Ever since the Federal Reserve arranged for the acquisition of Bear Stearns and opened the discount window to investment banks, the phrase moral hazard has been on everyone's lips. The idea is that by relieving Bear Stearns investors and creditors of the full cost of Bear's failure, the Fed encouraged more risky behavior.
Today Michael Lewis proposes a new kind of moral hazard created by this series of moves by the Fed and the Treasury. He says that the bailouts have led market participants to believe that they don't need to worry about the collapse of another investment bank because the government will step in. Where once Wall Street would have scrambled to prop up Lehman, as it did Long Term Capital Management, now it feels secure enough to watch Lehman go down.
People are enjoying its failure. The pleasure and interest the markets now take in seeing it fail now exceeds their pleasure and interest in seeing it survive.This is one of the many unintended little side effects of the government bailout of Bear Stearns Cos.: to greatly reduce the interest of the people who do business with Lehman Brothers in the survival of Lehman Brothers.
All those people whose affairs are intertwined with Lehman might have pressured them to handle their problems more briskly and intelligently -- and might also be trying to keep it afloat. The U.S. government has made it possible for them to instead stand back and watch with some detachment and even pleasure as Lehman collapses.
After all, the Federal Reserve will give them their money back, re-insure their credit defaults, take another pile of these distressed assets out of the market. And when the dust settles they can go in and poach Lehman's business and its smarter employees.
Lehman's stock is down another 40% this morning.
Joyous Loathing at Lehman Brothers' Collapse: Michael Lewis [Bloomberg]
Posted by guest , Sep 11, 2008 10:16AM
FIRST Fuckers
Oh and Substitute "WACHOVIA" for every instance of "LEHMAN in the article
Posted by blndebnker , Sep 11, 2008 10:16AM
This is sort of sickening to watch.
Posted by guest , Sep 11, 2008 10:23AM
@2
Are you kidding? I'm reveling
Posted by guest , Sep 11, 2008 10:24AM
options express is totally screwed today...any lawyers out there, you are going to have a field day, as these idiots are causing lots of people to lose money today
Posted by guest , Sep 11, 2008 10:24AM
anyone have the dealbreakers text tip number?
Posted by guest , Sep 11, 2008 10:24AM
Very interesting post Carney. I agree 100%.
Posted by guest , Sep 11, 2008 10:26AM
@3 - Charming. How miserable are you if you take joy in others' misery?
Posted by guest , Sep 11, 2008 10:26AM
Sickening! I'm 100% on the week and its only thursday. This is just like when soros broke the bank of england. every day I just take my profits and roll them over into bigger long vol positions. The after market volume yesterday in LEH was more than the volume for the whole day Monday. they're in a death spiral and ever time the circle the drain i make another 10%. They'll never make it to monday.
Posted by guest , Sep 11, 2008 10:27AM
@5-- db text line is 973-495-0177
Posted by guest , Sep 11, 2008 10:27AM
Bloomberg is dog shit as a news source, or for that mater over priced dog shit period.
Posted by guest , Sep 11, 2008 10:29AM
@2 absolutely!
LEH is done and that is sickening. What is worse is that it could have been avoided. Dick Fuld is primarely responsible as he has had 6 monthes to deal with this mess.
Both LEH and WM going down durning the week of 9/11 week........
Posted by guest , Sep 11, 2008 10:29AM
@8 - It's one thing to make trades and money based on what's going on in the market. It's another to cheer on the demise of a company and watch with glee as it sinks.
Posted by guest , Sep 11, 2008 10:31AM
Its official now.
GS buying LEH for $ 2bn
Checkout nakecapitalism.blogspot.com
Posted by guest , Sep 11, 2008 10:32AM
@ 8 -
You are absolutely right! OMG! You are exactly like Soros when he broke the bank of England! Keep telling yourself that.
Posted by guest , Sep 11, 2008 10:32AM
judging by his tabloid-esque kiss-and-tell book, Lewis seems to have a flair for melodrama.
Nonetheless, it's a thought-provoking rant. He's apparently grown up a little since the '80's.
Probably running out of money.
Posted by guest , Sep 11, 2008 10:34AM
@ 14 -- deep, belly-shaking laughter.
Thanks, reminds me that I need to put those new running shoes to work.
Posted by RAW DOG , Sep 11, 2008 10:36AM
@ blndebnker - Seriously, it truly is sickening. We have to do something. Perhaps if we pool our own funds together and buy out LEH ourselves, we can avert disaster. Market cap is at about $3B this morning; so I only need about $2.5B more to do this thing. Who's gonna help me? Let's do it.
Posted by guest , Sep 11, 2008 10:37AM
#8 here, yeah the options have been totally fubar because they listed new increments in leh last night. Net net i'm happy though cause when I went to bed last night I'm dreamed that there would be a $4.00 straddle on LEH and when I woke up this morning, my dreams had come true.
@#2 you should rethink your approach to the market, haven't you ever watched shark week? Once there's blood in water the sharks go on auto pilto and just start taking a bite out of anything that moves funny.
Posted by guest , Sep 11, 2008 10:38AM
To all the crybabies, this is capitalism. Sorry if you did not have the foresight to profit on LEH's misery. Take a hike boys.
