Investors bid up Lehman Brothers’ bonds yesterday after news broke that the company was replacing two top executives. The price of protection on Lehman bonds also declined. This reaction–which starkly contrasts to the decline in Lehman’s share price yesterday–has government officials concerned.
Government officials who spoke to DealBreaker on the condition of anonymity said they are worried that the market is convinced the Federal Reserve won’t let a major US securities firm collapse. This is a cause for alarm because it indicates that investors are not taking into account full range of risks faced by investment banks, which could in turn remove an important market check on risky behavior. Although Lehman and its rivals have been pushing down debt levels recently, cheap debt that is unlinked to institutional risk could encourage a new round of re-levering, one official warned.
“What we saw yesterday was moral hazard in action,” the official said.
The price of credit default swaps for Lehman is now half of what it was in March, the Wall Street Journal pointed out this morning. That can be looked at as a dramatic demonstration of the value of having the Federal Reserve’s implicit guarantee of Lehman’s credit worthiness. In recent weeks, officials from the Federal Reserve have publicly remarked on the dangers created by this guarantee. On Wednesday, Treasury department undersecretary Robert Steel went out of his way to stress that the window was not a permanent guarantee for securities firms.
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Government Officials Worry About Bond Market’s Muted Reaction To Lehman News
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Here’s a list of other companies that CDS is half what it was in march. citigroup. goldman. jp morgan. merrill. morgan stanley. credit suisse. bofa. wells fargo. wachovia. capital one.
i could go on. notice a trend here? dolts.
also how about, deere, ibm, alcoa. fed discount window helping them out too?
Things may be called temporary or permanent but if my ass is on the line that means shit. I rule.
Yours,
Fuld
Any “anonymous government official” who didn’t see this coming, when the facilities and BSC debt backstop were being created, is a stump-toothed moron.
Some banks need to fail, PAINFULLY, or all this “restoring liquidity and sanity to the financial markets” BS will just prove to have been a dangerous doubling down by the Fed.
Let Lehman fail. No Fed bailout in the offing. My ‘CDS’ bet is that Fed will close the window and turn its back on LEH. Once with Bear is enough.
Two big houses need to fail before an end to the credit crisis can occur.
There’s no mystery to this. But then again, my “remarks betray a lack of understanding”.
“Credit Default Swaps”. What a f’d-up name for a roulette wheel.
The Guy from Delaware
Shutting the barn door after the horses have bolted has historically proven to be not a very good strategy.
Bernanke and his pals can scream til they’re red in the face about “temporary this or that.” They’ve created one huge moral hazard that won’t go away any time soon.
Plus, what 4:25 said.
The question is this:
Are they willing to take the risk of a systemic collapse in order to let a big bank fail to prove that they will let a big bank fail because nobody believes that they will let a big bank fail?
I, personally, don’t think they are.
The numbers don’t make sense. Say that letting LEH fail has only a 5% chance of causing major systemic failure due to lack of confidence and a bad-counterparty-cascade sort of thing, and letting it happen has a 95% chance of increasing awareness of hazard and making the market more efficient. Them’s good odds, really.
But 5% chance of ARMAGEDDON is still probably higher than they are willing to accept. It all depends on whether they think that the risk of systemic failure, no matter how tiny, is real. If they do, then they will do everything in their power to prevent it, and moral hazard be damned.
M
Yes. This is the dog that will bite the hand that feeds it for sure.
wonder what its gonna take to make myself ‘too big to fail’. im thinking lots and lots of cake.
The real question is:
“Government officials who spoke to DealBreaker on the condition of anonymity”?
Really? Calling The mail guy at the Fed reserve a government official is a little bit of a stretch, eh Carney?
http://home.inklingmarkets.com/markets/12658
By 12/31/08, will Lehman Brothers fail?
What say you, unwashed Dealbreaker masses?
StMarc…
My “lack of understanding” says that the Fed will begin raising rates soon, gas prices and econ weakness be damned.
They’ll also take that 5% you refer to. Bringing a return to confidence is more important than LEH’s survival. The country is so f’n fed up with Wall St bullshit, that nobody except Wall St cares about LEH.
LEH = Too small to make a dent.
