouldn’t affect you in any way really.

Even if your 401K was managed by Lehman, you would be fine in theory, although there may be a period of gigantic headaches as the lawyers try to figure out what belongs to whom.
E. O'Neal Says:
September 14th, 2008 at 9:28 pm
Jersey, Merrill Lynch is fine. Bank of America bought them tonight for $29 a share.
E. O'Neal Says:
September 14th, 2008 at 9:36 pm
The SEC just issued a statement saying that the customers of Lehman would not be adversely affected. It’s the shareholders and creditors that have real problems.
Shrike58 Says:
September 14th, 2008 at 9:36 pm
#22: I think that you’re on the right track. What this mostly boils down to is that too many dollars were chasing too few investment oppertunities as the Boomers tried to prepare for retirement. Maybe it’s just that damn eighty-year cycle again.
Harvey Lobster Says:
September 14th, 2008 at 9:38 pm
Well, the wealthy and their corporations pay the vast majority of taxes to begin with, so, you know, same difference.

That’s completely untrue, and I’m sure you know it. They might pay a majority of *income* tax, but certainly not of payroll taxes, sales taxes, property taxes, etc. Looking at *all* taxes, our overall tax structure can be regressive.

That might be the single most perverse thing about federal-level tax cuts: over the medium run, they force up all the local and state-level flat and regressive taxes.
Joel Says:
September 14th, 2008 at 9:38 pm
“So what does this mean for my 401K that’s handled by Merril Lynch?”

That’s what I asked my ML broker this morning. Her response?

“your holdings are still your holdings. Your cash is insured up to 200,000.”

FWIW.
rapier Says:
September 14th, 2008 at 10:00 pm
Finance is the art of passing money from hand to hand until it disappears.

Quote from I think, Murray Kempton
Craig Says:
September 14th, 2008 at 10:01 pm
Anybody who was sure that these institutions would fail could have shorted them and made a lot of money.
Philly Says:
September 14th, 2008 at 10:07 pm
I hope the Obama campaign is furiously at work on a new ad to air tomorrow linking McCain to this, bringing up the S&L crisis and his involvement Keating Five. A stretch, you say? Well you can’t put lipstick on this fat hog of a fucking mess, and McCain’s 25 years in the pigpen.
--PatF in Madison Says:
September 14th, 2008 at 10:14 pm
My irony meter just melted down.

I was watching CNBC’s coverage of this financial crisis when it was interrupted by an advertisement for pokerstars.net.

“LEARN TO PLAY POKER FOR FREE!”

Maybe these geniuses should have gone there instead of to business school.
Pan Says:
September 14th, 2008 at 10:14 pm
I’m sure the Keating Five ads are in the hopper and ready go to in October. The Dems would be stupid not to bring that up since McCain’s campaign has shown no limit to their willingness to distort and lie. At this point, they can’t complain or act indignant about anything, least of all a charge based on a real event.
E. O'Neal Says:
September 14th, 2008 at 10:16 pm
These investment banks were leveraged 30 or 40 to 1. A lot of people should have seen this coming. Now the shorts are going after A.I.G., the world’s largest re-insurer, which has insured a lot of the mortgage-backed bonds.
E. O'Neal Says:
September 14th, 2008 at 10:22 pm
PatF, playing poker for free is a good metaphor for this fiasco. Investors in China and other places bought crap from Fannie and Freddie and the other big banks at higher yields than they would have earned on Treasury bills, confident that the U.S. taxpayers would bail them out if the paper turned out to be no good. They were right.
E. O'Neal Says:
September 14th, 2008 at 10:24 pm
The Lehman bondholders weren’t so lucky. Lehman wasn’t too big too fail. Moral: Invest with the really big guys.
tomboy Says:
September 14th, 2008 at 10:25 pm
Mary, the economy grew 3.3% last quarter.

What a joke!!! Do you know anything about how GDP is calculated or the GDP deflator? Hannity tried that line too. Nobody, and I mean nobody on wall street believes that. Nobody in the treasury department or federal reserve does either.

