American Investment Banking on the Ropes - Lehman / Citigroup etc. - the 8.5 trillion Bailout

It is expected that Lehmans Brothers will declare bankruptcy. The Wall Street Journal has reported that there has been Sunday trading in the attempt to limit potential damage across the investment banking sector.

As word that a Barclays deal was off filtered across Wall Street, credit derivative traders scrambled to unwind their outstanding contracts with Lehman and shift their positions to other banks. CDS traders at many Wall Street firms were told to come to work immediately. Costs of investment protection for other banks are shooting up.

The Wall Street Journal says "A disorderly unwind of Lehman's derivatives trades is only one worry. Another worry is that if Lehman collapses, its distressed assets -- such as commercial real estate -- could suddenly hit Wall Street for sale, forcing prices even lower and potentially forcing other dealers to mark down once again the value of their own holdings.

Quote :

It is now clear that we are again — as we were in mid- March at the time of the Bear Stearns collapse — an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

The probability seems to be that this whole model of banking can't work if its regulated, as it wouldn't be profitable, and can't work if it isn't. It seems unlikely that any of these investment banks, reliant as they are on a pile of dubious assets mainly in real estate, can survive in their present form.

The Fed seems to be trying to keep these banks afloat with a 50 billion dollar pool. It looks like a desperate measure with small chance of long term success.

Breaking News on Sky - the Fed says they are prepared to be more generous with their commercial lending programme ...

this guy was ranting on in April about the ramifications about propping up the banks ..



http://www.tickerforum.org/cgi-ticker/akcs-www?post=60290

Chapter 11 today it would seem.

While the Lehman Bros episode plays out with its attendant reprecussions, Merril has quietly been consumed by Bank of America. Two major Investment bank gone in one day. Dat's a record. The landscape of US banking has just changed forever. The mega-super-duper bank has just arrived and the competition within the US has virtually disappeared. The remaining players won't give a damn about regulation. I'm betting regulation will virtually become a thing of the past to be replaced by a cozy relationship between US mega banks, the Fed and the Treasury. Watch what happens to the SEC after the elections are over. Regulation will be subsummed by new market clearing and efficiency oversight. The upshot will be a workable system for marking derivatives to market more transparently but with so few players as to make it irrelevant to the small investor.
The virtual demise of F&F will allow the mega-banks to take on the bulk, if not all, of mortgage securisation and give them a huge financial boost in the future.

On another note, the CBI has also finally acknowledged that the UK is in a "mild" recession. I expect alot of news will be packed into today and the next few days. Getting all the garbage out and under the radar screens. I came across a new term, to me anyway, called "recession light". It's being used by economists who know the data they are receiving from govts are virtually useless so they are hedging forecast on recession by using the lite term. 'Tis malarky. The UK's been in recession most of this year and it could get alot deeper.

rockyracoon wrote:

While the Lehman Bros episode plays out with its attendant reprecussions, Merril has quietly been consumed by Bank of America. Two major Investment bank gone in one day. Dat's a record. The landscape of US banking has just changed forever. The mega-super-duper bank has just arrived and the competition within the US has virtually disappeared. The remaining players won't give a damn about regulation. I'm betting regulation will virtually become a thing of the past to be replaced by a cozy relationship between US mega banks, the Fed and the Treasury. Watch what happens to the SEC after the elections are over. Regulation will be subsummed by new market clearing and efficiency oversight. The upshot will be a workable system for marking derivatives to market more transparently but with so few players as to make it irrelevant to the small investor.
The virtual demise of F&F will allow the mega-banks to take on the bulk, if not all, of mortgage securisation and give them a huge financial boost in the future.

On another note, the CBI has also finally acknowledged that the UK is in a "mild" recession. I expect alot of news will be packed into today and the next few days. Getting all the garbage out and under the radar screens. I came across a new term, to me anyway, called "recession light". It's being used by economists who know the data they are receiving from govts are virtually useless so they are hedging forecast on recession by using the lite term. 'Tis malarky. The UK's been in recession most of this year and it could get alot deeper.

At the bottom of all this, a massive amount of notional money has been flushing around the system in property and personal consumption that is not backed up by any real value, or by overvalued assets. Is this in some way tied in to the idea dating from the formation of OPEC that we can "recycle" other people's money/oil revenues and live off the recycling? The first flush of Chinese and Indian manufacture must have put a big squeeze on the rate of profits made from manufacture right across the world. The price of clothing is a fraction of what it used to be, for example. We've been living off this cheap stuff and off credit to a large extent for the last ten years. What kind of state is US and UK manufacturing in? Aer Lingus outsourcing its workforce from the US tells us something about how competitive we are.

It looks like there is a massive amount of unemployment on the way and reduced incomes all around. .

Again what rockyracoon is saying is that wealth and power is contracting into a tiny and tightly compacted core. That would seem to be likely to lead to an even more intense and all encompassing collapse further down the road.

A lot of voices again today are saying that National regulation and the Fed is powerless in the globalised economy and there is a need for a World Bank and world wide financial regulation

Another example of the shit running through these 'blue blooded' institutions. McWilliams was on RTE Radio this morning discussing how when he was at UBS, Lehman Brothers were the creme de la creme, the holy grail which each and every trader wanted to work for - a beacon of successful prudence. This is the same image which was held of Arthur Anderson when my father trained as a Chartered Accountant....

Who is next?

Hard to know what should happen next.

For my sins I have been looking through endless lists of property in the UK. Utter tedium, but good money in it, no risk and the potential to pay exceedingly well if I can see an opportunity.

There is a degree of weirdness that would defy a Horror enthusiast. The market is dead but the corpse refuses to keel over. Plague of the zombie house holders.

House prices don't seem to be moving in any noticeable manner. Yes there is an easing back in value, but the resistance to correction seems formidable. We have a market that has little life, where estate agents and solicitors are facing Armageddon, where first time house buyers can't get a mortgage without a substantial deposit, where those with any blemishes on their credit rating can't get loans, where valuers are marking property prices down and yet the asking prices seem to be stubbornly stuck at some mythical value. Syrup of figs needed.

If ever there was a clear indication that markets are not logical it is this.
I can't see anything improving or stabilising until the problems in the Financial sector are behind us and people accept reality and accept that their castle is worth less but their new home should also cost less.

With two people working you can afford 5 times one earning but that is an absolute MAX and should be seen as a short term only. 3 times (or lower) average income is a stronger long term position. As far as the economy is concern the lower the better, but eventually you hit a point where you can't build for the market price. Building stops and supply falls off and prices again rise. There is a very complicated and interrelated set of equations relating to increasing populations, land prices, build price, and affordability which I think we just have not begun to address.

The average income in the UK is somewhere around £27,000 - £28,000. So long term position has to be average house about £84,000. Problem is you can't build them and buy the land for that and you certainly can't build eco houses for that sort of money. Triple glazed argon filled K-glass is expensive as are solar panels and heat pumps.

Ireland same basic problem.

If house prices fall back to what people can afford then there is no viable business in construction. So does this mean the future will be houses that people share? Extended families? Or very small houses? Be in no doubt this could be the first indication of a major reversal of living standards.

It seems like a good time to be the first to make a sensible cut and sell a property, for those who have to. I wonder how Johnny is doing?

I posted a number of times on Politics.ie in the last while, and I think here, saying that we are facing into a housing shortage in the short/medium term.
The only thing that could reduce it would be mass emigration of the household forming age group.

There was already a lot of overcrowding in social housing, with shared bedrooms and three generations in the one house, even two or three years ago.

This would be worth a full discussion on our housing thread (do we have one?)

Lehman Brothers are small change compared to AIG, if it were to implode. It has today asked for a $40bn bridging loan from the Fed. AIG unknown to many apart from its sponsorship of Man Utd football shirts is the world's largest insurance group and the 18th largest corporation on the planet employing nearly 120,000 people. That is six times the number of employees of Lehman Brothers.

johnfás wrote:

Lehman Brothers are small change compared to AIG, if it were to implode. It has today asked for a $40bn bridging loan from the Fed. AIG unknown to many apart from its sponsorship of Man Utd football shirts is the world's largest insurance group and the 18th largest corporation on the planet employing nearly 120,000 people. That is six times the number of employees of Lehman Brothers.

What does it ensure johnfás?

**cactus wrote above

cactus flower wrote:

At the bottom of all this, a massive amount of notional money has been flushing around the system in property and personal consumption that is not backed up by any real value, or by overvalued assets. Is this in some way tied in to the idea dating from the formation of OPEC that we can "recycle" other people's money/oil revenues and live off the recycling? The first flush of Chinese and Indian manufacture must have put a big squeeze on the rate of profits made from manufacture right across the world. The price of clothing is a fraction of what it used to be, for example. We've been living off this cheap stuff and off credit to a large extent for the last ten years. What kind of state is US and UK manufacturing in? Aer Lingus outsourcing its workforce from the US tells us something about how competitive we are.

It looks like there is a massive amount of unemployment on the way and reduced incomes all around.

A lot of voices again today are saying that National regulation and the Fed is powerless in the globalised economy and there is a need for a World Bank and world wide financial regulation

Apocalyptic stuff, nearly. There could be tons of unemployed out of this - we could be seeing a sharp world-wide apathy-ridden Depression for a while - China is dicking with its interest rates now too. Did we get too ahead of ourselves with time ? How much of the 'wealth' is based on real need and real production as you say above? There could be a huge correction back to the basics for a while - will something new, different and better emerge out of this? In the long run can the world deal with such heightened production as we've seen? I don't think it can as there's no sense of time and long-termism in it. How the hell can we make wealth by only selling and buying houses? Real wealth must be based on other human needs and that doesn't come quick and fast either. We lock ourselves into 30 years of mortgaged time, we have little time for the homes we spend so much time on and we wish we could have more time for personal things but we haven't allowed ourselves to foster a society where real needs are emphasised and are permitted to create real wealth.

Squire wrote:

Hard to know what should happen next.

The average income in the UK is somewhere around £27,000 - £28,000. So long term position has to be average house about £84,000. Problem is you can't build them and buy the land for that and you certainly can't build eco houses for that sort of money. Triple glazed argon filled K-glass is expensive as are solar panels and heat pumps.

Ireland same basic problem.

If house prices fall back to what people can afford then there is no viable business in construction. So does this mean the future will be houses that people share? Extended families? Or very small houses? Be in no doubt this could be the first indication of a major reversal of living standards.

This will be one of the first things to obviously correct dramatically - did we all movetoo suddenly from a society where generations of families overlapped a lot more in the one house and could we see a temporary return to that? I've already said that youngdan's neighbours could be two and a half families of South Americans prepared to occupy a house that is not big enough for half a U.S. family.

They're the largest underwiter of commercial insurance in America. That would be possibly the biggest effect on the financial world. Aside from that they are enormous in the life insurance market - perhaps an example of the trickle down effect to the (wo)man on the street.

Aside from that they hold huge secondary assets such as London City Airport and ILFC - the world's largest aircraft leasing company.

Their collapse would be an enormous catastrophe. It will be interesting to see how the Fed reacts to their request for emergency funding. What the Fed is interested in is not liquidity but solvency. That's why they bailed out Bear Stearns but not Lehman Brothers.

On the otherhand there is plenty of money to be made from all this by liquid companies. AIG will probably have to sell off enormous assets at cutdown prices in order to stay afloat. They'll be ripe for the picking for companies which did act prudently during the boom years.

johnfás wrote:

They're the largest underwiter of commercial insurance in America. That would be possibly the biggest effect on the financial world. Aside from that they are enormous in the life insurance market - perhaps an example of the trickle down effect to the (wo)man on the street.

Aside from that they hold huge secondary assets such as London City Airport and ILFC - the world's largest aircraft leasing company.

