by Lawrence McDonald Info
Lawrence McDonald is a managing director of Pangea Capital Management and the cofounder of Convertbond.com. He was, until 2008, vice president of distressed debt and convertible securities trading at Lehman Brothers and wrote the bestselling A Colossal Failure of Common Sense.
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Exactly two years after the bank failure that triggered the economic meltdown, former Lehman exec Lawrence McDonald, author of the bestselling A Colossal Failure of Common Sense, shows how that day’s events cost taxpayers $60 billion—and a new round of headaches today.
Almost precisely two years to the day you're reading this, Richard Fuld sat back in his leather armchair on the 31st floor of the Lehman Brothers headquarters, off Times Square, dumbfounded by a game he had just played and lost. After 30 years on Wall Street, and countless games of high-stakes poker, often with billions on the line, Treasury Secretary Hank Paulson had called his bluff, leaving Fuld with a pathetic pair of pocket twos. After that, he became the snarling face of this financial crisis.
An employee of Lehman Brothers carries a box out of the company's headquarters building while dodging the media assembled outside September 15, 2008 in New York. (Chris Hondros / Getty Images) But more germane, those events led directly to the bailout of AIG, a twist of fate that is still creating headlines and headaches this very day. As reported in The Wall Street Journal and elsewhere, the U.S. is frantically trying to come up with a plan that will get taxpayers out of the insurance business, but that paradoxically will require the U.S. government to temporarily up its ownership stake past 90 percent. The government never wanted to own this much of AIG, or any other company, but it’s in a bad spot, and if they try—emphasis on try—to get their money back, that’s how much they’ll need to own. Getting rid of AIG of means owning more of it. That’s the bailout math.
Did it make more sense to lend AIG $180 billion when they have $60 billion in collateral, instead of lending $30 billion to save Lehman?
And it’s an equation that started during the most fateful week in the U.S. economy since October 1929. On September 15, 2008, Lehman Brothers was executed... bullet in the forehead. Roughly 25,000 people had their careers incinerated. To some, a lifetime of work. Down came the biggest bankruptcy in history—$660 billion—bigger than Enron, Worldcom, Adelphia, Chrysler, and General Motors combined. The 158-year old investment bank, where I once traded distressed bonds, ceased to exist.
Fuld had misjudged his man. Paulson had a couple aces in the hole, one on Park Avenue (J.P. Morgan’s Jamie Dimon), the other at 85 Broad Street (his former comrade, Goldman's Lloyd Blankfein). As a trader who had been in the action, taking big risks, I can tell you there is no better asset than a direct line to the trading floors of Goldman Sachs and J.P. Morgan. In the end, it was these powerful figures who gave Paulson the misguided confidence to shoot Lehman. Fed Chairman Ben Bernanke, Chris Cox, and Geithner were merely spectators.
They all should have known better. A Lehman Brothers executive I spoke to and know personally told the group, "you don't know what you're doing—you will unleash the forces of evil on the global financial markets." Bernanke, cleaning up for Paulson, claimed that Lehman Brothers lacked the sufficient collateral the Fed needed to continue lending to them: Lehman was under the modern equivalent of a bank run.
But then, on September 17, 2008, AIG needed bailing out, triggered by Lehman's demise. The Federal Reserve claimed that AIG had enough collateral to justify being saved, whereas Lehman didn't. Bernanke continued to make this claim last week, in his testimony to the Financial Crisis Inquiry Commission.
So let’s examine the math. Did it make more sense to lend AIG $180 billion when they had $60 billion in collateral, instead of lending $30 billion to save Lehman? Saving Lehman would at the very least have made the AIG bailout much less expensive. The Fed deliberately put the U.S. taxpayer on the hook for $120 billion. True AIG had “more” collateral than Lehman. But Lehman didn’t need $180 billion—it needed $30 billion.
The Fed chairman said an injection of public money would have meant that, "Lehman Brothers would [still] fail and would have saddled the taxpayer with tens of billions of dollars of losses." That is probably the worst lie since, I did not have sex with that woman...
By letting Lehman fail, they created a run on AIG. Lehman had over $400 billion in credit default swap contracts with AIG, and over $6 trillion with the world’s largest banks. The other part of the deception is the untold truth, both our Fed and Treasury did not have anywhere near the appropriate grasp of Lehman’s counterparty risk to banks around the world. They had an even poorer grasp of AIG’s credit default swap positions and what might happen to them if they let Lehman fail.
12 September 15, 2010 | 12:43pm Twitter Emails
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I call BS. Nice theory but it is filled with many assumptions and the fact is no one really knows what would have happened if they bailed out Lehman. The economy was already tanking by then and we would have ended up in a deep recession one way or another. With equall credibility to the author one could argue (and some economists have) that had we propped up Lehman we would have merely prolonged the time until the dam burst elsewhere and had an even more dramatic aftermath. The entire culture of these investment houses and banks betting money they can't cover then expecting the government to rescue them is sick and pathetic and the execs should be ashamed of themselves, but instead will spend the rest of their lives convinced (and trying to convince everyone else) that they were victims and that it would have been different if daddy had lent them the money to pay off their bad bets. My advise -- man up. Admit Lehman and its peers were acting unethically and with reckless disregard for the consequences and move on, hopefully with a commitment to act differently. But that is a pip dream of course. Most of these guys are already back at it.