“In the second quarter, Wachovia lost $9.11 billion, Citigroup lost $2.5 billion and the nation’s thrift banks, which loan most of their money to consumers, lost $5.4 billion. After stripping out those and other write-downs, however, the GDP calculation for the second quarter computed financial companies’ profits grew 24.7 percent.” Sure
El Cid Says:
September 14th, 2008 at 10:35 pm
Is the Era of Big Government still Over?
E. O'Neal Says:
September 14th, 2008 at 10:37 pm
tomboy, that’s the official number calculated the way it always is. If you want to argue the underlying economy isn’t that strong, you’re probably right. Most economists expect about 1% growth this quarter. The financial sector is obviously in real trouble. Exports, consumer spending and capital investment so far have held up well, but those could deteriorate quickly if there’s a general loss of confidence. If so, these will be remembered as the good old days.
allbetsareoff Says:
September 14th, 2008 at 10:43 pm
Think of these buchaneer financiers as you would of neoncon foreign-policy analysts: a small but persuasive group that cherrypicks facts to build narratives that often prove to be misguided, and sometimes purely fictional, but in any case drive the uninitiated into making unwise decisions.

The really bad news is that this crop of buchaneers will be taken over by another crop that has been playing by the same loose rules. Their time will come.

The short-sellers, a different group of buchaneers who profit by hastening the demise of financial institutions holding too many dubious securities, will continue to go after progressively larger institutions. They won’t stop until the feds step in and systematically reform the financial system.

They only question is how much of the loss will be absorbed by investors — not just the big guys, but small fry via 401(k)s, IRAs and pension funds — and how much will be absorbed by taxpayers.
flory Says:
September 14th, 2008 at 10:56 pm
There’s an accounting principle which requires the matching of revenues and expenses in the same time period. Somehow or other, the wizards of Wall Street are regularly let contravene this principle. Their bonuses are paid out in the current year when its well known that any losses based on their activities won’t be recognized for years down the road.

Nothing will change until the accounting standards that govern the payout of Wall Street compensation are revised to recognize this reality.
tomboy Says:
September 14th, 2008 at 11:05 pm
that’s the official number calculated the way it always is. If you want to argue the underlying economy isn’t that strong, you’re probably right.

From the article I linked earlier: In the second quarter, that deflator was 1.3, a figure that was half what it was in the first quarter and tied with a 10-year low. Starting with nominal GDP of 4.6 and subtracting that 1.3 deflator, we get real GDP of 3.3.

Do you believe that inflation was at a 10 year low during the second quarter this year? Remember, this was the quarter that saw all time highs in oil, nat. gas, coal, corn, wheat, steel, copper and fertilizer. It also saw lows in the dollar vis. a vis. the euro.

I’m not arguing the economy isn’t strong, I’m calling shenanigans on the bullshit economic data that you cited as proof the economy isn’t that bad. The government is lying to us, and wall street knows it but regular folks maybe don’t.

Currently, my blackberry is flipping out. My friends at Lehman are in their office putting their shit in duffel bags. WM, MER and AIG look fucked too. But McCain and his loser advisers keep saying things aren’t that bad, citing the same bullshit numbers as you and Hannity.

Overnight S&P futures are down over 40 fucking points!!! Dow futures are down over 300!!! This before the market has opened and a single share has been sold. Oh yeah, and expect another huge fed rate cut his week.

I’m wired as shit with all this news, but I better go to sleep because tomorrow is going to be fucking nuts!
El Cid Says:
September 14th, 2008 at 11:15 pm
Hey, leave Sean Hannity out of this. He’s busy finding ways to blame this on Nancy Pelosi and Bill Ayers.
E. O'Neal Says:
September 14th, 2008 at 11:32 pm
tomboy, get a grip. The GDP numbers are calculated the same way every quarter by career bureaucrats. If political appointees ever tried to cook the books, you’d read about it the next day in the NYT.

This is an awful crisis, and we can’t know where it will eventually lead. If you want to think the sky is falling, then sell everything you have. Short the market. If enough people panic, it really will be that bad. My opinion, which is worth what I’m charging you for it, is that the real economy is basically sound, although some, but not all, of our major financial institutions have blown their capital. 30 to 1 leverage can do that, you know.
PDX Pete Says:
September 14th, 2008 at 11:36 pm
That 3.3% GDP number is correct. But when it is used, it is not used to enlighten.

