Editore"s Note
Tilting at Windmills

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September 14, 2008
By: Hilzoy

Wall Street

I don't know about you, but I find the news from Wall Street a tad unnerving:

"The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. was close to a deal to sell itself to Bank of America Corp.

"We have never seen anything like this," said analyst Glenn Schorr, who covers the investment banks for UBS AG. "There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers."

The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital. Those moves could cause the U.S. economy to slow further."

And that's not even the latest news: since that article was published, Merrill has decided to sell itself to BofA, Lehman Brothers seems to be about to file for bankruptcy, AIG has asked the Fed for help, though the WSJ adds that "it wasn't clear what (the Fed) could do", and the Fed, for its part, has expanded its lending facilities, prompting Yves Smith to comment:

"I guess it is now official. We no longer have functioning trading markets, at least in terms of serving their alleged purpose of giving companies access to capital."

Nouriel Roubini is generally pessimistic, but he's also generally right. Here's his take*:

"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."

I very much hope he's wrong. But it looks to be a wild ride.

* Ken Houghton at AngryBear adds a caveat:

"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."

Hilzoy 10:11 PM Permalink | Trackbacks | Comments (35)

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I can't find your second page.

More deregulation anybody?

Posted by: Ron Byers on September 14, 2008 at 11:09 PM | PERMALINK

Yes, it most certainly is un-nerving.

Thanks for the fantastic (albeit disturbing) info information here tonight, Hilzoy.

The 'tax and spend' myth is so horribly pervasive and deceptive.


Posted by: on September 14, 2008 at 11:14 PM | PERMALINK

The main difference between today and 1929 is that, in '29, you saw bankers jumping out of their office windows and exploding on the pavement. Today, each gets a golden parachute, to ease their graceful exit to the ground. The rest of us... Got screwed then, will get screwed now.

Posted by: exlibra on September 14, 2008 at 11:16 PM | PERMALINK

exlibra is right. these of the "golden parachutes" should be hunted down with torches and pitchforks. Truly, the economy has teetered on the decisions of a few with the monies of the many to the detriment of all.

Alas, it will not happen. Too bad. Too bad their citizenship cannot be stripped due the the damage their decisions have wrought.

I dream. Alas.

Posted by: jcricket on September 14, 2008 at 11:22 PM | PERMALINK

Wasn't it Thomas Jefferson who said "That government is best which deregulates the whole financial underpinnings of the national economy and blows it all to hell"?

Posted by: Max Power on September 14, 2008 at 11:25 PM | PERMALINK

This is all the Democrats fault. If they hadn't been running things for the past 8 years, nut instead we had gotten rid of all those burdensome regulations and oversight like those smart people like Phil Gramm wanted, why the financial markets would be running like a Swiss watch. Er, a UBS watch.


Posted by: Jeff S. on September 14, 2008 at 11:25 PM | PERMALINK

Excuse me, but, "the news from Wall Street is a tad unnerving". No shit! Are we all to young to remberber somthing called an economic depression. Maybe people should rent the movie " The Grapes of Wrath" and see what happened the last time Wall Street went nuts. Or should I say Republican.

Posted by: crimelord on September 14, 2008 at 11:26 PM | PERMALINK

Maybe the populists were right about postal savings banks.

Posted by: leo on September 14, 2008 at 11:32 PM | PERMALINK

McHoover and Caribou Brownie to the rescue!

I feel good about America...
Hope you do too!

Posted by: koreyel on September 14, 2008 at 11:34 PM | PERMALINK

I work for BofA Investment Banking Marketing. It's going to be an interesting Monday for sure.

Posted by: Mick on September 14, 2008 at 11:37 PM | PERMALINK

I can't wait to see what happens on Monday. they'll probably stop pegging foreign currencies to the dollar at this rate. (which would cause a meltdown for us)

Posted by: Mick on September 14, 2008 at 11:45 PM | PERMALINK

Comrade Paulson:

My dog is suffering from liquidity problems (aka constipation). I heard you already bailed out two dogs named Freddie and Fannie. When is the Central Committe for Taxpayer Funded Bailouts meeting to bailout my dog?