And therein lies the bigger problem. Banks are back to doing business as usual and making money while the taxpayer gets screwed. The bailout was a bandaid on a horrendous problem that will eventually come around again and again.
I blame the politicians, of both parties in both Congress and the White House. Wall Street is like an animal acting on instict to kill and consume as much as possible. It is ridiculous to think it will ever self police or limit itself. It will always do as much as it can. The only possible way to control it would have been through law and the pols once again let themselves be bought or intimiated out of meaningful action.
Headline: Everyone else to blame but Lehman exec; so says former Lehman exec. Spare me.
These billions of dollars wasted by the USA tax payers is nothing compared to the rip off being perpetrated ( against our average Joe ) by the stinky USA Health Care Industry. M.D's,dentists,hospitals,insurance companies,big pharmaceuticals,et cetera had been ripping off our tax payers for more than 40 years.Very few of these medical crooks had been prosecuted.Why? Because our USA senators are health care insurance whores,et cetera. Insurance is a rip off,we do not need crooked middle men.We also do not need the hateful Republican KKK GOPiss Tea Party.These republicans wish to keep giving welfare to the filthy rich. If you want to make the rich richer,make sure you vote republican!The 20 million filthy rich are going to do their best to keep the other 300 million Americans heavily indebted,living wretched lives the rest of their lives. Shit sandwich with Kool-Aid sellers like Goldman Sachs,Lehman Brothers,AIG insurance crooks,Bernie Madoff and their whores ( USA politicians ) are the product of the GOPiss GOD G W Bush.
As long as the USA is a heaven for corrupted,unethical,crooked politicians,"leaders",et cetera.The USA will never see any economic improvements.This economic depression that we are experiencing right now is going to continue until the heavily indebted 300 million USA tax payers do something about the 20 million filthy rich that created this economic fraud.long live the GOPiss GOD.The GOD of the hateful Republican KKK GOPiss Tea Party! These crooks need to change their name to: "The party of the 20 million filthy rich" or " The party of the rich gets richer ".
Lehman Goldman JP Morgan Chase Genovese Gambino Columbo I'd say no difference but some get public guarantees Meanwhile the rest of the world is tired of the moral rot and decay enabled by the US government From Jesses Cafe: "China and Russia and some of the other developing nations have been proposing a reformulated SDR, with less US dollar content, a broader representation of currencies, and the inclusion of gold and silver, as a suitable replacement for the US dollar as the global reserve currency. The US and UK are opposing the SDR as replacement to the US dollar as the new global reserve currency. They prefer to delay and postpone the discussions, and to maintain the status quo for as long as is possible to support their primacy in the financial markets. Control of the money supply is a huge hand on the levers of financial and political power. It will be most interesting to see where the European Union comes out on this issue, especially in light of the recent drubbing that their banks have taken via dodgy dollar assets and a vicious dollar short squeeze, alleviated by a rescue from the Federal Reserve. It could have gone otherwise, and that provides things to think about. No one wishes to be at the mercy of a small group of unelected financial engineers who are closely aligned with an equally small set of Anglo-American banks operating with a somewhat opaque discretion. Or the goodwill of totalitarian governments who are acting aggressively from their own mercantilist self-interest for that matter. One hears things. A deal being offered to Germany by the financial interests, for example, as a counterbalance to sentiment for greater latitude and independence in the EU. The lines of discussion move, and sometimes blur. Currency wars are the continuation of diplomacy, and possibly a revival of the cold war, by other means, to paraphrase Clausewitz. And a chilling fog is rolling over the landscape. This is what the timeless metal has been telling us, as it sounds an historic warning. This is just the latest episode in a long unfolding macro change I have been calling Currency Wars after the Chinese best seller authored by Song Hongbing in 2007. I viewed it as the definitive spike in the theory of The End of History by Fukuyama. It will continue to proceed slowly, at least for now, but such events tend to accelerate and sometimes dramatically as they progress. However the longer term implications for a change to the de facto Bretton Woods arrangement in place since Nixon closed the gold window in 1971, are enormous and yet little remarked yet by conventional economists, who too often prefer to glare at photons, gaping in the light. It has all the hallmarks of a classic conflict yet unfolding. Rather than standing fast on an unsustainable status quo, as noted in Triffin's Dilemma, that serves the special interests of a wealthy few, the US might be well served to reform its banks, and balance its economy between service and industry, and stand once again for independent freedom and the common good, rather than narrow power and greed of the monied interests, and their willing tools and frivolous assistants. That is to trust in the wisdom and altruism of a people and their leaders who have of late shown a greater propensity to greed, deceit, and self-destruction. And so I say we must be in God's hands, because I recoil from Caesar's deathly grasp. Some worry about deflation and inflation. Those outcomes are both hedged easily enough. I am more concerned about the next global holocaust of human destruction, and the bonfire of the vanities yet to come. That is history"
Isn't it ironic that Wall Street raised the scare tactic that more controls would make them uncompetitive with Europe yet Europe had the balls to put more controls in place than we did...
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