The news on Lehman

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.