Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

No Bailout for Lehman as Fed Awakens to Bond Market Crash Risk

News_Letter / Credit Crisis 2008 Sep 18, 2008 - 03:32 AM GMT

By: NewsLetter

News_Letter The Market Oracle Newsletter September 14th , 2008 Issue #25 Vol. 2

Dear Reader,

My Fridays commentary closed with expectations that the weekend would see the formerly worlds fourth largest investment bank, Lehman's Brothers taken over by one or a consortium of bidders at mere peanuts of its former valuation further sweetened by a healthy subsidy from the US government / central bank. However the noises emanating from Hank Paulson at the US Treasury department over the weekend of having drawn a line against an effective bailout of the bankrupt investment bank, this will not live up to bidder expectations of providing tens of billions of tax payers money so as to enable a relatively risk free takeover by other banks, this therefore results in suitors in advanced talks such as Barclays now declaring their withdrawal from a possible weekend bid for the bank and indicates that Lehman's is now heading directly towards bankruptcy.


The Market Oracle Newsletter
September 14th , 2008            Issue #25 Vol. 2

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Best Analysis

No Bailout for Lehman as Fed Awakens to Bond Market Crash Risk


Dear Reader,

My Fridays commentary closed with expectations that the weekend would see the formerly worlds fourth largest investment bank, Lehman's Brothers taken over by one or a consortium of bidders at mere peanuts of its former valuation further sweetened by a healthy subsidy from the US government / central bank. However the noises emanating from Hank Paulson at the US Treasury department over the weekend of having drawn a line against an effective bailout of the bankrupt investment bank, this will not live up to bidder expectations of providing tens of billions of tax payers money so as to enable a relatively risk free takeover by other banks, this therefore results in suitors in advanced talks such as Barclays now declaring their withdrawal from a possible weekend bid for the bank and indicates that Lehman's is now heading directly towards bankruptcy.

Lehman's which survived the 1929 crash, survived Sept 11th (having offices in the World Trade Center), was taken down by its exposure to Tulip backed securities through huge positions in the over the counter derivatives market at huge leverage, the bank has been teetering on the brink since March this year following Bear Stearns collapse. Its decimated stock price having lost some 94% of its value reflects the banks true financial state as it prepares to disappear into the history books.

However the bank is not alone as competing banks right across the globe have their own derivatives and tulip backed black holes to contend with, comprising of assets originally booked at several hundreds of billions with true real market valuations of perhaps less than 30%, therefore the a stream of continuing huge losses amongst virtually all large financial institutions on a quarter to quarter basis claiming more bankruptcies in the future.

US Treasury Drawing a Line?

After the huge unprecedented bailout and de facto nationalisation of Fannie Mae and Freddie Mac, that effectively saw the US take on and give Treasury Bond status to $5 trillion of Fannie and Freddie debt so as to prevent foreign investor panic, and therefore in the process devaluing the whole US Treasury Bond Market with the likelihood that the eventual losses to the tax payer being far above the $25 billion indicated at the time, with the UK Northern Rock example implying losses of as high as $500 billions. In the interests of self preservation the US Treasury said NO., We are NOT going to risk the collapse of the US Treasury Bond market as foreign investors reappraise the credit worthiness of US Treasury Bonds and therefore the US dollar in the face of a stream of bailouts of $30+billion dollars per week!.

However, this decision would not have been taken lightly, as it now leaves the financial markets facing a huge crisis due to Lehman's now being in default on its derivatives exposures which impacts on its counter parties. Lehman exposure is put at over $200 billions which now risks a cascade of failures rippling throughout the financial markets as the financial system adjusts to the increased risk of default amongst Lehman's counter parties.

Is this the End of Bailouts ?