Rational of the Internets

Posted by: rational on September 14, 2008 at 11:59 PM | PERMALINK

When is it going to occur to the 'low information voter' that EVERY DAMNED TIME the GOP is in charge of the economy, they try to steal too much and cause a meltdown. When Bush-I got stuck with the S&L bailout, it wound up costing the taxpayers 160B, which seemed ENORMOUS at the time. Cost of this crisis is thought to be one trillion.

Why are Republicans thought to be 'better on the economy'? WHY???

Posted by: Arachnae on September 15, 2008 at 12:03 AM | PERMALINK

Isn't the government supposed to prevent private entities from doing stuff that will be majorly detrimental to the common good? Isn't that what we pay taxes for?

Posted by: Carl Nyberg on September 15, 2008 at 12:04 AM | PERMALINK

they'll probably stop pegging foreign currencies to the dollar at this rate

That already sort-of happened with oil prices.

The recent rise in oil prices happened concurrently with a deep slide in the US dollar exchange rates - which meant that the oil price shock was more severe in the US than in the rest of the oil-importing world.

It's basically the international financial markets saying that the US dollar, backed by the full faith of the incumbent US President, ain't worth a twig of Crawford brush.

Posted by: Max Power on September 15, 2008 at 12:05 AM | PERMALINK

Isn't the government supposed to prevent private entities from doing stuff that will be majorly detrimental to the common good? Isn't that what we pay taxes for?

Posted by: Carl Nyberg on September 15, 2008 at 12:08 AM | PERMALINK

rational writes: I heard you already bailed out two dogs named Freddie and Fannie.

Reminds me to ask, what has Obama been saying about this bailout? Seems I haven't heard anything in his recent speeches about it. Is there some reason he's being quiet about it? There's some blog buzz that he received over $100K in political donations from these agencies during his two years in the Senate.

Posted by: pencarrow on September 15, 2008 at 12:17 AM | PERMALINK

Isn't the government supposed to prevent private entities from doing stuff that will be majorly detrimental to the common good? Isn't that what we pay taxes for?

This is the age old debate of Federalists vs. Anti-federalists. Guess what. It's still not resolved. GOP would love to see all government regulations disappear since it's "bad for business." Pure capitalism demands Zero regulations. Markets are always self correcting.

The problem is, we can't let the markets self correct these days... It seems like we need a government bail out or government brokered sweet deal to keep some of these institutions afloat or it would be detrimental to the dollar. So in essence, we aren't letting these markets self correct. We're giving them taxpayer money so that our tax payer money doesn't become worthless in the long run. But the problem is the people who have been making shitty decisions are rewarded with golden parachutes with packages up wards near 35 million. Meanwhile, back at the ranch, 25,000 workers are unemployed in Manhattan alone.

You make the decision - Capitalism on paper or capitalism in practice.

Posted by: Mick on September 15, 2008 at 12:23 AM | PERMALINK

Just like with all the lying in the McCain, at some point the 'economists' need to be called on the obvious flaws in their theories exposed by the actual results.
February 2003

The Honorable George W. Bush
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500

Dear President Bush:

We enthusiastically endorse your economic growth and jobs proposal. It is fiscally responsible and it will create more employment, economic growth, and opportunities for all Americans. Moreover, it will improve corporate accountability and strengthen the nation's international competitiveness.


[I removed the other economists to add emphasis
to some of my favorites here.]

Larry Kudlow, Kudlow & Co.
Arthur Laffer, Laffer Associates
Larry Lindsey, The Lindsey Group
David Malpass, Bear Stearns & Co. Inc.
Steve Moore, Club for Growth
Grover Norquist, Americans for Tax Reform
Ben Stein, actor, writer, economist

Posted by: John Henry on September 15, 2008 at 12:24 AM | PERMALINK

At this point, it doesn't do much good to trot out the usual (albeit true) criticisms of the financial industry and its government enablers. What's happening now is bad shit for all of us, unless you happen to be a lottery winner or a survivalist. There isn't any way to insulate yourself from this collapsing economy. Making sure we minimize the damage, then ensure the fox isn't in charge of the hen house again is more important than saying I told you so. This is really pretty scary.

