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.

Dealbreaker.com, 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.

StupidiNews, Weekend Edition

• Ike is wrecking Galveston to Houston right now, still waiting to assess the damage.
• Potential First Dude Todd Palin faces Troopergate subpoenas.
• McSame is going after the media as hard as he can in an effort to rile the base.
• The big game of Lehman Brothers Deal or No Deal is leaning towards No Deal.
• A major train collision in LA kills several people.

Global No Confidence Vote: Deal or No Deal

Is everybody ready for the newest game on Wall Street?

It's time to play Deal or No Deal, America!

Despite all protestations by Helicopter Ben and Hammerin' Hank, the Fed held an emergency Friday night meeting to discuss the future of Lehman Brothers. Deal, or No Deal?

The game is on, but it's not like anything you've seen with Howie Mandel. In this version, Hank and Ben are trying to pick a bank to buy Lehman Brothers, but the problem is this: All of the suitcases are winners, and they are waiting to be filled by Treasury and The Fed! The financials have called Treasury and The Fed's bluff. No buyer has stepped up to the plate to save Lehman...not without a sweetheart deal like JP Morgan Chase got for Bear Stearns.

In other words, what if all the pretty girls on Deal of No Deal said "Hey Howie, one of us is a millionaire! We'll stop the show unless you and The Banker make US an offer!" It's a mutiny, and everything's topsy-turvy now.

So now, the clock is ticking. If Hank and Ben don't pick a suitcase and fill it up with enough taxpayer money before Sunday night...it's No Deal. And No Deal is the end of the game for America.

The Fed said "We won't give a sweetheart deal, we're still The Banker!" The financials replied "You're full of shit. You have until Sunday, and then Lehman goes under and takes the entire financial sector down with it...and that will lead to a complete loss of confidence in the markets. Game over. We're The Banker in this game now, and you've got to make a Deal. You have no choice!"

The Street knows that Hank and Ben have no choice. Failure to save Lehman Bros. will ruin WaMu, AIG, Wachovia, and trigger a sweeping collapse of the markets. They will crash and take our economy with it.

We've entered Moral Hazard territory now. The Banker is now the Player, and the Suitcase Suits are now calling the shots on the show. After Bear Stearns and Fannie and Freddie, dozens of banks and financials are now Too Big Too Fail. The only thing keeping these banks afloat is the general consensus that the Fed will bail them out.

If Lehman goes under, people will be asking "Am I next?" They will panic. They will cause panic runs on the financials that are on the edge right now. The companies that have lost half their value in the last 12 months will lose the other half in 12 hours. It will be a massacre.

The game of Deal or No Deal is on.

Tonight's meeting means the Fed blinked first. Banks will be bailed out with magically created fiat money. Failure to do so by the Fed will end the fiat money game...and the US economy.

You'd better believe that Hank Paulson has his marching orders. His orders are to save the economy until the election, then it becomes the next President's problem. In the halls of power, frantic calls are being made and gentlemen's agreements are being reached tonight.

The Fed couldn't directly bail out Lehman. But nobody wants to be the guinea pig to save them, because whoever does take Lehman is going to have to make the deal next time...and then next time...and then next time. They'll be in for the Fed right up until the bad deals close THEIR doors.

Nobody wants to be the sacrifice. The larger banks think they will all make it. They are waiting for the Fed to make them the Deal of the Century. And they know the longer they wait, the better the deal gets.

As Hank and Ben make offers, the financials are just laughing. They know one of them has the suitcase with billions of taxpayer money. They are waiting for a high enough offer from The Banker.

And The Banker has no choice either. The clock is ticking. Asian markets open in less than 48 hours. If there's No Deal on the table by 7 PM Sunday, then people will start asking why...why Fannie and Freddie got the MOTHER of all Deals, and Lehman Bros. gets nothing. Everyone else will quit the game in anger.

Global financial meltdown. And the financials know they have all the power in this equation for now, especially in a tight election year. Bread and circuses (and crappy gameshows with Howie Mandel) keep America fat and happy. If those stop, the American people start getting out of control. They start realizing they've been used for generations. They start to rebel.

So very much is at stake in this game of Deal of No Deal. There's an entire global financial system to lose. But the Fed has already lost. They made the precedent with Bear Stearns and Fannie and Freddie. Now they have to decide how to bail out the rest, or the financials will pull the plug on the game and everyone will lose.

As it is of course, the American taxpayer is the big loser. You and I are paying for this game, and it's a game we can't afford anymore. The Fed has a few months to go before dumping the disaster in the next President's lap, but that plan came unraveled. The bailout of Fannie and Freddie gave Wall Street two days...and even then Lehman Brothers was falling.

Not even the largest bailout in the history of the universe could give the Fed more than a couple of market sessions worth of relief.

So we wait as The Banker makes offers to the girls with the suitcases for a big enough Deal...or it will be No Deal for the global economy.

And the best part is when the next major financial goes under, Washington Mutual, AIG, whoever...we get to play Deal or No Deal all over again!

The only loser is you.

And eventually...The Fed will be out of deals to make. The game ends when the Fed and the financials reach No Deal.

And so does our economy.

Be prepared.

Cross-posted at the Frog Pond.

I Don't Like Ike

...because this thing is going to barrel straight up the Galveston Bay ship channel, and it's going to screw Houston over. First priority is the people of Texas, and from what I've been hearing and reading, a lot of folks in Houston and Galveston decided to stay. The storm was heading for Corpus Christi, not Houston. It's too late for a lot of folks right now. The loss of life and damage could be catastrophic.

Massive Hurricane Ike bore down on the Texas coast on Friday, driving a wall of water into seaside communities and threatening catastrophic damage.

Waters rose rapidly as Ike moved within hours of striking low-lying areas near Houston with a possible 20-foot (6-metre) storm surge in what may be the worst storm to hit Texas in nearly 50 years

"Our nation is facing what is by any means a potentially catastrophic hurricane," said U.S. Homeland Security Secretary Michael Chertoff, warning that Ike's storm surge could present the gravest danger.

"This certainly falls in the category of pretty much a worst case scenario."

But the rest of the country could be in for a hell of a gas shock. Houston/Galveston up to Port Arthur is Refinery Row for up to a quarter of America's total refining capacity. As the Scholars and Rogues guys explain:

This map shows the 6 meter (20 foot) flood zone from sea level rise. It’s likely the worst-case for the storm surge. Feel free to scroll around, especially up to Port Arthur on the Texas-Louisiana border.

This site has all the oil refineries in the US on it. Zoom in on the Houston area and compare the two maps. If you look closely at Texas City, between Galveston and Houston, and well within the 20 foot flood zone, you’ll find three refineries - BP Products North America, Marathon Petroleum, and Valero - and there’s another close to Houston that might also be flooded, depending on how big the surge is when it reaches the Houston Ship Channel - ExxonMobil Refining.

If you drag the refining map over to Port Arthur, there’s two more that might be hit of the storm surge gets into Sabine Lake (unlikely, but possible) - Valero’s Port Arthur Refinery and Motiva Enterprises.

The three at highest risk combine to refine 798,000 barrels of oil a day. Add the ExxonMobil refinery and that jumps to 1.384 million barrels of oil per day. And if the two Port Arthur refineries I mentioned are damaged, then that’s another 565,000 barrels per day.

And if we include the other four refineries that are out of the flood zone but still in high wind damage areas (i.e. Houston), that’s yet another 860,000 barrels per day of oil refining capacity. Outside the flood area of Port Arthur are two more refineries with another 603,000 barrels of capacity at risk.

All told, Ike has the potential to directly damage via storm surge, wind, and rain-driven flooding 12 refineries in Houston and East Texas that combine to refine 3.412 million barrels of oil per day. As of the end of last week, the EIA data says that total barrels of oil refined in the U.S. was 13.483 million barrels. These 12 refineries at risk represent 25.3% of the entire U.S. refining capacity.

That refining capacity could be offline for weeks, if not months.

Worst case scenario and these refineries are heavily damaged for months? Gas prices at or above $5 a gallon nationally. Strategic oil reserves will do nothing for refining capacity. This means gas shortages in the South and Midwest, quite possibly.

The GOP will certainly say DRILL DRILL DRILL DRILL and still expect you to vote for them. Remember that when the scope of the failure here become apparent.