GDP 4th Q 2007 was negative 0.2%
GDP 1st Q 2008 was 0.9%
GDP 2nd quarter was 3.3%

What happened in the 2nd quarter? Checks were mailed to every US household, equal to about 1% of GDP. You do the math on how much that increases quarter GDP.

The economy is sick.
Jersey Says:
September 14th, 2008 at 11:39 pm
Thanks to everyone who answered my question.
Don Williams Says:
September 14th, 2008 at 11:39 pm
Re Bill’s comment “Even those on Wall Street that saw the problem didn’t see it until there were a few warning signs – nobody was smart enough to understand the potential risks of these structures beforehand.

There are real issues that need to be dealt with, but we would be better served by trying to understand those issues and fix them rather than vilify all of Wall Street.”
————
ha ha ha.

Bill is full of shit.

O’Neal is full of shit for agreeing with him.

The rich rats started running down the mooring line almost 18 months ago — as shown by the yield curve INVERTING.

That happens when people in the know start looking for a safe harbor for their money because they know their dancing bear is about to fall off the highwire. When they start moving into US Treasuries.

They just needed some time to dump the stinking catshit off into the stupid Middle Class’s 401Ks/IRAs. Have you looked at what the mutual funds have done in the past year?

Here is my post from December 2006, on Matthew’s previous blog at The Atlantic:

Ref: http://matthewyglesias.theatlantic.com/archives/2006/12/the_sweet_sweet_fed.php#comment-119132

————
Ah, Matthew. You don’t realize the evil genius of Karl Rove.

When the bill for 6 years of corruption, venality, and economic incompetence comes due, someone has to be the designated scapegoat. And if Nancy Pelosi doesn’t make sure that it’s the Republicans, then it’s going to be her.

The Republicans are handing the incoming giddy Democrats a big brown bag of cat manure called an “inverted yield curve.”

It’s the Fed’s job to now make sure that bag bursts.

The MOST reliable predictor of a recession is the yield curve. Normally, long term Treasuries sell at interest rates well above rates paid on short term bills. When the yield curve inverts — i.e. interest on short term bills rises above
that on long term bond — then a recession follows in 8-12 months. The likelihood of recession increases as the inversion gets steeper.

The latest yield curve model –developed by Fed researcher Jonathan Wright — indicates a probability of recession within 12 months to be around 47% –very high by historical standards.
An earlier model by Fed Researcher Estrella puts the probability at around 41%. If the Fed raises the federal funds rate yet again, recession will become a certainty.

Just in time for the 2008 campaign.
pseudonymous in nc Says:
September 14th, 2008 at 11:40 pm
Now that the party’s over, the taxpayers have to pick up the tab.

Well, not quite. You’ll get more T-bills pumped out, the usual suspects will buy them with the dollars they earn from exports.

A modern economy is a confidence game — once confidence is lost, economic activity stops. There’s no credit and no investment. Consumers stop spending except on essentials.

I half agree. This is a game of pass the parcel, except that this parcel is a pile of used shitrags passed from hand to hand, and they’re denominated in billions until they’re dumped, ideally in the lap of a Democratic administration and Congress, at which point the music stops and everyone says ‘look at that heap of turdwipe!’

It’s not good enough to play chicken and say ‘as long as no-one bothers noticing the shit, we’ll be fine’. Reality always kicks the fuck in.
E. O'Neal Says:
September 14th, 2008 at 11:50 pm
PDX Pete, I wasn’t trying to mislead. The economy has taken two body blows — the housing bust/mortgage/financial crisis and record high energy prices. It’s truly amazing that so far we have stayed out of recession and that unemployment is only 6.1%, which is pretty average historically. Energy prices are finally falling, but we still face severe challenges in the financial sector. Until housing prices stabilize, it will be a nervous time in the markets. The world economy is slowing, and a real financial panic is a possibility. I’m hardly being Pollyanna, just because I’m not Chicken Little.
E. O'Neal Says:
September 14th, 2008 at 11:58 pm
pseudo, yeah, but the taxpayers are guaranteeing the “heap of turdwipe” with the “full faith and credit” of the United States. China and the other purchasers will get paid their principle and interest even if the fraudulent mortgages underlying the securities are worthless. Unless we want to be Argentina.
tomboy Says:
September 15th, 2008 at 12:00 am
tomboy, get a grip. The GDP numbers are calculated the same way every quarter by career bureaucrats. If political appointees ever tried to cook the books, you’d read about it the next day in the NYT.