Posted by guest , Sep 11, 2008 10:40AM
GS buying LEH for 2bio
GS buying LEH for 2bio
GS buying LEH for 2bio
GS buying LEH for 2bio
Posted by guest , Sep 11, 2008 10:42AM
How many Wal St. CEOs are still billionaires?
Jimmy, Dick are not; Sandy?
Posted by guest , Sep 11, 2008 10:43AM
@ 19, what you have described is not "capitalism," but an idiot's vaunting of base motivations.
"...Do you know what a Philistine is, Bob?"
Posted by guest , Sep 11, 2008 10:46AM
@ 18, part two: one of the most lucid posts ever on this esteemed forum.
Posted by guest , Sep 11, 2008 10:48AM
@22
Cash is cash. And I love the smell of it.
Bite me.
Posted by Anal_yst , Sep 11, 2008 10:51AM
@ 19
Intelligent capitalists understand that actions have consequences, and the secondary, tertiary, etc. The consequences of lehman going down the drain have the potential to be far more wide-spread, uncertain, and damaging than the all-in benefit of a few shorts making $ watching it die.
Sometimes, you have to take a step back and do some seriously thinking to balance the short vs. long-term benefits my friend
Posted by guest , Sep 11, 2008 10:56AM
@18 - I wasn't really referring so much to the profit being made off of the downfall. That much, as you allude to, is obligatory and not unfair. If I ran a book, I'd be doing the same exact thing. After all, we're not all in finance to make the world a better place.
I was more thinking of the people involved. After seeing the devastation that the BSC collapse had on the employees of the firm, I feel for the LEH guys that are waiting to get fired, etc. And the sickening part is that people are watching this going down, praying for them to tank, not just to make money but to see another one bite the dust. That to me is just sad.
Posted by guest , Sep 11, 2008 10:57AM
25 If it was GS or ML maybe, but LEH is a niche player, that does nothing that others don't do just as well. LEH RIP
Posted by blndebnker , Sep 11, 2008 10:58AM
BTW that was obviously me @26. Not sure how I got logged out but whatevs.
Posted by guest , Sep 11, 2008 11:00AM
@ 24 I love to watch dopes like you ruin everything their shadow touches.
Posted by guest , Sep 11, 2008 11:01AM
Since when has wall st balanced short vs. long term benefits. The bailout of LTCM did that, but what since then? Or maybe the general drop in the market is representative of the negative LT effects of the failure. That said, I hope the Gov't doesn't step in. They are even talking about bailing out the automakers w/ $50Bn.
Posted by guest , Sep 11, 2008 11:01AM
@ 26: an interesting collage of bad logic.
"We're not in finance to make the world a better place....I was thinking more of the people involved..."
You really don't see the contradiction?
Posted by guest , Sep 11, 2008 11:04AM
@ 8: George Soros and England, indeed.
One has to wonder at the clockwork destruction of legacy investment banks and at least entertain the possibility that someone might be 9-11'ing them.
Posted by guest , Sep 11, 2008 11:06AM
@ 29
LEH and WM are my BFFs this week.
Posted by guest , Sep 11, 2008 11:12AM
@ 33 oh you rule we're not worthy.
get a life, kid. a real one.
Posted by guest , Sep 11, 2008 11:12AM
@19, agreed, don't feel sorry for lehman.
The real idiot is Fuld, had six months to prevent a repeat of Bear Stearns.
Posted by guest , Sep 11, 2008 11:12AM
@19, agreed, don't feel sorry for lehman.
The real idiot is Fuld, had six months to prevent a repeat of Bear Stearns.
Posted by guest , Sep 11, 2008 11:13AM
@ 33 it wasn't meant as a validation of your delusions of grandeur.
Posted by guest , Sep 11, 2008 11:14AM
geez. how do you kids get jobs on wall street (presuming you do -- of course, you could all be busboys in japan or something) without knowing the very basics of what capitalism is?
Posted by FUNdamental , Sep 11, 2008 11:23AM
I don't buy the new moral hazard argument, most people I think were absolutely aware another bank could fail.... Even considered it likely.
And yeah you could make money on the collapse, but remember you can shear a sheep many times....but skin it only once. And it isn't good for the local economy, national economy or worldwide confidence in what is a global economy or the poor bastards that work there, mostly support staff and such who are screwed.
Posted by blndebnker , Sep 11, 2008 11:24AM
@31 - No I don't. You combined two distinctly different thoughts. In the former I was saying that we are all in this business to make money. That's our bottom line. At this moment, money can be made off the back of LEH and people are going to make those trades and I'm not going to argue that they necessarily shouldn't. However, that doesn't mean that just because we're making money we should be high-fiving each other and hooraying every dollar drop in LEH's stockprice. Especially because that delight isn't even necessarily from the money made but from the sick amusement of watching others go down.
If you glean pleasure from the suffering of the people that work for LEH, you are more than a little twisted.
Posted by guest , Sep 11, 2008 11:33AM
@ 40...just warped. too much time in the twighlite zone of investment banking.
Posted by blndebnker , Sep 11, 2008 11:40AM
@41 - That's a good point. This business does have a way of making even the most optimistic person a jaded son of a bitch.
Posted by guest , Sep 11, 2008 12:54PM
DAVID EINHORN JUST BLEW A LOAD IN ERIN CALLAN'S FACE.