Counterparty-cascade = Pissed-off bagholders.
The Casino is about to close. 32x lev plus another 32x on top of that. You call that ‘business’. Hahaha.
The Guy from Delaware
If you’ve voted in our polls frequently, please email us at tips@dealbreaker.com
GFD: I’d like to think you’re right, and I agree with you in principle. (Especially about the interest rate thing.)
However, some of those bagholders are major pension funds and major mutuals which pensions and retirement funds are heavily exposed to. If they calculate that letting LEH (not to pick on them, they’re just at the top of the list right now) go down has a 50% chance of bankrupting CalPERS in a cascade, just to pick one example, even if it didn’t mean a system crash I honestly don’t think they’d let it happen.
M
It’s easy to gamble with OPM when you collect fees regardles of whether the OPM goes up or down.
I could do that too. I just wouldn’t need a $1500 B-Squared suit, Gucci shoes and a Rolex.
The Guy from Delaware
Nothing stops TGFD. Notice his unrestrained hostility.
Thank you for the post, John. Thought-provoking.
StMarc…
My “lack of understanding” is broad. If I had all the answers, Goldman Sachs would be calling hourly to get me an appt with that tailor who’d put that B-Squared suit on me.
My thought would be a twofold approach if it’s possible…
1) Backstop the CalPERS types directly to SOME level (If this is possible). This would give the country confidence that the Fed is not just bailing out the “Wall St Gambling Thieves”.
2) Let the “WSGT”(above) fend for themselves. Make them do the “Mark-To-Market” thing for real.
Maybe we do need a real “blowout” year on Wall St.
What’s the best for the nation in the long run? I don’t know for sure, but I do know that selling our nation’s financial soul to foreign soverign wealth funds is not in the best interest of Main St or of Wall St for that matter.
Besides, Wall St is a gambling town. 95% odds are pretty good, are they not?
Thanks for asking,
The Guy from Delaware
TGFD….you’re a f’ing tool. What’s your address? I’m going to come over and smash your face in.
Fed is fucked if they do, fucked if they don’t.
If Lehman is bailed out, everyone will know that banks can’t fail and even greater risk will be taken. This will, of course, lead to even bigger issues.
If Lehman isn’t bailed out, they go down in flames and hurt a few other people with them. How many people is undecided but it will definitely be a huge, economy-killing issue.
The question isn’t will Armageddon happen, it’s which Armageddon will happen. As nice as it would be to save Lehman, the monsters that will create down the road will be ten times as big and hurt ten times as many people. Of course, when has anyone at the Fed or the Treasury ever been anything but short-sighted?
Expect a bailout and expect much bigger issues than this one in the years to come.
The Fed doesn’t have the BALLS to let a major US securities firm collapse.
Hey Clown@5:27pm…
Your assface comment is unnecessary. Your gd right I’m hostile.
I don’t have a subprime, adjustable-rate mortgage. I don’t own any f’n CDO, CDS, SIV, or CPDO’s. I don’t go to the f’n casino with OPM. I don’t brag about the ‘$millions’ I’m pulling down at some f’d-up IB or dipshit PE outfit.
But you know what? All that fucking shit is affecting me personally. My relatively straightforward investment portfolio takes a shave every time there’s a hiccup in your fucking town.
My business is also tied to the vagaries of commercial construction( I’m not a realtor). How many projects get underway when owners/developers can’t get financing because the scared-shitless banks are locked-the-fuck down. Locked down because of Wall St’s fuck-up work.
Fuck those VIE’s. Put ‘em all on the fucking books.
And Fuck You Too, clown.
Shit. I’m fucking exhausted. I’m going up to the pool with my wife.
The Guy from Delaware
What the guy from delaware said!
The Guy From Texas
AssFace@5:58pm…
Give me your fucking address instead. I’ll come over so you can try.
Are you that fucking idiot “Androgyny”? You sound like that fucking clown. Tool, what a candyass word.
The Guy from Delaware
@TGFD – Fellow Delawarean: Remember brother, that we are guests here. It appears that you’ve suffered some financial reversals. This is, of course, unfortunate. I’ve dumped on these tools from time to time as they have pointed out, but this is really over the top. My suggestion: go to the Italian Festival and chill! The weather is perfect.
T_G_D(stealthily)
Breaking down into three or more personalities (see blog from 6/12 re Erin Callan stepping down, now a blog devoted to TGFD/TOGFD and their supportive “friend”)and this new Guy from Texas, all congratulating each other and snarling at the outside world, would exhaust me too. New weird detail. TGFD/TOGFD claims to own a business tied to construction. Up until now, TGFD/TOGFD was retired. TGFD/TOGFD also acquired a wife this past week, after months of salacious remarks about single women.
No, TGFD/TOGFD/TGFT/”friend”, all the criticism is not coming from one source.
@6:56=asswipe
asswipe@6:56,
“all congratulating each other”–> all congratulating one another.
Didn’t you study for the SAT in the 6th grade too?
Let LEH go to hell, it is full of morons.
@2:16am = blackout
I think anyone who has ever had any exposure to counterparty risk at an I-bank knows the ramifications of letting a major investment bank fail. I definitely think that the Fed knows that the street may try to get a little more reckless due to their assumption of a guaranteed backstop.
…but really think about it….
These banks are so inter-tangled that letting a large one go bankrupt is just too risky. The banks are like a loose piece of string on your shirt. You pull one end and the next thing you know the whole seam is coming undone.
I’ve worked in the back-office, middle-office and front-office at various times in my short career and I think that I have seen enough to be able to truly understand why it is the Fed could not let these banks fail. I think it is close to impossible to get a true understanding of what is going on at an I-bank if you just worked in the front-office, or just the middle, or just the back-office. Being exposed to all three gives you a better understanding of how these firms operate.
I know about the various types of exposure that these banks have with each other. I worked in counterparty risk for a year and I know how much trouble we would have been in if Bear or LEH fails. You just can’t risk it, ESPECIALLY in an election year!!
You Wall Street guys are like the Mafia. The government lets you fuck each other to some degree but when “civilians” get in the way of your financial debauchery, the government gets more interested in keeping you on the reservation. The Delaware contingent is correct in that if your models lose money you go find a new job. If your models cause civilians to lose money, the government creates new jobs to get on your ass.
Lehman’s access to the discount window is huge in staving off the kind of liquidity crisis that lead to the Bear Stearns collaspe. Also there are several fixed income shops that are partnering with Lehman to buy up Lehman debt, causing the market to trade tighter on technicals (it seems everytime there is a significant widening in Lehman spreads, Lehman is bidding for 250M each of their big issues across the curve).
This is a major issue for Lehman. If the value of their debt doesn’t continue to decline, they won’t be able to report that as earnings on their next 10Q!
@ 9:36 AM
Yes, we are like the Mafia.
And you, we are afraid, do not belong on this message board.
@11:53am = assgas
8:41
sounds like that comment by 11:53 applies to you, as well my dear sir (madame?). Stop on by again when you’ve got something even remotely substantive to contribute, kthnx!
Is the fed bailing out banks any different that the federal govmt bailing out people being squashed by their mortgages? It all sets a terrible precedent in what is suppose to be a free market economy…sliding ever closer to marxism. Healthcare for all, education for all(I’m not anti-education – just saying we have a lot of all inclusive programs), , bailouts for bad decisions (just pointing out be they companies or individual) increasing chatter of taking windfall profits. The government is advocating taking whatever risks you like – fear not the people will bear the burden of your choices if they go poorly, but only shareholders reap the benefits if the risks go well. Eventually there is a cost, and that is being passed on to everyone at the moment.
And guy from delaware – I’m sorry that the wall street crowd doesn’t measure up to your intellectual ivory tower of the clubs you own. But no one really cares who you’re takin down at the nursing home, enjoy your tapioca pudding.
Is the fed bailing out banks any different that the federal govmt bailing out people being squashed by their mortgages? It all sets a terrible precedent in what is suppose to be a free market economy…sliding ever closer to marxism. Healthcare for all, education for all(I’m not anti-education – just saying we have a lot of all inclusive programs), , bailouts for bad decisions (just pointing out be they companies or individual) increasing chatter of taking windfall profits. The government is advocating taking whatever risks you like – fear not the people will bear the burden of your choices if they go poorly, but only shareholders reap the benefits if the risks go well. Eventually there is a cost, and that is being passed on to everyone at the moment.