You are clueless. They are NOT calculated the same way each quarter by carreer bureaucrats. There is plenty of room for them to fudge on stuff like the GDP deflator. Which is why I linked to an article listing several Wall Street economists laughing at the numbers, saying they were doing just that. The article (from the IHT, a New York Times company) also said that large writeoffs are not factored in, which only matters when you have huge writeoffs across a very large industry, like say the US financial industry.

If the economy is fine, try getting a car loan, try starting a new business, or try getting a construction loan. Wall street credit spreads effect the whole economy, and they are soaring today.

And please, try making comments about something you at least understand.
Don Williams Says:
September 15th, 2008 at 12:06 am
Oh, there’s a couple more body blows to come. George W Bush has spent over $5 Trillion in the past 8 years of money he didn’t have. What’s going to happen to the US economy when that spigot turns off? After the buttfucking they’ve taken on US securities (with the fall in the dollar) , do you think the Chinese and Japanese are going to keep buying dreck?

So why didn’t George Bush’s Keynesian stimulus cause a boom –instead of a S&P 500 that’s way lower than what it was when he entered office?

Well, George the Moron gave $2 TRillion to a bunch of rich fuckers — who immediately laid off American workers and put the $2 Trillion into building up the economy of CHINA. Just look at how many US workers Dell Computer has cut — and how many tens of thousands of foreign workers it has hired.

He pissed the rest away in Iraq, Afghanistan and god knows where. One thing we know is that he sure as shit didn’t INVEST it in anything — like ,oh, alternative energy sources. Ask Halliburton what it’s giving us for all those billions sent its way.

But ,hey, if you give your credit card to a drunk and a failed businessman, don’t be surprised when the monthly statement comes in.
Ed Marshall Says:
September 15th, 2008 at 12:14 am
Once upon a time I sold structure settlements and annuities. I’d argue with defense lawyers that the haggling over contract language was meaningless because if the entities they were dealing with fell over we would all be warming our hands over trash barrels anyway.

We are one degree away from that scenario playing out.
E. O'Neal Says:
September 15th, 2008 at 12:16 am
tomboy, you don’t understand what I’m saying. All kinds of financial data are interpreted by analysts who might decide that they are misleading for various reasons. For instance, the jump in the unemployment rate was partially explained by the recent extension of unemployment benefits for some additional weeks. Some fairly small group of unemployed will always wait until their benefits are running out to find employment — enough to have a small statistical effect. Labor economists take this into account but don’t challenge the data itself.

So interpret the data however you wish, but you shouldn’t challenge the integrity of the data without cause. The calculations you refer to are aboveboard and are subject to outside scrutiny.

I never said the economy is fine. So far employment is still high and businesses are operating at normal levels. No economist says that we’re in a recession, though many believe that we’re headed into one. Obviously, a financial panic, if one can’t be averted, would do the trick.
Don Williams Says:
September 15th, 2008 at 12:21 am
It’s hilarious to see how the bond market is reacting to Paulson’s “leadership”.

Current rate on 5 year Treasuries is 2.91 , down from 3.19 last month because a wave of money is flowing into them for safe harbor. Rate on 10 T is 3.64, down from 3.93.

Meanwhile the already large spread between corporates and Treasuries has widened. Spread between 5 Year AA corporate bonds and 5 Year Treasury has widened in past month from 2.20 percent to 2.58 percent — with 5 year AA corporate now around 5.49 percent. Spread for 10 year AA versus Treasury has widened from 2.23 to 2.42 percent.
Ed Marshall Says:
September 15th, 2008 at 12:28 am
I never said the economy is fine. So far employment is still high and businesses are operating at normal levels

Is that your “salt of the earth” take on things? It’s nuts. My salt of the earth, sister who still works in the bond industry is about to jump out of a window. You don’t know what the hell you are talking about.

