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The news on Lehman

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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 11:30
pelihu wrote:
The assertion that this (or any other) crisis or shock was foreseeable is complete and utter horseshit. There are two sides to every trade, and whatever level a market is at at any given point is the fair value based on available information. There's smart money all over the street, and the Tuesday Morning Quarterbacking of assigning blame in hindsight is just plain crap. If people knew trouble was coming they wouldn't have thrown good money and their firms' good names in the pile.

Let's not forget that while the big banks are the poster children of the problem, main street America was all too happy to buy homes on easy credit, max out home equity loans and lines of credit to support their own lifestyles. Don't forget, the biggest driver of the economy, through the tech boom and the LBO boom has been personal spending. Everyday people. The banks are easy targets, but people shouldn't complain that their own wealth is being used to back-stop the banks; a key reason they have personal wealth is that they rode the wave all the way up.

Calling for more regulation? Gonna have to put forth a better argument than that.


While I'm not an advocate of arm chair quaterbacking or assigning blame just for the sake of it, I don't think assertion that some of the problems were having were forseeable is horseshit. And yes, main street America was happy to but homes on credit and then refinance them because they being told the value of their houses were appreciating by 20% a year.

I remember taking an appraisal class a couple years back and my instructor was telling me how you couldn't do an appraisal to early because if you spent a couple of months negotiating and closing the home price could have appreciated 3-4% in that time frame. In most cases were talking about an extra $10-12,000 in a matter of months. Houses were going up 12% a year easily.

I can't think of any job where your salary increases 12% year over year. It doesn't take a rocket scientist to see that eventually were going to need a pretty big correction. So while $4/gal gas wasn't foreseeable, a correction of 20% house price gains year over year was. I think you're giving the average Joe far to much credit. If banks let them, most people would always take out more credit than they can afford. The person lending the money should be more responsible than the person receiving it. Especially considering this is not what the average Joe does for a living. An "expert" tells them this is what their house is worth today and it's going up in the near future and a bank is willing to lend them the money without throughly checking the financial status. Worse case scenario for the borrower is that they ruin their credit, worse case scenario for a lender is that they lose their lively hood.

So why would people who saw this coming still throw "good money and their firms' good names in the pile". I can give you a one word answer. Greed. Plenty of people did deals that they knew were not in the best long term interest of their firm. But it made them good money now, and they weren't sure when it would come back to bite them. Or if it would ever come back to bite them at all. After all not everyone at a bank is looking out for the strategic long term vision of the company. If they have a good 4 year run and make money who cares if someone else gets left holding the bag.

I think it's obvious that without the proper regulation most people will push the limits until it breaks. Now what amount of regulation is "proper", I don't know. But I think we can all agree that giving out hundreds of thousands of dollars for mortgages with out any down payment and little to no checking of their financial situation isn't it.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 12:23
gixxer1000 wrote:
pelihu wrote:
The assertion that this (or any other) crisis or shock was foreseeable is complete and utter horseshit. There are two sides to every trade, and whatever level a market is at at any given point is the fair value based on available information. There's smart money all over the street, and the Tuesday Morning Quarterbacking of assigning blame in hindsight is just plain crap. If people knew trouble was coming they wouldn't have thrown good money and their firms' good names in the pile.

Let's not forget that while the big banks are the poster children of the problem, main street America was all too happy to buy homes on easy credit, max out home equity loans and lines of credit to support their own lifestyles. Don't forget, the biggest driver of the economy, through the tech boom and the LBO boom has been personal spending. Everyday people. The banks are easy targets, but people shouldn't complain that their own wealth is being used to back-stop the banks; a key reason they have personal wealth is that they rode the wave all the way up.

Calling for more regulation? Gonna have to put forth a better argument than that.


While I'm not an advocate of arm chair quaterbacking or assigning blame just for the sake of it, I don't think assertion that some of the problems were having were forseeable is horseshit. And yes, main street America was happy to but homes on credit and then refinance them because they being told the value of their houses were appreciating by 20% a year.

I remember taking an appraisal class a couple years back and my instructor was telling me how you couldn't do an appraisal to early because if you spent a couple of months negotiating and closing the home price could have appreciated 3-4% in that time frame. In most cases were talking about an extra $10-12,000 in a matter of months. Houses were going up 12% a year easily.

