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Sept. 16, 2011, 12:01 a.m. EDT
By Howard Gold
NEW YORK (MarketWatch) "” Three years ago, the House of Lehman collapsed like a house of cards. And if you thought the original was scary, just wait until Lehman II comes to a theater near you "” in IMAX 3D with digital surround sound.
That's the view of sober-minded Canadian strategist and money manager John Stephenson, senior vice president of First Asset Management in Toronto.
David Wessel and Charles Forelle discuss how five central banks are moving to inject dollars into the European banking system, as fears of a sovereign debt crisis mount.
He predicts a new, Lehman-like financial crisis in the next six to 12 months, only this time involving the debt of governments and European banks.
He thinks it could drive stocks much lower, to levels at which they traded, well, just after the collapse of Lehman and AIG in fall 2008.
"When it happens, it's going to happen fast, and it's going to be ugly and very deep," he told me in a telephone interview, adding that he expects it to be "worse than the last crisis. Last time around, the governments had some room to bail people out. They don't have that capacity [now]."
Stephenson isn't well-known in the United States, but I find him smart and credible. He's been named one of the 50 best money managers in Canada and is steeped in Toronto's conservative Bay Street culture.
Other famous investors agree with him. Investing giant George Soros, for one, said: "This crisis has the potential to be a lot worse than Lehman Brothers."
Read Jim Jubak's take on preparing for the next crash on MoneyShow.com.
Taking a page from the work of Carmen Reinhart and Kenneth Rogoff, Stephenson says the financial crisis first hit the private sector and then moved to the public arena as governments bailed out the banks to "save" the economy.
"A buildup in government debt has been a defining characteristic of the aftermath of banking crises for over a century, " wrote Reinhart and Rogoff in their 2011 paper "A Decade of Debt." "For the countries with systemic financial crises and/or sovereign-debt problems, average debt levels are up by about 134%."
That puts a huge burden on taxpayers and makes the creditworthiness of sovereign debt shakier. "You've had a transfer of risk to governments," Stephenson said. "The average citizen wonders why they're going to have to suffer for someone else's mistake."
Indeed they do, especially Germans and other northern Europeans who balk at helping countries like Greece, which they see as freeloaders. "Politically the Germans have no interest in bailing people out," Stephenson said. That puts elected officials like Chancellor Angela Merkel on the spot.
Merkel is committed to keeping the euro zone together but she's unpopular and her ruling coalition is strained to the breaking point. So she and other European leaders have consistently been behind the curve, favoring one short-term fix after another rather than telling their electorates what they really think needs to be done. (She and French President Nicolas Sarkozy just announced yet another deal they say will keep Greece from defaulting, causing markets to rally Thursday.)
In retrospect the much-reviled TARP here in the U.S. and the subsequent stress tests did put our banks in, well, less bad shape than their European counterparts.
"The U.S. has been more proactive," Stephenson told me."In 2008-2009, U.S. banks started issuing equity like it was going out of style. European banks never took the opportunity to recapitalize."
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