9.29.2008

The meltdown, now in progress

So the Republicans voted down the Paulson bailout. The Dow was down a couple hundred before the vote, and is now down more than 500.

Now people are starting to question the wisdom of the Fed's no-bailout policy, which lasted precisely a single weekend, coinciding with the death of my employer.

The timing of Lehman's downfall

I've been wondering why Lehman had to file for bankruptcy when it did. At least one other person is asking the same: "But there's a big question that remains unanswered about Lehman: what triggered the filing?"

9.26.2008

The Paulson Tragedy



"My name is Henry Paulson and I run the Treasury. And I don’t mean to make you panic, but if you do not give me a balance sheet that can hold $700 billion on it, and unlimited funding, than [sic] the economy will die. That’s right it will die."

Pictured: a young Paulson holding a prototype of the bailout plan

The Poetry of Rumsfeld

As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.

--Donald Rumsfeld in a Department of Defense news briefing, Feb. 12, 2002

9.19.2008

Dead cat bounce, global edition.

Things are looking up today. People were working for the first time in a while. We are conducting the digital equivalent of moving to a new apartment. Notably, we are leaving most derivatives behind. Our new landlord is Barclays Capital, and they don't want to have sort through that mess.

I noticed that we are no longer getting paper cups in the pantry. The cafeteria is slowly shutting down. It is unwinding its positions in cheese and deli meats.

I am trying to unwind my position in my cafeteria debit card before the market becomes completely illiquid. I may attack the vending machines if I get really desperate.

The stock market bounced big. But the Pakistani market bounced, too, after banning short selling.

Popular sentiment and John McCain seem to agree that the bailouts are a bad thing. Maybe they are right, but the argument should focus on the execution rather than the morality. For those asking, "Why should the Fed get involved in propping up insolvent banks?", here is one answer.

And I do find it funny that Lehman was the only bank that died under the Fed's no-bailouts policy, which lasted all of three days. Now we have a policy that collects the nasty stuff from all the ailing players out there and creates a universal Bad Bank out of the Fed. Who will be holding this stuff when we discover their true price? I hope this works, but if it doesn't ... well, you know.

9.18.2008

Cats will save the world

Maybe things will be fine. Here is why. The market for cuteness is alive and well.

Things to ponder while stocking up on Spam and ammo

This should prove that I am, by comparison, an optimist.

Here I have compiled some of the most interesting articles about this debacle.

Some signs that we are doomed



Believe me, I am an optimist at heart. But consider these developments:

The credit market is fucked. No one is lending to anybody. Money market funds are no longer cash equivalents. People are hoarding gold, and possibly shotguns and bear traps.

The tide's going out on the remaining investment banks, who have apparently been swimming naked all along. We now have the absurd spectacle of financial institutions begging for more regulation. And the regulators, here and across the pond, are giving it to them.

The Fed is fielding a Premier League squad.

There is some sign of sanity, though. I am not surprised that it should come from this guy.

The sun will rise tomorrow. I think.

9.16.2008

The trade of tomorrow: short world economy, long shotguns and fortified cabins in the mountains

The Lehman bankruptcy has enormous personal consequences for me, but I am more fascinated by the big picture. Unfortunately this picture keeps getting bigger by the hour.

We appear to be screwed. Lehman has shown the way for many other overleveraged firms to follow. A daring peek into the dirty end of the balance sheet results in write-downs, which requires capital. Said capital turns out to be hard to get; preferreds are no longer an option. Hubris prevents drastic action. Implosion.

The world appears to be deleveraging. Money in action is going back under the mattress. To help the process, the rating agencies are experiencing a moment of righteousness.

The Fed, in turn, has drawn a line in the sand, and made an example of Lehman, which certainly deserved its fate. But the fall started a dangerous chain of events. Despite having avoided the moral hazard of propping up an insolvent giant, the Fed has failed to maintain consistency of righteousness; all manners of rules have been relaxed to deal with the aftermath of Lehman and the coming AIG disaster. It seems to me that the Fed has chosen the wrong moment to let Lehman die alone.

9.14.2008

Lehman: No Love, Only Bankruptcy

Love did not triumph this weekend, and it looks likely that the "lonely death" scenario will play out for Lehman Brothers. It was too much to ask of the CEO convention downtown to recognize this most obvious pool of untapped wealth. Meanwhile, faith is drying up at an alarming rate, as default protection spreads widen all over the place. Hope is out fishing, or says its secretary, who has been working all weekend fielding calls from the Fed.

The credit crunch is in fact a faith flameout, and we now believe in nothing but cold cash and a shotgun. And even cash appears vulnerable.

The latest indications suggest that we will not have a new overlord on Monday, and my hopes for a relatively sane de-employment process are fading fast. Lehman has hired Weil, Gotshal & Manges to represent its impending liquidation. Unless something unexpected happens tonight, everything must go, go, go. ISDA will open on Sunday to prepare for this possibility. Monster truck show to follow.

There is one thing I don't quite understand: why can't Lehman simply pretend nothing happened, and open for business on Monday? One possible course of action: spit on the downgrades when they happen, start laying off most of its staff, sell off its good assets, and simply become the "bad bank." Can't we collectively turn a blind eye to the bad stuff, and conveniently forget to discover the true MTM on the piles of commercial real estate and its like? The potential negative net worth would be contained in this new incarnation of Lehman, and it will simply become a long-term vehicle for anyone who wants any piece of it.

This is attractive to me mostly because it involves severance pay. I am calling hope, but the line is busy.

9.13.2008

The End of Lehman

As we speak, there are scores of bankers in conference rooms at Lehman trying to figure out the literal terminal value of the firm. If their conclusions point to a negative net worth, Lehman may be hosed. A credit downgrade and the desertion of clients will start a chain of events that quickly lead to complete insolvency. Lehman may be left to die alone. The assets will meet the liabilities in a brilliant explosion that burns away any remaining equity and potentially singes the debtholders as well.

Some have suggested that a stealth bailout may be possible, but even under this rosy scenario, Bank of America or some other unlikely 'savior' will simply use the government backstop to unwind Lehman to a modest profit.

Perhaps, in a boardroom at the Fed, the big boys will collectively recall that love is greater than faith. They will announce a plan whereby Lehman's equity will be replenished with warm and fuzzy feelings. The debtholders will receive coupons of hugs and a principal repayment in kisses. This is the best hope for my once mighty employer.