Month: September 2008

What Matt Said

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Mr. Yglesias is a wise man:

Unlike the guy who runs Lehman Brothers, the guys who clean the bathrooms in the Lehman Brothers office have, as best one can tell, been doing an excellent job. And yet if the company going under results in everyone involved losing their jobs, the guy who runs Lehman will wind up being better off than the guys who clean the bathrooms. This is because in the United States of America, hard work is the way to get ahead.

Madame Guillotine is beginning to look remarkably attractive.

A Good Consequence of the Lehman Failure

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It appears that they are shuttering their carbon trading desk.

Anything that kicks carbon trading in the teeth is a good thing. It is bad, incredibly bad, policy.

The stated idea is, “Let’s let Wall Street apply the same practices ant techniques to a world threatening problem, the innovation unleashed will solve that problem.“

The real goal is, “If we create a market mechanism for this sh#@, then I can pull down major fees as an expert in this sh#@, my Ivy League classmates can get commissions whenever someone sells this sh#@, we can get more commissions whenever we repackage these things as sh#@ backed obligations, and I can get a Porsche.“

Market based solutions: Because baby needs a Porsche.

Bad Foreign Policy Analysis

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So now Bloomberg is suggesting that western flight from the Russian markets may drive russia to moderate its position on Georgia.

This is bovine scatology….the people who will flee are the foreign investment banks, and the people who will snap up stuff at depressed prices are Putin supporters, and they will make more money when the money reenters the Russian market, and the net result will be a movement of ownership from transnational corporations to Putin and his cronies.

This is a feature, not a bug.

The Problem With Journalists

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Will Bunch has an interesting observation regarding the press, that they are almost completely divorced from life around them.

He was reading an account of Len Downie upon his retirement from the Washington Post, and he noted that Downie said that he did not have any friends outside of the paper. Note also that Downie also did not register to vote until he retired.

So Bunch asks the question, “If Len Downie only hung around with other journalists, where did he get his ideas for what was news?”

The answer is, of course, PR flacks, because he has no context to make these decisions on his own.

What the War Nerd Said

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Gary Brecher makes a very good point, that the Neocons who are suggesting that Georgia needs to be reorganized along the lines of Hezbollah do not have the best interest of the Georgians at heart.

Rather, as the War Nerd so eloquently puts it, “America’s chickenhawks are ready to turn Georgia into a nation of missing-relative-seeking refugees.”:

I’m pretty sure if you asked any Georgians, they’d screech, “Agh! No! We don’t want to live like Hezbollah, cowering in our huts under constant bombardment, raising kids with no prospects but martyrdom!” But then the neocons haven’t asked anybody in Georgia. Safe in their living rooms, they think it’d be a great idea for Georgia, a very unwarlike little middle-class country, to try to imitate the Lebanese Shia who make up Hezbollah’s suicide squads.

Why Save Bear Stearns, and not LEhman

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Buried in a very good post by the Angry Bear is this little gem:

But the effect of LEH going out of business would not be so severe as the effect of BS going out of business for one reason that Roubini, for some reason, appears not to have mentioned.

Lehmann has no clearing business.

Had Bear gone out of business, about 30% of the hedge funds in the country would not have been able to execute virtually any transaction for the following thirty days. Not a payment. Not a redemption. Not a trade on a listed exchange. Not a receipt. Not a de-leveraging. Not a swap payment, not a CDS payment, not fulfilling an option exercised against them.

There’s not just a “maybe” about financial collapse in such a scenario; P probably well in excess of 0.9944. $30 billion is a “bargain” in such a situation.

(emphasis mine)

Bear Stearns was a surprise. Lehman was not. This has been bubbling up for months, and the firms have been able to create contingencies to allow for trading in the departure of the firm from the market.

Diving Deeper in the Financial Mess: Lehman and Bankruptcy Laws

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Well, it appears that while Lehman technically filed for chapter 11 reorg, because of changes to the laws the effect is much closer to that of a Chapter 7 liquidation, particularly with the 2005 changes to the bankruptcy laws.

The bullet points:

  • The holding company has filed for BK, but , its subsidiaries, “its brokerage-dealer subsidiaries, asset management unit, and investment management division”, continue to function.”
  • Lehman will try to sell off the good bits.
  • Under normal BK procedures, there is a stay on collecting debts, but, “most financial contracts — including securities contracts, swaps, repurchase agreements, commodities contracts, and forward trades — are unaffected by automatic stays.“
  • By declaring bankruptcies, it means the creditors can file to collect immediately.

So have this problem:

Now comes the downside potential. The risk is that lots of these commercial counterparties will choose to terminate their financial contracts with Lehman — say, for instance, credit default swaps — all at once, and then try to rehedge themselves all at once, causing the market to seize up.

But the market is already seized up.

The US financial system is in a pit of ugly, and no know knows which way is out.

Economics Update

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Obviously, with Merrill Lynch ceasing to exist as an independent entity, and Lehaman ceasing to exist completely, it has been a busy day.

This update, therefore just covers the more ordinary stories, as opposed to the 767s slamming into the US financial system, though many of these stories are in fact driven by the bigger stories.

Let’s start with one that has nothing to do with Lehman or Merrill, retail gasoline is up for the 3re time in 3 days, because Hurricane Ike has closed about 20% of US refining capacity.

We’ll see how this shakes out over the next few days, but we also now have another unrelated pice of news, that the New York Fed Manufacturing Index Decreased to -7.4 in September, indicating that it’s not just those Wall Street whores getting it up the ass, it’s all of us, which is why
credit card debt and delinquencies are up the past month.

And now on to the main show: