Sunday, September 14, 2008

What If There's No Deal?

What if the Lehman Bros. deal falls through? It's a real outcome at this point. The Fed and the banks are running out of time. What if the worst happens? Let's start with this:
Cumberland Advisors Investment Chief David Kotok said Friday the stock market could plunge 1000 points if Lehman Brothers fails.

“If Lehman fails credit spreads change because they will reflect this new dynamic of the Fed is not always going to bail out,” Kotok said in an interview with CNBC. “And when credit spreads widen, stocks will get in trouble. They’re in trouble because of that risk.”
Let's continue with this:
If Lehman can't make good on some portion of its hundreds of billions of dollars in commitments, there is a risk of a domino effect throughout the financial system. And all of us, one way or another, are dependent on that system.

For the last 20 years, the idea of protecting the biggest financial firms from failure has centered in large part on the boom in so-called derivative securities such as credit default swaps -- a way for banks and investors to bet on, or hedge against, financial market moves.

The value of outstanding derivatives now is measured in the tens of trillions of dollars. Billionaire investor Warren Buffett has called derivatives "financial weapons of mass destruction" because of the market's size and complexity and the threat that one party's inability to honor its commitments could topple many others.

But some experts say that threat always has been overstated.

"I've heard this so many times," said Allan Meltzer, a veteran economist at Carnegie Mellon University in Pittsburgh. "I don't believe it."

The public's suspicions are correct, Meltzer asserted. In the case of Lehman, he said, it's natural that the investors who own the firm's stocks or bonds, or have other investments tied to Lehman, will say the company is too important to fail.

"The people who have the losses want help, so they tell you it's going to be a disaster," he said.

Janet Tavakoli, a Chicago-based consultant on derivative securities, says it may finally be time to find out just how well the derivatives market can stand up to a serious financial failure.

"It would be good to have a test case," she said.
And let's end with this:
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.
Are you willing to bet your portfolio on a deal?
You already have.
What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.
Endgame for the global financial system, folks.

It's coming. If it's not Lehman, it will be one of the next insolvent brokerage banks. One will take down the system. It will take down the rest of the US economy with it.

The Second Great Depression? Could be.

Hurricane Ike: Aftermath

The survivors are picking through the wreckage of Ike.

"I've never seen water like this," she said after the storm surge ruined everything in her garage, including a 2002 pickup truck, two Harley-Davidson motorcycles, a freezer, a washer and a dryer.

Collins' daughter, Cynthia, also weathered the storm. After her roof collapsed, she waited hours for help to arrive. When it didn't, she said, she waded seven blocks through thigh-high water to get to her mother's house.

"I decided just to go, because no one was coming to get me," she said. "We have been calling emergency people since 5 o'clock this morning."

Twenty-four hours after Hurricane Ike slammed into Galveston, packing 110-mph winds, rescuers began efforts early Sunday to check on the estimated 20,000 people who failed to heed mandatory evacuation orders.

Around the South and Midwest, gas prices have shot up to $5 or more.
As Hurricane Ike barrels down on Texas, the impact is being felt in other parts of the country as the oil industry comes to a near halt and reports of price gouging start to spread.

Fears of gas shortages are leading to exploitation in some parts of the Southeast, where some stations are reported to be charging as much as $6 a gallon for gas.

In North Carolina, Gov. Mike Easley has declared a state of "abnormal market disruption" and signed an order allowing the attorney general to enforce the state's anti-gouging law. In South Carolina, Attorney General Henry McMaster invoked a similar law for his state, and Kentucky Gov. Steve Beshear declared a state of emergency.

"Fear of price gouging is bad in the state right now," Mark Plowden, communications director for the South Carolina attorney general told ABC News. "Public panic can cause a run on the pump, creating more panic, so we are trying to control the situation."

His office has fielded hundreds of phone calls, and many other calls have been received by county law enforcement offices. Plowden added that the receptionist is fielding "a phone call every eight seconds on this topic."

"People have gone as far as calling 911 to report that gas is expensive," he said.

Here in Northern Kentucky I can tell you gas has gone from $3.69 to $4.15 or more. People are angry. Prices of $4.99 and up have been spotted in Knoxville, Atlanta, Louisville and Lexington, and that was yesterday.

Remember that the GOP still wants to give billions to energy companies.

A Crusading Reformer, My Ass

Lot of buzz about the NY Times' deconstruction (demolition!) of Sister Sarah.
Gov. Sarah Palin lives by the maxim that all politics is local, not to mention personal.

So when there was a vacancy at the top of the State Division of Agriculture, she appointed a high school classmate, Franci Havemeister, to the $95,000-a-year directorship. A former real estate agent, Ms. Havemeister cited her childhood love of cows as a qualification for running the roughly $2 million agency.

Ms. Havemeister was one of at least five schoolmates Ms. Palin hired, often at salaries far exceeding their private sector wages.

When Ms. Palin had to cut her first state budget, she avoided the legion of frustrated legislators and mayors. Instead, she huddled with her budget director and her husband, Todd, an oil field worker who is not a state employee, and vetoed millions of dollars of legislative projects.

And four months ago, a Wasilla blogger, Sherry Whitstine, who chronicles the governor’s career with an astringent eye, answered her phone to hear an assistant to the governor on the line, she said.

“You should be ashamed!” Ivy Frye, the assistant, told her. “Stop blogging. Stop blogging right now!”

Ms. Palin walks the national stage as a small-town foe of “good old boy” politics and a champion of ethics reform. The charismatic 44-year-old governor draws enthusiastic audiences and high approval ratings. And as the Republican vice-presidential nominee, she points to her management experience while deriding her Democratic rivals, Senators Barack Obama and Joseph R. Biden Jr., as speechmakers who never have run anything.

But an examination of her swift rise and record as mayor of Wasilla and then governor finds that her visceral style and penchant for attacking critics — she sometimes calls local opponents “haters” — contrasts with her carefully crafted public image.

Throughout her political career, she has pursued vendettas, fired officials who crossed her and sometimes blurred the line between government and personal grievance, according to a review of public records and interviews with 60 Republican and Democratic legislators and local officials.

Still, Ms. Palin has many supporters. As a two-term mayor she paved roads and built an ice rink, and as governor she has pushed through higher taxes on the oil companies that dominate one-third of the state’s economy. She stirs deep emotions. In Wasilla, many residents display unflagging affection, cheering “our Sarah” and hissing at her critics.

“She is bright and has unfailing political instincts,” said Steve Haycox, a history professor at the University of Alaska. “She taps very directly into anxieties about the economic future.”

“But,” he added, “her governing style raises a lot of hard questions.”

It turns out Sarah Palin is pretty much just another politician...and not even a very good one at that.

Interviews show that Ms. Palin runs an administration that puts a premium on loyalty and secrecy. The governor and her top officials sometimes use personal e-mail accounts for state business; dozens of e-mail messages obtained by The New York Times show that her staff members studied whether that could allow them to circumvent subpoenas seeking public records.

Rick Steiner, a University of Alaska professor, sought the e-mail messages of state scientists who had examined the effect of global warming on polar bears. (Ms. Palin said the scientists had found no ill effects, and she has sued the federal government to block the listing of the bears as endangered.) An administration official told Mr. Steiner that his request would cost $468,784 to process.

When Mr. Steiner finally obtained the e-mail messages — through a federal records request — he discovered that state scientists had in fact agreed that the bears were in danger, records show.

“Their secrecy is off the charts,” Mr. Steiner said.

Sound familiar? She's Bush in lipstick: deep mistrust of outsiders, my way or the highway cronyism, "bold" decisions that she dares anyone to call her on, constant spewing of attack points. McCain is Bush's third term, but Palin is Bush's fourth and fifth.
Laura Chase, the campaign manager during Ms. Palin’s first run for mayor in 1996, recalled the night the two women chatted about her ambitions.

“I said, ‘You know, Sarah, within 10 years you could be governor,’ ” Ms. Chase recalled. “She replied, ‘I want to be president.’ ”

And she may very well be it. We're being fooled again. Remember, Bush was given to us as a major reformer in 1999-2000. But Sarah Palin is just as paranoid, corrupt, mean-spirited, petty and vindictive as they come, just like Bush.

If we make the same mistake here, we deserve our fate.

Deal Or No Deal Part 2

Rumors are floating that the sticking point in a deal between Lehman Bros. and Bank of America is the resignation of Lehman's CEO Dick Fuld, but the deal is on:
A financial website said a deal has been reached to split beleaguered Lehman Brothers into two entities, with a "bad bank" taking the toxic, real-estate assets amounting to around $85 billion and Bank of America taking the lion's share of the good assets.

A second day of emergency meetings between regulators and Wall Street bankers on the crisis at Lehman ended on Saturday without an announcement, and talks were extended to Sunday., whose story could not be independently confirmed, said the deal would be financed without any government backing. Lehman CEO Dick Fuld will resign, it said.

Britain's Barclays Plc and Japanese investment bank Nomura Holdings will also play a role, the website said, while an international consortium of financial firms will inject capital for the deal.

Dick Fuld's resignation was demanded by Bank of America, the website said.

Bank of America played a brinkmanship role in negotiations, threatening to let Asian markets open on Monday without a deal, the website said, citing a person familiar with the matter.

"Fuld is said to have taken ... developments very badly," the report said. "He does not believe that the situation is as desperate as others on Wall Street believe it is, and may be trying to negotiate an alternative deal, we're told."

Keep in mind the deal hasn't been sealed yet, and there's still about 9 hours left before Asian markets open for Monday trading.

If there's No Deal...expect a catastrophic loss in the markets. The clock is ticking. BoA would be getting all the good parts, and the bad parts would go to whom, exactly? Oh yes...the American Taxpayer.

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