Can Lehman be trusted with more leverage? Charles Morris, a lawyer and former banker who wrote “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash,” says that Lehman is using its new equity to re-up it’s leverage ratio in chase of double digit returns. The problem is that they don’t seem to have learned from their earlier failures, according to Morris.
“So why believe Lehman now?” Morris writes. “A couple of months ago, after all, Fuld was telling the world that Lehman didn’t need any more equity, only to find himself scrambling madly for new equity just before the quarter’s close to avoid joining Bear Stearns in the display rack of pickled corpses of former firms.”
Wall St. Still Hasn’t Learned [Washington Independent]
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leverage is like steroids and the banks are professional athletes.
why be a .240 hitter when you can take a little extra risk and hit .290?
the thought process of each is very similar. “If you get caught, do your penance and get back in the game.”
Lehman doesn’t learn anything. They just fire the messenger. Back in ’98
Lehman fired John Succo for saying the same thing:
“The trouble started when John Succo, trading manager at Lehman
Brothers’ equity derivatives volatility desk, agreed to speak at an
investment conference sponsored by Grant’s Interest Rate Observer.
After discussing the pricing of risk and the correlation between
equity derivatives and the underlying stock market for a while, Succo
was asked a question. “I don’t think my boss is here, so I’ll address
that,” he responded. “I don’t think that the people running our firm,
our equity floor, have any idea of the things that we actually do, of
how we…(audience laughter) I’m serious…of how we hedge, the
products that we’re involved with, the amount of risk we take or the
lack of risk we actually take.”
He went on to describe a 26-year-old derivatives trader at a big bank
who believed that his senior management’s understanding of the risks
at the institution was “probably off by a factor of 10.” “And I think
that’s probably pretty accurate. I think as I said before, management,
if you’re making money, kind of leaves you alone until there is a
crisis situation. And I don’t think that’s a way to run a firm.”
topset72