Their collapse would be an enormous catastrophe. It will be interesting to see how the Fed reacts to their request for emergency funding. What the Fed is interested in is not liquidity but solvency. That's why they bailed out Bear Stearns but not Lehman Brothers.

On the otherhand there is plenty of money to be made from all this by liquid companies. AIG will probably have to sell off enormous assets at cutdown prices in order to stay afloat. They'll be ripe for the picking for companies which did act prudently during the boom years.

Were there any?

Are they saying that Wells Fargo and CitiCorp are looking healthy?

Of course, there always are.

That or they will all just be snapped up by the oil rich regions.

But yea there will be companies who still possess the clout to take over profitable assets of these companies. Goldman Sachs, apart from some exceptions, has faired comparatively ok throughout the whole thing.

On a more local level, there is always prudent companies which you just rarely hear about. They keep their assets tight to their chest and privacy is their key. We may all know who Gerald Keane's clients are or where Independent News and Media go for legal advice, but there are plenty who take prudent decisions and keep the whole thing very secretive.

the collapse of a bank is probably the most destructive (peacetime) incident in the economy.

a bank collapse triggers capital destruction through the early redemption of bonds and securities written, with the contagion spreading to similar instruments in other financial institutions.

** zakalwe post above

Quote :

While the Lehman Bros episode plays out with its attendant reprecussions, Merril has quietly been consumed by Bank of America. Two major Investment bank gone in one day. Dat's a record. The landscape of US banking has just changed forever. The mega-super-duper bank has just arrived and the competition within the US has virtually disappeared. The remaining players won't give a damn about regulation. I'm betting regulation will virtually become a thing of the past to be replaced by a cozy relationship between US mega banks, the Fed and the Treasury. Watch what happens to the SEC after the elections are over. Regulation will be subsummed by new market clearing and efficiency oversight. The upshot will be a workable system for marking derivatives to market more transparently but with so few players as to make it irrelevant to the small investor.
The virtual demise of F&F will allow the mega-banks to take on the bulk, if not all, of mortgage securisation and give them a huge financial boost in the future.

How bad will this be? Weren't these banking practices edging towards the edge of a cliff anyway? There was one case which Sidewinder pointed out on p.ie in the spring - a repossession case was thrown out of court in Ohio because the mortgage had been sold on to Deutsche Bank and kerrynorth says it better:

Quote :

A guy successfully resisted the foreclosure on his home in Ohio on this basis. His mortgage company went bust but they had sold his mortgage a part of bundled mortgage bond to Deutsche Bank who then moved in to foreclose on the property. However, the banks claim was thrown out by the Courts as they did not appear anywhere on the mortgage deeds or on any assignment of the mortgage. Essentially the Ohio Courts found that Deutsche had no standing and that their claim was against the mortgage company not the property owner.

I think youngdan told us that a law was quickly implemented to prevent more of this from happening.

Isn't that just cuckoo-clock banking - something that's better off driven into the Abyss or whereever it goes?

The p.ie thread (3 pages so far) started by seabchan on the 9th September
http://www.politics.ie/viewtopic.php?f=161&t=40841

what de fock is happening with AIG? shares down 79% in last week, emergency funding requested last night, big impact on aig ireland?

zakalwe wrote:

what de fock is happening with AIG? shares down 79% in last week, emergency funding requested last night, big impact on aig ireland?

This all makes Ike look like a gentle breeze.

“This typical example of balance-sheet jugglery, quite common in joint-stock companies, explains why their Boards of Directors are willing to undertake risky transactions with a far lighter heart than individual businessmen. Modern methods of drawing up balance-sheets not only make it possible to conceal doubtful undertakings from the ordinary shareholder, but also allow the people most concerned to escape the consequence of unsuccessful speculation by selling their shares in time when the individual businessman risks his own skin in everything he does....

“The balance-sheets of many joint-stock companies put us in mind of the palimpsests of the Middle Ages from which the visible inscription had first to be erased in order to discover beneath it another inscription giving the real meaning of the document. [Palimpsests are parchment documents from which the original inscription has been erased and another inscription imposed.] ...