I can't think of any job where your salary increases 12% year over year. It doesn't take a rocket scientist to see that eventually were going to need a pretty big correction. So while $4/gal gas wasn't foreseeable, a correction of 20% house price gains year over year was. I think you're giving the average Joe far to much credit. If banks let them, most people would always take out more credit than they can afford. The person lending the money should be more responsible than the person receiving it. Especially considering this is not what the average Joe does for a living. An "expert" tells them this is what their house is worth today and it's going up in the near future and a bank is willing to lend them the money without throughly checking the financial status. Worse case scenario for the borrower is that they ruin their credit, worse case scenario for a lender is that they lose their lively hood.

So why would people who saw this coming still throw "good money and their firms' good names in the pile". I can give you a one word answer. Greed. Plenty of people did deals that they knew were not in the best long term interest of their firm. But it made them good money now, and they weren't sure when it would come back to bite them. Or if it would ever come back to bite them at all. After all not everyone at a bank is looking out for the strategic long term vision of the company. If they have a good 4 year run and make money who cares if someone else gets left holding the bag.

I think it's obvious that without the proper regulation most people will push the limits until it breaks. Now what amount of regulation is "proper", I don't know. But I think we can all agree that giving out hundreds of thousands of dollars for mortgages with out any down payment and little to no checking of their financial situation isn't it.


While I usually agree with Pelihu - who is probably my favourite poster - I'm 100% with Gixxer here.

When you mention that whatever level a market is at at any given point is the fair value based on available information, now we both know that it is not true (even though markets are very often pretty efficient). If we have learned anything from the latest financial meltdowns, it's that markets sometimes go crazy, just because people are convinced that whatever the price they will buy something, there will always be somebody to buy it for more (the famous Castle-in-the-Air Theory). Just look at the internet bubble.

I mean, come on: who in his right state of mind could think that the expected yearly price increases of houses were sustainable? It was a classic speculative bubble, it's nothing new: it happened centuries ago with the tulips in Holland, it happens today again in another form. Smart people have fallen for this trap before, and smart people will still continue to fall for this trap. And as usual, all this was driven by greed - high bonuses combined with no major negative consequences (getting fired is the worst that could happen, a small risk in comparison with the massive bonuses one could earn).

Everyday people bought houses because they weren't able to read the fine print: now they have to surrender their houses. Again, this was driven by greed, fueled by so-called "experts" as Gixxer puts it so well.

Finally, concerning regulation, I honestly don't see how we can avoid it: a normal company is allowed to take massive risks, only to go bankrupt later on. It's the shareholders' problem (I won't even talk about employees made redundant). However, when companies have the potential to put in peril the whole economy by going bankrupt, they shouldn't be allowed to do whatever they want. That's why we have the Basel convention for example.

I really don't see how we can avoid more regulation in this case. The banks have simply been too greedy because they could do whatever they wanted; this cannot go on IMO.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 13:52
I can definitely agree that many people were predicting a bubble in the housing market, and that at any point, one could argue that there are people saying that any strong bull market will correct. It will; the market cannot beat historical growth rates forever (unless there's been a fundamental shift in the markets, which many people were arguing not more than a year ago).

What nobody (and I mean NOBODY) could foresee was how widely the damage would spread. Markets seized up last summer, and by last fall (that's fall 2007), many people believed the the worst was over. After Citi, Merrill and UBS took huge mark-downs late last fall, a lot of people believe that those events marked the bottom. When Bear collapsed in March, a lot of people thought that was market capitulation. Lehman lost 50% in one day back in March (intra-day), and by the start of the summer the stock price had recovered almost all of it. People didn't rush back into Lehman stock at that point because it was obvious Lehman would go to zero within 6 months. Dick Fuld didn't take the stage at his annual meeting (April I think) and declare that the worst of the market correction was behind us just to make himself look silly.