And guy from delaware – I’m sorry that the wall street crowd doesn’t measure up to your intellectual ivory tower of the clubs you own. But no one really cares who you’re takin down at the nursing home, enjoy your tapioca pudding.
All right, now that we have had the weekend to digest things a bit, let’s put them into proper perspective. First, the alarmists at CNBC – anxious to claim “I broke dat story yous guys”- beat a press release by two minutes and hyped the story. The market, after a premarket over-reaction, saw it for what it was – no news at all. First, the two were’t “fired” as they reported. They were moved to their prior roles in the bank with some fresh talent off the bench (BFD). Second, the market already had such a move baked into the stock price. Last but certainly not least, the thought that banks will take more risk because they view themselves as having a fed willing to anything to save them is downright stupid. This would invite over-regulation of the banks like they have never dreamed and they would seek to avoid at any price. The bottom line is that this “story” was little more than a media induced blowjob.
Don’t over-analyze the situation. The odds are against Lehman surviving beyond September. It’s just bad timing that no US commercial bank is in a position to take them over.
Deutsche seems to have their hands full trying to buy Deutsche Postbank and/or Citi’s German commercial bank operations. Furthermore, I doubt Deutsche’s supervisory board would risk their balance sheet to buy Lehman.
Like it or not, the Wall Street firms are going to have to live with a lot more regulations in the future. Their access to Fed funds via the term auction facility do come at a price. But I do question Paulson and Geithner’s concept of a single super-regulator to supervise all financial institutions. Such a body will be too cumbersome and unwieldy to respond quickly to situations.
Yes, I think we need to stop pointing fingers at Lehman saying they have a problem with their books. Everyone is having problem with their books and the amount of level 3 assets of almost all firms have risen since the last quarter or the end of 2007.
TOGFD@6:50PM,06/13…
Thanks for your comment. I’ll try to remember that I’m a guest on db. The “financial reversals” you think I’ve “suffered” are actually minor. More of an annoyance than anything else.
I don’t think my comments are “over the Top” as you say. I observe that whenever anyone says something that doesen’t agree with the db community’s belief system, that poster gets soundly trashed. BTW, I hate to say it, but you’re starting to sound like a wimp. What’s up with that “T_G_D(stealthily)”? That doesn’t sound like the TOGFD I know.
To the poster @6:56PM,06/13…
We (not Wall St) are “the outside world”, and the outside world doesn’t seem to have much good to say about what’s been going on in your neighborhood lately.
You must have OCD. I should have inserted the word “interest” between “business” and “is” in my post. People can be retired and still have an “interest” in a business.
I am married and have been for a number of years. Any of my ‘active work’ with the ladies stopped in ’85 when I began dating my wife. My ‘work’ now is more of the ‘passive’ kind. The “chicks of all ages” still do come on to me; they do have their fantasies. Who am I to deny them?
I think the “salacious” remarks I make about women include both single and married ones. The derogatory comments are reserved for the arrogant, high-handed chicks on Wall St (on db) who appear to believe that their own worth is measured only by their income, by their toys, and by how ‘hot’ they think they are. They are the sorry-ass ones I find particularly distasteful.
Personally, I do not want to be the subject of a db blog. I tried on this thread to have an on-topic dialog with StMarc, and I got attacked by one or more you “guest” posters. You made it about me, and then you whine.
Lastly, I’ll leave you with this. I think you’ll like it. I heard the expression a while ago, and now is a good time to share it…. Since you appear to believe that there now are 4 distinct personalities within 1 GFD, you may have my(our) permission to say that I(We) am(are) now “like an insane asylum with pants”.
It’s late; I’m turning in. We old fucks need to get some rest from time to time. Maybe I(We) will drop by later in the week.
The Guy from Delaware
p.s. FUNdamental@4:59PM, 06/15…
Your post was good until you decided to bring me into it. “Nursing Home & Tapioca Pudding”? HaHaHa. Dream on clown.
If the IBs are considered too big to fail, then they have a choice of heavy regulation or being broken into chunks that are small enough to fail. You can’t have government backing a (relatively) unregulated industry.
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