If your brand of stupidity wins, we live in the age of idiocracy. I have no idea what happens from here on out but you got the rein’s pal. I’ve noticed how resilient your weird ideology is to self-inspection, but if you succeed what are you going to blame all this on?
Mike Says:
September 15th, 2008 at 12:29 am
This never would have happened if it weren’t for Ward Churchill.
E. O'Neal Says:
September 15th, 2008 at 12:41 am
Ed Marshall, are you fifteen years old? Were you alive in the recessions of the seventies and early eighties? This, so far, doesn’t compare, unless you’re in one of the industries that’s been badly affected like the financial sector. The civilian labor force is 154,853,000, of which 145,477,000 are employed. Not exactly a depression, nitwit. But don’t give up. You may get one.
Don Williams Says:
September 15th, 2008 at 12:47 am
1) You would think that Obama would be well ahead of John McCain –given that he is running in the same position Franklin Roosevelt had going up against Herbert Hoover in 1932.

2) But that’s not happening. In part because the voters are getting the impression from Obama that everything is just PEACHY. No hint at all that there’s anything wrong.

Evidently, “Post Partum” Obama is just ..er.. speechless with admiration at how well the Republicans have run the economy.
Ed Marshall Says:
September 15th, 2008 at 12:47 am
E. O’Neal do you not understand what a credit crunch is?

No, I’m not fifteen, I’m thirty-four and I remember the early 80’s. My dad would mix powdered milk into normal jugs and try and convince us it wasn’t powdered even though you could look at it it’s texture and know it wasn’t bought at a grocery store.

All that’s gone now anyway, been gone for twenty years. He was a tool and die guy, and all that’s been moved to Asia.

You have no idea what’s about to defecate on your head but when it does I’m sure you are going to find a way to blame me.
Don Williams Says:
September 15th, 2008 at 12:52 am
In the meantime, tens of millions of middle class Republicans have been so screwed by George Bush that their butts look like the Lincoln Tunnel — they are just too stupid to realize it yet.

But I suppose it would be “Old Politics” to suggest that Obama might bring that to their notice.

I think I understand him, finally. He’s recognized what a fucking catastrophe Bush has brought down upon this country and he doesn’t want to be in charge when the massive bucket of shit drops.

Guy WANTS to lose. Let John McCain ..er.. Sarah Palin handled the disaster. Maybe she can show all of us how to hunt for our food.
E. O'Neal Says:
September 15th, 2008 at 12:57 am
Ed, yes I understand what a credit crunch is. The Fed is trying to supply liquidity, but when the banks have impaired capital, and everybody’s waiting for the other shoe to drop, no one wants to lend. I’ve said we’re in a dangerous situation. The difference between us is that you think the hurricane has already hit and I think these are just the outer bands, but that the hurricane could be headed our way or it could miss us.
Don Williams Says:
September 15th, 2008 at 1:01 am
Looks like the US stock markets are set to take a 3 percent haircut tomorrow morning:
http://www.bloomberg.com/markets/stocks/futures.html

Was kinda cute of Paulson to hold off on grabbing this particular nettle until the Asia markets were closed for a Monday holiday.

“Hang Seng!” is the cry a Chinese investor makes when he is kicked in the balls.
Ed Marshall Says:
September 15th, 2008 at 1:05 am
The difference between us is that you think the hurricane has already hit and I think these are just the outer bands, but that the hurricane could be headed our way or it could miss us.

I wouldn’t have seen Lehman folding. Ask me a month ago and I’d have said you were nuts. You are talking about a company that a few weeks ago was rated AA. AA is not what you are looking for in an equity firm but it shouldn’t spell disaster waiting next week. I don’t doubt your predictive skills, I doubt your ability to look at today’s reality and understand what you are looking at.
pseudonymous in nc Says:
September 15th, 2008 at 1:09 am
China and the other purchasers will get paid their principle and interest even if the fraudulent mortgages underlying the securities are worthless. Unless we want to be Argentina.

We shall see. Is a default implausible? Yeah. Economic mutually assured destruction works that way. Is it more plausible than it was a decade ago? Yeah. And of course there’s a market in that, too: credit-default swaps on 5-years hit 18 b.p. last week. (It’d be nice to know who’s selling those contracts.)