I doubt it, as the apparent action NOT to bailout Lehman's is actually a panic move, under normal circumstances the US Treasury and Fed WOULD bailout Lehman's but the in the current climate of the likelihood that the US government will have to start bailing out other distressed industries in some shape or form such as airlines, insurers and auto manufacturers, though probably not going so far as to nationalize them but rather to make huge loans available to corporations much as the Japanese government did during the early 1990's which resulted in Japans Great Depression.

Already it is being reported that Bank of America is eagerly sniffing around Merrill Lynch as a better candidate to takeover following Lehman's bankruptcy, will they get a sweetener form the US Fed?, despite announcements of no tax payers money, they probably will.

Whilst the focus is on the US, the bailouts and unprecedented loans being made available to financial intuitions is not just limited to the US Fed, Central banks right across the globe will be flooding the markets Monday in an attempt to prevent a cascade of failures amongst banks that have already lost their capital bases over the last 12 months and therefore are teetering over the edge.

Meanwhile the architect of the whole crisis through a series of blunders which includes cutting and keeping US Interest at 1% for several years and therefore igniting the derivatives bubble as investors and financial institutions took on far more risk so as to generate returns, was again doing the rounds on US media such as the ABC network, stating "We will see other major financial firms fail, but it did not need to be a problem. It depends on how it is handled and how the liquidations take place, And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

What Does this Mean for Investments ?

The short-term response will be an immediate bloodbath on the equity markets Monday morning, with asian markets already sharply lower in the order of 4%, will we witness a crash ? Probably a crashette in the region of 4 to 5% , that more importantly threatening a trend towards a possible break of the July lows right across the worlds stock markets, once those support levels go then that will signal the NEXT LEG of the STOCKS BEAR MARKET, as both investors and deleveraging distressed financial's continue to liquidate assets in the face of increased counter party risk and potential losses.

Expect scared money to flow into traditional safe havens such as gold and precious metals, however the problem with the US Dollar as a safe haven is the risks associated by a potential stream of bailouts, nevertheless as the worlds other economies continue to crumble the US Dollar will be seen as a relative safe haven of sorts.

In conclusion, we are witnessing panic moves by the US government and worlds central banks on literally an hourly basis in the face of a potential wave of bank failures as I have pointed out several times over the last 6 months that most of the big western worlds banks are bankrupt, insolvent, and the only thing thing that will keep them afloat is a flood of tax payers money with all of the economic consequences associated with running huge budget deficits at the same time as the credit markets contract, which implies economic depression.

Monday Morning Update -

  • Lehman said it intends to file for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.
  • Bank of America buys Merrill Lynch for $29 a share at a value of $50 billion. As Merrill rushed to prevent itself following Lehman's path to bankruptcy.

Our friends at Elliott Wave International have kindly made available for FREE to our readership their The Most Important Investment Report You'll Read in 2008. which covers the credit crisis and stocks bear market.

Your analyst watching the tip of the credit crisis ice-berg.

Nadeem Walayat,
Editor of The Market Oracle

For more in depth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

Subscription

You're receiving this Email because you've registered with our website.

How to Subscribe

Click here to register and get our FREE Newsletter

Forward a Message to Someone [FORWARD]

To update your preferences and access the Newsletter archive [PREFERENCES]

How to Unsubscribe - [UNSUBSCRIBE]

 

About: The Market Oracle Newsletter


The Market Oracle is a FREE Financial Markets Forecasting & Analysis Newsletter and online publication.
(c) 2005-2008 MarketOracle.co.uk (Market Oracle Ltd) - The Market Oracle asserts copyright on all articles authored by our editorial team. Any and all information provided within this newsletter is for general information purposes only and Market Oracle do not warrant the accuracy, timeliness or suitability of any information provided in this newsletter. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We recommend that independent professional advice is obtained before you make any investment or trading decisions. ( Market Oracle Ltd , Registered in England and Wales, Company no 6387055. Registered office: 226 Darnall Road, Sheffield S9 5AN , UK )

Terms of Use | Privacy Policy

Copyright 2008 MarketOracle.co.uk

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in