Monday, December 29, 2008

Lehman Bankruptcy: Crisis Management Through Crisis Export?

Although Lehman bankruptcy has long past us (feels like an era way for many of us if only for the fact that so very much has happened since, doesn't it?), I think it's nevertheless valuable on many levels to understand it in the correct context. For those of you who'd like to retrospect, CNN Money has an excellent in-depth review of the Three Days That Shook The World.

There's one unmistakable take-away from the analysis: US government definitely, specifically wanted Lehman to go down. They couldn't prevent the BoA and Barclay's talks of a buy-out, of course. But whenever parties involved in the rescue effort went to them for help, you could almost see the glee in their collective eyes when they said "no". Why is that?

In retrospect, FSA's refusal to approve the Barclay's deal was a devastating, decisive event. Why did they? The official explanation is that Barclay's was not strong enough to take over all of Lehman. But they surely could've asked the US government for some assistance and, between US and UK government backing, there surely must've been a way to make the deal happen. We don't know whether UK government did ask US for some corporative effort. Nor do we know whether FSA acted on request from the US government. But we do know for a fact that US didn't do anything.

But even then, all hope was not lost:

But Lehman's ordeal that Sunday night was far from over. First came a tantalizing ray of hope with the word that the Federal Reserve Board agreed to expand the collateral that investment banks could pledge to the Fed as part of both the Primary Dealer Credit Facility - the name given to the historic measure that allowed investment banks to borrow directly from the Fed window after the demise of Bear Stearns on March 16 - and the Term Securities Lending Facility, a $70 billion "collateralized borrowing facility" created on Sunday by banks to enhance liquidity in the marketplace.

When the Lehman executives started to hear on Sunday afternoon that these windows of emergency financing were opening up, they called the New York Fed to see if it were true. If the Fed allowed Lehman to pledge its shaky collateral to the discount window "we might get a reprieve," one Lehman banker said. But the Fed told Lehman, according to this Lehman banker, "'Yeah, we're doing that for everybody else but you. We're going to let you guys go.'"

Now let's take a look at what Lehman bankruptcy has changed.

Since the subprime crisis first broke out in August 07, it had been a US crisis. Everybody else was still looking pretty, especially the Old Europe. But after Lehman bankruptcy, it became a global crisis within a week. All of a sudden, we learned that European banks were in even deeper trouble than their US counterparts. The invincible Euro and GBP started tumbling, along with Ruble and Won and whatnot. Iceland went bankrupt. Basel II became the Biggest Joke in Financial Regulation...well, you know the rest.

Lehman bankruptcy marked the globalizaiton of the crisis.

But, as I said before, the beauty of this crisis is that it's global. If it had been a US crisis, any single one of the subsequent bailouts -- the AIG bailout, the $700B bailout and the Citi baliout -- would've been devastating to the USD and treausires. Another beauty is that everybody has fiat money. The two combined means that everybody can print as much money as she needs without worrying about currency exchange or inflation -- not until the economy revives.

I'm usually not the one who starts conspiracy theories. But the links here are too strong to deny.

Here's another passage from the CNN Money article to finish this off:

McDade and Lowitt, on Lehman's behalf, made one last-ditch effort to convince Paulson that taxpayers should bail out Lehman. They went back down to the Fed and walked the Treasury secretary through a doomsday presentation that Lehman had put together foretelling the likely global consequences in various markets - foreign exchange, swaps and derivatives, among others - if Lehman were allowed to fail. After McDade finished, Paulson told him, "You're talking your own book. We've thought this over."

"That's exactly the point you idiots", Paulson silently laughed to himself.

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