In some parts of California, housing prices went up 20% a year for 5 straight years (I was in on about 3.5 years of that); but the housing correction in many parts of California has been mild, perhaps 20-30% off peaks, or about a year of growth. Leading up to recent weeks, most of the big banking stocks have lost ten years of growth - ten! That's back to the early days of the internet boom, then bust. So, if the point is that many people saw well in advance that there would be a market correction in the housing market, I do agree with that. But nobody thought that a some boom years in the housing market would lead to the bust in the overall economy, taking major investment banks down with it.

It's much different to say that we were due for a correction in housing (yes, we were definitely due), and to say that anyone could have foreseen the devastation. Meridith Whitney was just on CNBC saying that in her wildest dreams she didn't imagine that the problems in 2007 would lead to what we've seen in recent months - and her views on the market are some of the most influential around these days. The reality is that regulation wouldn't have changed much because nobody saw this coming - not to this extent. Regulation is very much a reactionary tool, generally over-reactionary, but I don't think regulation works well to prevent market situations that haven't happened before. You can generalize and say they market corrected here, here and here, so they could have stopped it, but that's just not true. Different market conditions, different circumstances.

Regulations are great for preventing another savings and loan crisis (only a dozen or say bank failures so far this time, compared with several thousand in the S&L crisis), but regulations are a reactionary tool. Without a doubt, regulations will be implemented to prevent restrict leverage levels in the future, but market participants (the banks) would know to do that anyway. That's why Merrill rushed into BofA's arms, because it's clear the funding model is broken, and that they would be next. They didn't need regulators to tell them that. Yes, regulators must react, but suggesting that simple things could have been done to prevent the current crisis is severely understating the historical nature of events. Decades from now people will still be talking about the day that Lehman & Merrill died, and the year that independent broker/dealer model was destroyed.

Do not be surprised to see Morgan with a partner in the coming months. I think that's all but inevitable now. And Goldman, they might need to buy a deposit base of their own as well. Wachovia is looking pretty cheap these days.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 14:29
The way I see it, it comes down to :
1. Greed
2. Financial instruments so complex that no one has a clue how far the sb-prime contagion has spread
3. (Paraphrasing Michael Lewis, Bloomberg): Wall street CEOs/leaders do not have no clue about what their traders do because it is too complex even for their understading; Citibanks Rubin did not know what liquidity puts were! They ride along becuase they do not want to lose their highest earners and also because everyone else seems to be doing it
4. Did I say greed? ;)

Regarding regulation:
It always seems to be the case of coming up with lock after the horse has already bolted the barn..only for the horse to find a new way out in the future.

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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 14:37
pelihu wrote:
What nobody (and I mean NOBODY) could foresee was how widely the damage would spread. Markets seized up last summer, and by last fall (that's fall 2007), many people believed the the worst was over.


Apparently, you aren't familiar with Jim Sinclair nor Peter Schiff.

They have predicted nearly everything that has come to pass since at least 3 years ago.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 15:19
Was it Buffett or Soros who called derivatives the financial "weapons of mass destruction" ages ago?

trader1 wrote:
pelihu wrote:
What nobody (and I mean NOBODY) could foresee was how widely the damage would spread. Markets seized up last summer, and by last fall (that's fall 2007), many people believed the the worst was over.


Apparently, you aren't familiar with Jim Sinclair nor Peter Schiff.

They have predicted nearly everything that has come to pass since at least 3 years ago.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 15:48
bsd_lover wrote:
Was it Buffett or Soros who called derivatives the financial "weapons of mass destruction" ages ago?

trader1 wrote:
pelihu wrote:
What nobody (and I mean NOBODY) could foresee was how widely the damage would spread. Markets seized up last summer, and by last fall (that's fall 2007), many people believed the the worst was over.


Apparently, you aren't familiar with Jim Sinclair nor Peter Schiff.

They have predicted nearly everything that has come to pass since at least 3 years ago.


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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 16:21
"What nobody (and I mean NOBODY) could foresee was how widely the damage would spread."

I think that is the whole point. The market was filled with a lot of liquidity that wasn't really there due to hundreds of billions of dollars of mortgage backed securities that banks knew were garbage but kept moving because they were making money now. Once that liquidity was exposed and evaporated all of the other risky securities that were dependent come into question and along with high fuel prices now everything is down the drain.

If Lehman new it would get this bad would they have acted differently, yes. They gambled and lost. But some things you shouldn't be able to gamble with.