“The simplest and, therefore, most common procedure for making balance-sheets indecipherable is to divide a single business into several parts by setting up ‘daughter companies’—or by annexing them. The advantages of this system for various purposes—legal and illegal—are so evident that big companies which do not employ it are quite the exception.”[6] ...

None of the rules of control, the publication of balance-sheets, the drawing up of balance-sheets according to a definite form, the public auditing of accounts, etc., the things about which well-intentioned professors and officials—that is, those imbued with the good intention of defending and prettyfying capitalism—discourse to the public, are of any avail; for private property is sacred, and no one can be prohibited from buying, selling, exchanging or hypothecating shares, etc. [/quote]The extraordinarily high rate of profit obtained from the issue of bonds, which is one of the principal functions of finance capital, plays a very important part in the development and consolidation of the financial oligarchy. “There is not a single business of this type within the country that brings in profits even approximately equal to those obtained from the floatation of foreign loans,” says Die Bank.[10] ...

“No banking operation brings in profits comparable with those obtained from the issue of securities!”

Finance capital, concentrated in a few hands and exercising a virtual monopoly, exacts enormous and ever-increasing profits from the floating of companies, issue of stock, state loans, etc., strengthens the domination of the financial oligarchy and levies tribute upon the whole of society for the benefit of monopolists.

Speculation in land situated in the suburbs of rapidly growing big towns is a particularly profitable operation for finance capital. The monopoly of the banks merges here with the monopoly of ground-rent and with monopoly of the means of communication, since the rise in the price of land and the possibility of selling it profitably in lots, etc., is mainly dependent on good means of communication with the centre of the town; and these means of communication are in the hands of large companies which are connected with these same banks through the holding system and the distribution of seats on the boards. As a result we get what the German writer, L. Eschwege, a contributor to Die Bank who has made a special study of real estate business and mortgages, etc., calls a “bog”. Frantic speculation in suburban building lots; collapse of building enterprises like the Berlin firm of Boswau and Knauer, which acquired as much as 100 million marks with the help of the “sound and solid” Deutsche Bank—the latter, of course, acting through the holding system, i.e., secretly, behind the scenes—and got out of it with a loss of “only” 12 million marks, then the ruin of small proprietors and of workers who get nothing from the fictitious building firms, fraudulent deals with the “honest” Berlin police and administration for the purpose of gaining control of the issue of cadastral certificates, building licences, etc., etc.[14]

During periods of industrial boom, the profits of finance capital are immense, but during periods of depression, small and unsound businesses go out of existence, and the big banks acquire “holdings” in them by buying them up for a mere song, or participate in profitable schemes for their “reconstruction” and “reorganisation”. In the “reconstruction” of undertakings which have been running at a loss, “the share capital is written down, that is, profits are distributed on a smaller capital and continue to be calculated on this smaller basis. Or, if the income has fallen to zero, new capital is called in, which, combined with the old and less remunerative capital, will bring in an adequate return.” “Incidentally,” adds Hilferding, “all these reorganisations and reconstructions have a twofold significance for the banks: first, as profitable transactions; and secondly, as opportunities for securing control of the companies in difficulties.”[12]


V.I. Lenin - Imperialism, the Highest Form of Capitalism


http://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch03.htm


The above was written in 1916. The only thing that seems to have changed is that the financial instruments have got more complex, more obscure and less accountable, and the amounts have got larger.

http://www.breakingnews.ie/business/mhqlqlqlausn/



AIG proposing to "restructure"

good luck!!!! no-one's buying!!!!

and no-one will touch that aircraft leasing business (think its based in the IFSC) in the current market!!!

AIG will be a difficult one to sweep under the carpet.


Cactus Flower interesting post.
There has to be better structures that restrict potential abuse of power and better ways to fund business and society generally.

Looks like the Sage of Omaha, Warren Buffet, is going to swoop in for AIG. Not surprising.