In tribute to DFW: we really are in the Year of the Depend Adult Undergarment.
E. O'Neal Says:
September 15th, 2008 at 1:11 am
I’ve been watching the futures on Bloomberg since this afternoon. The S&P has been around -40 the whole time. It’s somewhat encouraging that the market digested the news about Lehman then stabilized at a lower level.
E. O'Neal Says:
September 15th, 2008 at 1:19 am
Ed, I doubt my predictive skills. I don’t understand why Lehman didn’t use the six months since Bear blew up to raise capital or find a buyer. I don’t pretend to know what the hell is going on. I just think it’s pointless to panic. I admire the Stoics, though I might pee in my pants if this thing dominoes. Lehman itself is not such a big deal. The question is are there more gut-wounded banks that are yet to topple.
Ed Marshall Says:
September 15th, 2008 at 1:27 am
Fer fucks sake, Bears, Stearns and Co. didn’t give you pause? Lehman isn’t a big deal? I was a minor league player in the industry not that long ago and I got out. Moved my positions to oil and then to currency speculation and I’m unwinding right now.

Yeah, domino effect, baby. Get the hell out of U.S financials, there are funds to short them and the time was last week. It’s still not a bad move today.
E. O'Neal Says:
September 15th, 2008 at 1:47 am
Ed, Bear did give me pause. I knew it wasn’t the last domino. I was saying above that Lehman had six months to do a deal, but they inexplicably didn’t. Executive malpractice. Lehman is important but didn’t present enough systemic risk for the Fed or Treasury to kick in taxpayer money to save its creditors. Moral: Lend to the biggest boys. Goldman and Morgan and BofA/Merrill should be too big to be allowed to fail. Our financial system is a wreck.
the other Ed Says:
September 15th, 2008 at 3:49 am
Most people really try to do a good job. You need to pay people well to get them to run their companies into the ground.
Aatos Says:
September 15th, 2008 at 3:51 am
“The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”

–John Kenneth Galbraith
rapier Says:
September 15th, 2008 at 6:12 am
To an ever increasing degree since the early 80’s all US economic growth has been based upon excessive credit creation. At each step of the way as asset prices and/or market segments which were inflated by that credit stumbled the Fed and the financial system stepped in to fix the problem with even more credit.

In the terminal stage the greatest engine of credit growth of all, the mortgage market, was used with knowledge aforethought by the government and political class, the Fed, the banking industry and the investment banking industry and the entire financial industry and by the foreign central banks as the method of keeping systematic credit growth rising.

Since at least the mid 90’s the financial system and thus the overall economy has had elements of a Ponzi scheme. Ever more credit had to be generated to pay off old debt and to mask the losses which were occurring. Credit has stopped growing. It’s shrinking. The modern financial system nor the economy can function without credit growth. For all practical purposes capitalism is founded upon credit. If the credit markets don’t work the system does not work.

The first victim has been asset prices. First real estate, then stocks and somewhat out of sight all those credit based derivatives upon which the Bear Sterns and LEH’s of the world based their worth. The virtuous circle of ever rising asset prices begetting more credit which bid up prices more has ended. Now the train is going the other way. As asset prices fall nobody wants to lend or even can so prices fall further and so there is even less lending and so on and so on. What is needed is not more credit but real new capital. That’s all mostly offshore now however and nobody is buying, yet. What we have is not a liquidity crisis but a solvency crisis.

The effects on the real economy, the Main Street economy, have been slow to develop but relentless. Unemployment rises and government tax receipts drop (or crater as NYC is soon to find out) Soon the government will be faced with helping people instead of the financial sphere, at the same time as the deficit is exploding.

In the most fervid dreams of conservatives has been the hope that somehow the Great Depression could be repeated, sans the New Deal. I have no clue if we are anywhere near there but the current situation has elements of it and a great political battle could unfold but for the most part US citizens are like sheep. Meekly slipping into insolvency or increased uncertainty. Making no demands of government except to perhaps somehow make the value of their home go up.
Steve J. Says:
September 15th, 2008 at 6:21 am
E. O’Neal Says:
Jersey, Merrill Lynch is fine.

Merrill sold itself because after Lehman, it was next.
Angellight Says:
September 15th, 2008 at 7:01 am
Republicans are terrible on Economics and on National Security. They have Led us into a Fake & Phony war and have yet to fully implement the recommendations of the 911 Commission. That is not being strong on National Security! Ground Zero is still a Dark Hole & open Wound and a symbol of their failed polcies! That is not change we can believe in and Enough is ENOUGH! Let’s expose the myth, deception and lies of the Wizards — GOP (Grand Opposition Party)! Let’s get off the Yellow Brick Road!

Suggestion: For those who write letters to the editors or write on blogs, we should do so on those states where the race is tight and we have a chance of swaying some minds.

Congress.org/stickers – provides a link to many newspapers and media outlets throughout the United States.
Jeffrey Davis Says:
September 15th, 2008 at 7:13 am
The same people who are telling us that Sarah Palin is presidential material are also saying that we have to bail out these institutions or we’ll face global panic.
John Emerson Says:
September 15th, 2008 at 7:29 am
Looks like Yglesias’s Ivy wonks have turned into pitchfork populists. My, my, my.
ET Says:
September 15th, 2008 at 8:16 am
I can’t be the only one out there that thought that the regulations that allowed the companies to go public was a big mistake?

Sadly the people that work/worked at the top won’t feel any negative affects at all.
joe Says:
September 15th, 2008 at 8:16 am
Looks like Yglesias’s Ivy wonks have turned into pitchfork populists. My, my, my.”

watch out, thought police are gonna get you.

Bottom line is these people get paid so much because of things like today. Matt ur not going to come into work tomorrow and learn that someone in a different country screwed the pooch and you are out of a job and 50% of your life savings.

Also, it requires you to be good at math. So there’s that.
Jeffrey Davis Says:
September 15th, 2008 at 8:26 am
So, Mr. Emerson, is Sarah Palin presidential material?
Don Williams Says:
September 15th, 2008 at 8:52 am
NEWSFLASH: Blind pig finds acorn, then spits it out.

From http://news.yahoo.com/s/ap/20080915/ap_on_el_pr/obama

[ "The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store," Obama said in a statement. "Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."

"I certainly don't fault Sen. McCain for these problems," Obama said, "but I do fault the economic philosophy he subscribes to." ]
———
Sigh.

Well, Americans will be glad to know that they can blame that cocksucker “Economic Philosophy” for the mess. Let’s Honest John off the hook — so they can vote for him.

What the hell is the matter with Obama? He’s SCARED of McCain — doesn’t want to run any risking of offending him. Obama’s acting like a bitch.

For the past 8 years, the most salient fact about Republican rule has been that they all marched in lockstep behind George Bush. TOTALLY.

The Republican Leadership has badly fucked the people of this country. John McCain is a motherfucking Republican. What’s so damm hard to understand?

And people don’t give a shit about a “financial crisis” hurting Wall Street — just as they don’t give a shit if Hurricane Ike rips Texas a new asshole. Some of them are like me — they even enjoy a little Schadenfreude.

Obama needs to make it PERSONAL — tell the people that they better prepare for retirement by asking the family dog to explain merits of Alpo over its competitors.

Because Big Tough Texan George Bush has turned this nation into China’s bitch — and CHina’s recommendation to the Baby Boomers is that they cook the dog.
SLC Says:
September 15th, 2008 at 9:18 am
Re Don Williams

I don’t know about ole Don Williams. He has posted several comments here and has yet to blame the economic problems on Haim Saban.
El Cid Says:
September 15th, 2008 at 9:18 am
Let me agree with Don Williams and exclaim that I have no idea on Earth why Democrats seek to preface every god-damn statement about the scumbag sh*t John McCain is doing or has backed with “But I Don’t Blame John McCain While He Suggests I’m Teaching Kindergartners To Have Sexy Sex With Each Other!”
charlotte Says:
September 15th, 2008 at 10:18 am
” … pitchfork populists …” Damn right, honey … Sign me up. Today is the first day of the rest of our lives, ain’t it? Alliteration creates its own alternate universe, I guess.
Me? I’m perfectly proud of my pointy pitchfork.
E. O'Neal Says:
September 15th, 2008 at 11:29 am
If you want to know who to go after with your pitchforks, read this article.
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/13/AR2008091302638_2.html
pseudonymous in nc Says:
September 15th, 2008 at 2:48 pm
Y’know, I had a comment up late on AIG being the joker in the pack — the goose among the financial ducks — but never hit ’submit’. That’s the big story from the weekend.
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