Posted by: jrw on September 15, 2008 at 12:36 AM | PERMALINK

Right! They're are greater priorities. But we can't continue to allow the confidence in a vital forecasting component of fiscal responsibility to be eroded by what amounts to malpractice by a few of its practioners. Without holding these professionals accountable at some point in time, the forecasting system is not allowed to 'self-correct'.

Posted by: John Henry on September 15, 2008 at 1:00 AM | PERMALINK

Is this moron Donald Luskin related in any way to the Discovery Institute moron Casey Luskin?

Posted by: Shaneequa Robinsack on September 15, 2008 at 1:22 AM | PERMALINK

While we're talking about books and movies that drive this situation home like a nail in the lid of your coffin, check out Anton Myrer's semifictional "A Green Desire". You'll have plenty of time to read while you're standing in the soup line. And, like in "Desire", there are people already planning on how they'll make a killing off the poor boobs who always listen to their advice, just as soon as things start to settle out.

Posted by: Mark on September 15, 2008 at 1:50 AM | PERMALINK

Does this mean American Express is dead if Lehmann Bros. folds? (Time to use another credit card, I guess... which, guess what, is owned by B of A which seems to be buying everything.)

Does it mean if you have your money all saved in US dollars, you should put it into another currency? Or something else?

Thanks for input from those of you more financially adept than I.

Posted by: clem on September 15, 2008 at 2:30 AM | PERMALINK

We're giving them taxpayer money so that our tax payer money doesn't become worthless in the long run.

It's not just the dollar.. if you own stocks in financial companies (like me) you'll be affected, your 401k, which mostly likely has financial stocks will be affected, mortgages are harder to come by (which might be a good thing), and the lack of liquidity will affect all businesses indirectly.. in addition to those who worked for this "well-managed" firms who will find themselves out of a job. Although the more experienced ones may find work at the few good financial institutions who were smart enough not to get sucked into this mess (BAC, Wells Fargo) At this point, I'm not sure how much more the bad news will negatively affect everything.. it might be better to just let these firms go under so the road to recovery can begin. But I just can't fathom why boards continuously offer these ridiculous packages to execs, like the one most recently for the new Wamu head..

Posted by: Andy on September 15, 2008 at 2:55 AM | PERMALINK

What I find unnerving is how none of the bailouts will do a single thing for home owners. The banks get money to shuffle amongst themselves until their bad debts disappear, but home owners are in the same bind as before.

I think the bailout should go to home owners. A billion dollars is enough to give 20,000 home owners $50,000 each. This would buy most people more than enough equity to refinance affordably, thus paying off the bad debts and keeping people in their homes at the same time.

Posted by: Aatos on September 15, 2008 at 4:36 AM | PERMALINK

We don't want a self-confessed economic ignoramus like John McCain steering the ship in perilous times like these. His only announced solution (literally) to spur the economy is to give these disgraced icons of industry more tax cuts.

After the billions in tax cuts George Bush has already given them this is what they do. These companies did just fine during the Clinton administration.

Posted by: pj in jesusland on September 15, 2008 at 5:53 AM | PERMALINK


Foreclosure Phil - David Corn's excellent overview about how this disaster was brought to us by Phil Gramm John McCain's economic guru.

Read it and send it to everyone you know.

Posted by: markg8 on September 15, 2008 at 7:04 AM | PERMALINK

First off, you can stick a fork in Lehman---they went Chapter 11. The EU is really, really pissed at us right now; the Bushites constantly promised them this wouldn't happen again (remember Bear?), and now it's going to be come commonplace.

If you work for BofA, y'might want to dust off the ol' resume and start looking now---and don't look in the financial sector. BofA offered $29 a share for Merrill, which closed Friday at about $17. The Merrill holders will no doubt wait for the sale to take place before going into run-mode---which equates to a run on BofA itself.

