time to party like it's 1929

[erf_]

I didn't feel comfortable talking about this at work, due to the non-disclosure clause in my contract, but hell, this is very public news by now. Guess what day it is today?

Yes, that's right! It's BLACK MONDAY!

Five hundred points. The Dow dropped five hundred points. In one day. You aren't supposed to ever see numbers like that on the stock

Comments

[aesvir]

The reason people aren't completely freaking out (as in committing suicide freaking out, versus shouting like maniacs on MSNBC) is because anyone who's been following the markets saw it coming. I'd first heard rumors about Lehman back in April on the Dealmaker and had a worried conversation with my friend (who was optimistic but now, sadly, out of a job). The individual investor is going to get fucked over, but they should have realized that when Bear Stearns went under and Lehman couldn't get any one buyer to pull the trigger.

Ultimately, I do think the last few weeks are extremely bad news for the American economy. But not because of Lehman or Morgan Stanley, which are ultimately the smaller investment banks on Wall Street. The takeover of Fannie Mae and Freddie Mac will possibly add trillions to government debt, and that will have long-term complications worse than any one bank that files for bankruptcy.

As for Lehman and Morgan Stanley--what they'd been hoping for was the opposite of free markets. They wanted to reap all the profits when the stock market did great, then wanted a government bailout when the losses pile-up. It's the "capitalism for me but not for thee." Paulson and Bernanke did the right thing here to let Lehman fail, though it's going to be extremely painful in the short-term (and might cost the R's an election--but so be it. I'd rather lose an election than permanently screw over taxpayers like this.) To quote my Bankruptcy prof:Bailouts will not put a stop to the underlying problem: we can't find a bottom in the housing market. Until that happens, the value of financial instruments based on those mortgage obligations will keep falling, and the worldwide market will keep sliding toward collapse.

Worse yet, so long as the government uses bailouts, the financial institutions have an incentive to sit on the sidelines in dealing with homeowners. There's less reason for them to take their hits for bad mortgage investments if they believe that the government may bail them out.

What will it take to put a bottom in the housing market? We have a lot of evidence now that the foreclosure approach isn't going to do it, and the voluntary rewrite-the-mortgage approach won't either. Instead, we need a serious program to write down mortgages to an affordable level, and sort out which families can afford to stay in the homes and which families need to move out. Whether we do that with a change in the bankruptcy laws or through another program, that is the only way we will find the bottom on the market and get this crisis behind us.

[erf_]

I think it's a long shot to say that Lehman Brothers was hoping for a government bailout. When you are a 120-year-old brokerage firm, one of the largest in the country, and your stability is the primary reason people invest with you, gambling on winning big from a bankruptcy is not an attractive strategy.

In any case, it's two days too late to debate the merits of a Lehman Brothers bailout. A deal by their rival banks to save Lehman fell through yesterday, and Lehman is now little more than a thick sheaf of outstanding debts. There were crowds of people outside today watching all of Lehman's employees walk out of their historic corporate headquarters with cardboard boxes. Right now the debate is mostly focused on whether the government should intervene in saving American International Group, whose debt has ballooned to astronomical proportions, compounded by a 60% drop in their stock price. Poetic justice is all well and good, and long-term market corrections are generally worth even serious short-term consequences, but when the short-term consequences are this apocalyptic the top priority should be surviving to make it to the long term. The one thing that would normally prevent the Lehman Brothers collapse from affecting Joe American directly is that Joe American's 401k is insured. What happens when 90% of America's pensions evaporate overnight because the insurance companies can't pay their dues?

Morgan Stanley? Last I heard they were one of the survivors. Are you confusing them with Merrill Lynch, for whom absolutely no tears are being shed right now? (Oh, boo hoo, Merrill Lynch. You nearly went bankrupt, but now you've merged one of the biggest brokerage firms in the country to one of the biggest banks in the country. You get the chance to make ridiculous money while Bank of America gets the rights to a bunch of foreclosures and enough debt to sink almost any smaller bank. Cry me a river.)

[aesvir]

Yes, you're right--it's Merrill Lynch that's been bought out. And eventually, once this mortgage mess is cleaned up, BoA will probably have made a good deal.

AIG can definitely turn into a black hole. Word is that the New York state government and such are trying to open up new lines of cash for it. It looks like we'll soon see whether AIG falls into the "too big to fail" category (like Bear Stearns) or the "example to the masses" category (Lehman). Lehman wasn't hoping for a straightforward government bailout--rather, its potential buyers had wanted the government to guarantee their investment. Which would have put the taxpayers on the hook for any eventual losses. I wish I knew more, but I am only two weeks into Bankruptcy. (And I suppose this is a great time to learn about bankruptcy law.) Too bad we don't get to Chapter 11 filings until next week.*

If Joe America is worried about his 401k, wait till Jill Civil Servant learns that her public pension has been underfunded (and that the municipal government can go ahead and declare bankruptcy) and Greg Grandpa loses Social Security and Medicare. *wince*

*One good thing about being a lawyer: even when it comes to bankruptcy, the lawyer always makes sure he gets paid first. I sometimes hate my chosen profession. o_0