I could start smoking weed and never foresee that it would leave to me a doped out fiend. I know it's wrong but I'll just have fun with all my other pothead friends who seem to function OK. But smoking week could lead to popping pills which could lead to doing coke which leads to doing crack and before you know it I'm drugged out Dirk Diggler style in a truck with a man......never mind. And all the while my mothers on TV saying she never could have foreseen that this would happen.

All the more reason to regulate and restrict the behavior.

"Regulation is very much a reactionary tool, generally over-reactionary"

I agree. I'm not simply calling for more regulation, I'm calling for smarter regulation. Let's simplify SOX so were not at a disadvantaged with foreign firms.

"Meridith Whitney was just on CNBC saying that in her wildest dreams she didn't imagine that the problems in 2007 would lead to what we've seen in recent months - and her views on the market are some of the most influential around these days."

She also said that she didn't know "How we get out of this without government intervention". So the government can't regulate an industry but they can bail them out. If your business is so vital to our economy that if you fail the government needs to step in then the government needs to lay down some ground rules to protect their (our) interest.

Heck Mudd and Syron were not only making ridiculous amounts of money at Freddie and Fannie but were also expecting $24 million on the way out the door! These CEO's get paid millions of dollars because they argue that wealth is created from their decisions. If so how can anyone in any of these companies justify their salaries for the past couple of years. I make millions from bad decisions and when the business fails I walk away or the government bails me out? Sign me up! But I digress.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 16:42
I remember this being posted earlier but here is my "layman's" view of the situation.

http://docs.google.com/TeamPresent?doci ... true&pli=1
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 18:27
"I'm calling for smarter regulation." - Of course we are talking about the government here, so smart regulation really can't exist. I would argue that it is impossible for outside stakeholders to properly govern an investment bank. Corporate governance simply can't exist when even the CEO doesn't understand his business. The financial products are just too complex for any normal investor to understand.

In place of a traditional corporate structure, I would say it might be prudent to go back to the private partnership-ownership framework that was common for most of these firms up until the last two decades. It really wasn't until these companies went public and gained access to huge amounts of capital that we began to have tremendous problems with the banks. Yes, Drexel went bust in 1990, but that had as much to do with the criminal problems as it did with the firm itself (I personally think they may have been able to ride out the junk bond storm). When firms began prop trading, they essentially went beyond the scope of current corporate governance standards and it became almost impossible to monitor these firms. I would argue that private equity and hedge funds are better self-regulators than the investment banks are now. The owners of these firms show better restraint and have a better handle on their business essentially doing the same thing as I-Banks. While hedge funds and PE firms do go bust, you really don't hear about them causing the 'moral hazard' the way you did with Bear Stearns. And don't bring up Long-Term because was as much the major banks fault as it was LTCM's. While not all financial firms show great restraint, either do businesses in any other industry.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 18:34
For those of you that think forecasting this was horseballooney, I send you to:

http://finance.yahoo.com/tech-ticker/ar ... ,JPM,BAC,C

Note the date. July 22.

BTW, you should all be reading Roubini.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 19:15
rhyme wrote:
For those of you that think forecasting this was horseballooney, I send you to:

http://finance.yahoo.com/tech-ticker/ar ... ,JPM,BAC,C

Note the date. July 22.

BTW, you should all be reading Roubini.


Very interesting article, thanks for posting!
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 19:16
gixxer1000 wrote:
I remember this being posted earlier but here is my "layman's" view of the situation.

http://docs.google.com/TeamPresent?doci ... true&pli=1


Famous, hilarious and so true! :-D
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 20:01
Today during a part of our orientation, we had a Finance professor explaining some courses of the curriculum, he started saying:
"As you may notice, we have 2 major sub-concentration, one is for those who want to go to Investment, Portfolio and Risk management - also called sometimes as Capital Markets. The second I might as well not spend your time talking about as there are no jobs available, people call this sub-concentration Corporate Finance, and those who studied it used to be called Investment-Bankers." :shock:

Then, he said out loud: "For those who want to change careers to IB it's going to be tough, and my advise is not to do so, but as everybody says here: You know You best." :shock: :shock: :shock:

I didn't know if I was supposed to laugh or cry. But it's true, it's going to be HARD, extremely HARD for those seeking banking.
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 20:28
kwam wrote:
I didn't know if I was supposed to laugh or cry. But it's true, it's going to be HARD, extremely HARD for those seeking banking.