Back to Lehman---the Germans have slapped a moratorium on all sales and payments not directed toward debt settlement. That punches a BIG hole in the Ch-11 cop-out, so now the fat-cats will bleed profusely as well, which could trigger a tremnor-run into other banking units.

Oil's down to around $97 a barrel, but gasoline's running at about $4 a gallon.

European markets are spiraling---downward.


Posted by: Steve on September 15, 2008 at 7:17 AM | PERMALINK

These are global players, it is not the job of a single nation to straighten this thing out. Where are the Sovereign Wealth Funds?

Posted by: Matt on September 15, 2008 at 7:19 AM | PERMALINK

Oops---sorry for the glitch; the finish (CNBC) should read---"...quotes that the US market is expected to plunge right at the opening in response to the Lehman debacle."

We're gonna need another FDR---and McCain is no FDR....

Posted by: Steve on September 15, 2008 at 7:21 AM | PERMALINK

The failure of the country's biggest banks should be a winning issue for the Democrats.

Even the New York–based media are starting to turn on the GOP. After all, their whole city depends on Wall Street. They rape the rest of the U.S. in a colonial fashion with government approval to support their own opulent lifestyle, then sneer at the rest of us as unmoneyed rubes. Surely the failure of Lehman and the sale of Merrill Lynch to North Carolina–based Bank of America (what happened to the rule of one bank owning no more than 10% of U.S. assets?) is going to hurt New York broadcasters personally. Indeed, we're probably seeing this in an anti-Palin backlash (ABC slimed Pentecostals, and her by implication, this morning, unfair but no more unfair than GOP Palin-worship).

So why can't the hapless Democratic party, seeming on a path to another planned and deliberate election loss, capitalize on the worst series of bank failures since the Great Depression? They seem to be silent.

One has to assume that the plutocrats who pay their bills won't let them bring this up. But why? Is it really OK with the East Coast puppetmasters that Charlotte, NC, just ate their lunch? Or are they afraid that Paulson won't give them a handout (hell, the trough seems to be empty of feed, so he's now out of goodies for the houses-in-the-Hamptons-and-Aspen set) if they complain about utter GOP incompetence in economic management?

This election will go the way the NY media push it. Usually they push in the direction that will favor their own investments. Why aren't they bothered by the loss of their own fortunes? Is it (shudder) because going broke and being forced into a (in my opinion heretical) Bible-based regime of no pill, no IUD ('cause these cause "abortions") and the transfer of real power to the South is better than having a schwartzer in charge?

Expect the McCain regime to be the last government that purports to be freely elected. Unfortunately democracy is not possible in a mass-media era as they will present a totally false picture to swing the election if they so choose. Why they continue to choose the party that is ruining their retirement is what I can't understand.

Next step: A Putin-like regime in which Washington controls the economy and owns most of the means of production, tailored to further enrich the lucky. When that fails, if they can't keep the masses Prozacked to a plateau of fake happiness (better keep those anti-depressant scrips coming, even if cancer patients die because of unprofitability, GOP!) expect a Chavez-type soft dictatorship on the other side.



Posted by: Lindsey Eck on September 15, 2008 at 7:41 AM | PERMALINK

Sorry, but Obama is no FDR either. He's a Clinton wannabe. And nobody knows how Clinton would have performed had there been a really serious crisis on his watch. (No, that isn't a jab about 9/11; that wasn't a serious crisis.)

Posted by: MFB on September 15, 2008 at 7:58 AM | PERMALINK

This is why I hope people go here, to get a simple message about where we could head...


Posted by: Florida Voter on September 15, 2008 at 10:17 AM | PERMALINK

Sunday Bloody Sunday
The Wall Street Shuffle

ralph DR RON cynthia

What have they done to the earth?
What have they done to our fair sister?
Ravaged & plundered & ripped her & bit her
Stuck her with knives in the side of the dawn
& tied her with fences &
Dragged her down!

mike dennis jesse ross

Posted by: nader PAUL mckinney on September 15, 2008 at 3:26 PM | PERMALINK



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