Great Depression Online Archive Issue:

Black Sunday

Great Depression Online
Long Beach, CA
September 16, 2008

Inside This Issue You Will Discover…

*** Working Overtime
*** Lehman Lays an Egg
*** Black Sunday
*** And More

Working Overtime

Treasury Secretary Henry Paulson had to work another weekend shift.  But he wasn’t alone.  Several of his banker buddies had to also punch their time cards for the weekend long meeting.

“An official from the Federal Reserve Bank of New York,” reported Jeannine Aversa for AP, “said Saturday’s participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the Federal Reserve Bank of New York, and Securities and Exchange Commission Chairman Christopher Cox.

“Citigroup Inc.’s Vikram Pandit, JPMorgan Chase & Co.’s Jamie Dimon, Morgan Stanley’s John Mack, Goldman Sachs Group Inc.’s Lloyd Blankfein, and Merrill Lynch & Co.’s John Thain were among the chief executives at the meeting.”

The purpose of the meeting was to figure out just what the heck to do about Lehman Brothers.

~~~~~~Book Recommendation~~~~~~

Manias, Panics, and Crashes – A History of Financial Crisis.  With all the banks going belly up, Wall Street in crisis, and Main Street in disarray now is the time to brush up on your history of financial crisis.  You may learn something that will help you preserve your life savings and dignity in the process.  Learn more here: Manias, Panics, and Crashes - A History of Financial Crisis.  

~~~~~~~~~~~~~~~~~~~~~~~~~

Just last year the investment banking company was flying high…booking $4.2 billion in profits.  But this year their business fell into a tailspin…already they’ve posted a $6.9 billion loss and their stock price has crashed 95 percent.

The cause of Lehman’s massive losses is the same thing that’s causing most of the financial world’s heartburn these days…the housing crisis and the resulting credit crisis.

Lehman Lays An Egg

“At the end of August, Lehman had $600 billion of assets financed with just $30 billion of equity,” reported CNBC.

“Having so little capital meant that a 5 percent decline in assets would wipe out the value of the company, which investors saw as a real risk due to the company’s billions of dollars of mortgage securities.

‘“Lehman decided to play chicken with the market and they lost,’ James Ellman, portfolio manager at hedge fund Seacliff Capital, said late on Sunday.”

Why not just let Lehman fail?

Because they’ve done so much business with other big Wall Street banks, so went the prevailing rationale, Lehman’s failure could produce a domino of failing banks.

For this reason Paulson and the rest of the big bankers got together to scratch their heads over the weekend to come up with a solution that would instill confidence in the markets.

“Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before Asian markets open, warning ominously, ‘‘the news that is coming out of the U.S. is bad.”’

But, contrary to the handling of the Bear Stearns buyout earlier this year, Paulson was unwilling to provide government money to help close the deal.  To explain why, Alan Greenspan opened his mouth on “This Week” on ABC and strung together several syllables that were actually discernable…

“‘When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance,’ Greenspan said.

“But, he said, ‘if you generalize that, it is very clear that that is an unsustainable situation in the financial markets.’  The government cannot set a floor below these firms, Greenspan said.”

Black Sunday

By late Sunday evening there was still no deal…and after 158 years in business, Lehman filed for bankruptcy.

Then in a late breaking Sunday evening story, we learned that, after walking away from a deal with Lehman Brothers, Bank of America would be buying Merrill Lynch for about $50 billion.

Apparently, with no rescue of Lehman, Merrill Lynch was thought to be next.  The Bank of America deal, it was hoped, would restore some confidence in the markets come the opening bell of the New York Stock Exchange Monday morning.   

Plus out of the weekend meeting it was announced that a group of 10 banks, including JP Morgan, Goldman Sachs, and Citigroup, formed a $70 billion pool slush fund that banks or brokerages draw from to cover short-term funding.

From what we gather, AIG, Washington Mutual, and Wachovia are already lining up at the trough.

Wall Street was in full panic on Monday.  The stock market carnage was the worst since the markets reopened after 9/11…with the DOW crashing 504 points.

As we noted several GDO issues ago, sitting on the sidelines can sometimes be the most shrewd investment strategy there is.  Right now just may be one of those times.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  With all the banks going belly up, Wall Street in crisis, and Main Street in disarray now is the time to brush up on your history of financial crisis.  In fact, in Charles Kindleberger’s practical classic, Manias, Panics, and Crashes – A History of Financial Crisis, you may learn something that will help you preserve your life savings and dignity in the process.  Learn more here: Manias, Panics, and Crashes - A History of Financial Crisis.

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