For how long do you guys think? Forget it until class of 2011, 2012, 2015...? Kwam, you're class of 2010 or 2009?
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Re: The news on Lehman [#permalink] New post 15 Sep 2008, 22:29
rhyme wrote:
For those of you that think forecasting this was horseballooney, I send you to:

http://finance.yahoo.com/tech-ticker/ar ... ,JPM,BAC,C

Note the date. July 22.

BTW, you should all be reading Roubini.


Jim Sinclair from July 2007:

Derivatives Dirty Little Secrets Revealed
http://www.jsmineset.com/ARhome.asp?VAf ... nks&UArts=

August 2007:

The Big Kahuna: OTC Derivatives Begin Full Blown Meltdown
http://www.jsmineset.com/ARhome.asp?VAf ... nks&UArts=

Next Derivative To Implode Has Close Call Last Week
http://www.jsmineset.com/ARhome.asp?VAf ... nks&UArts=

September 2007:

Prayers Are All That Keep The OTC Firestorm From Exploding Into The Limelight
http://www.jsmineset.com/ARhome.asp?VAf ... nks&UArts=

October 2007:

A US Recession Is Undeniable
http://www.jsmineset.com/ARhome.asp?VAf ... nks&UArts=

This Is It!
http://www.jsmineset.com/ARhome.asp?VAf ... nks&UArts=
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Re: The news on Lehman [#permalink] New post 16 Sep 2008, 00:10
I am with Pelihu here, by the beginning of 2008 with the hige write-offs everybody thought the worst was.

Roubini has a point, but the article was out on July 22, 2008, not so much time ago.

On calling for more regulation, I think Pelihu's views are mirrored by the (always excellent) Tyler Cowen in yesterday's NYT here.

We take a look to the powerhouses (they were incredibly profiltable) of the '80s, many of them do not exist anymore (Solomon, Drexel, Dean Witter to name a few). Wall Street has not starved in the meantime, has it?

I don't think the outlook for class of '11 looks bleak in IB. It might take a little more balls, a little more research as the market will be more fragmented, a little more entrepreneurial spirit. That would probably only differentiate the payoff between smart people and herd people, and I think many of the people here are on the good side.
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Re: The news on Lehman [#permalink] New post 16 Sep 2008, 00:50
Paradosso wrote:
I am with Pelihu here, by the beginning of 2008 with the hige write-offs everybody thought the worst was.

Roubini has a point, but the article was out on July 22, 2008, not so much time ago.



That's BS. You need to re-analyze your sources of financial market information.

If you've been reading people like Sinclair and Schiff, just to name a few, you could have seen this all coming when the first tremors shook the financial system in the form of the sub-prime fallout. Even Prof. Stiglitz of CBS has been reiterating how deep this financial crisis could get, and he certainly wasn't declaring the worst was behind us.
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Re: The news on Lehman [#permalink] New post 16 Sep 2008, 01:16
trader,

while I have not read Sinclair or Schiff (I listened to the pianist, though) and I cannot comment on them, I believe that you can always find someone who saw it all in advance, given that everybody has a say these days.

Yet it is safe to say that the consensus, after the write-offs (especially UBS's) and major houses losing 25-50% of their value, was that the market was to stabilize.

Besides, yesterday the Dow lost much less that was expected, considering $600B to be unwinded by Lehman. I hear about '31 a lot, but it seems to me this does not even come close to 10/19/87.
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Re: The news on Lehman [#permalink] New post 16 Sep 2008, 04:55
Schiff is known as Dr. Doom. He predicts we will always be in recession. Even a broken clock is right twice a day.
Re: The news on Lehman   [#permalink] 16 Sep 2008, 04:55
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Lehman Bankruptcy? Bank of America / Merrill Lynch merger? solaris1 11 14 Sep 2008, 13:19
Lehman reports record loss kwam 5 09 Jun 2008, 05:51
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