Lehman A Bit To The Left

Lehman Bros has gone from a market cap of $11.5 billion on Monday morning to $2.5 billion this afternoon.

At this point it only matters who disposes of the body.

Disrespectful Uppity House Negro Is Disrespectful

Dear Barry --



Are ya mad yet?

-Zandar PS: It's of course all bullshit.

The Numbers

FiveThirtyEight has McSame ahead now. We'll see if Obama can gain some over the next two weeks or so.

Leave It To Whoopi

As Baba Wawa and the Whoopster just tear ass into John McSame.

The ladies of "The View" confronted John McCain today for lying in recent attack ads. In arguably his toughest interview yet, View co-host Joy Behar asked McCain:

"There are ads running from your campaign... Now we know that those two ads are untrue, they are lies. And yet, you at the end of it say you approve these messages. Do you really approve these? Barbara then threw in her condemnation, by telling McCain: "You, yourself said the same thing about putting lipstick on a pig..."

Watch the video at the link.

Well, This Can't Be Good Either...

The latest Gallup generic ballot poll is very disturbing for the Dems.

A potential shift in fortunes for the Republicans in Congress is seen in the latest USA Today/Gallup survey, with the Democrats now leading the Republicans by just 3 percentage points, 48% to 45%, in voters' "generic ballot" preferences for Congress. This is down from consistent double-digit Democratic leads seen on this measure over the past year.

Not good. Not good at all. Can you imagine a GOP House/Senate/White House under McSame/Palin?

Move to Canada. Seriously. Wake the hell up, Dems. Your country is slipping away. The post-convention bounce won't hold...but it may be time to put ideas of 300 House seats and 60 Senate seats away and take the majority.

Jesus, Obama. FIGHT BACK.

Bailout? What Bailout?

Helicopter Ben pretends it's not coming.

Concern that Lehman Brothers Holdings Inc may fail to find a buyer because the U.S. government is reluctant to provide financial backing sent the investment bank's shares tumbling to a nearly 14-year low on Friday.

Lehman's bonds also dropped ahead of what is expected to be a series of frantic calls this weekend between Lehman, U.S. regulators and potential bidders. Bank of America Corp is widely seen as a leading contender, with British bank Barclays Plc also cited as a possibility.

The Financial Times reported that BofA, the No. 2 U.S. bank by assets, was considering a joint bid for Lehman along with private equity investor JC Flowers and sovereign wealth fund China Investment Co.

Lehman shares fell as much as 16 percent in early trading, though they trimmed those losses following the FT report. Lehman declined to comment.

"I think they're going to have to draw a line at some point," Rose Grant, managing director of Eastern Investment Advisors in Boston said of Washington regulators. "This could be the point."

The credit maelstrom is threatening other financial companies, including leading brokerage Merrill Lynch & Co Inc and American International Group Inc, once the world's largest insurer by market capitalization. AIG plunged 21 percent, while Merrill slid 5.6 percent.

Here's the reality of the situation, folks: the special Fed discount borrowing window is already a bailout of Lehman, and it's still not working.

The Fed's refusing to bail the company out for now, but if that doesn't happen, the financials are DONE. A full fledged-panic will ensue, and they will have to bailout the entire sector.

The Fed bailout option is the only thing keeping Lehman out of being a penny stock right now. WaMu and AIG too. No bailout? No financial sector.

A decision will be made this weekend to bail out Lehman. It's coming. If not, the stock market crashes due to a total loss in confidence as dozens of financials disintegrate.

Option 3 will be a buyer magically appears. Don't count on it. It's bailout or it's the end of the game.

In Which Zandar Answers Burning Questions

Today's question comes from Greg Sargent at TPM Election Central:

Will any Republican -- anywhere -- condemn the sleaze that the McCain campaign is cranking out on a now-daily basis?

A: Fuck no.

This has been another installment of Zandar Answers Your Burning Questions.

Le Sigh, Le Moan Part 4

It wouldn't be a weekday without more GOP concern-trolling that Obama should have picked Hillary. Today's contestant: RealCrappyPolitics blogger Marianne Means.

"Not a good fit" was about the closest an Obama mouthpiece came to an explanation. Meaning, one assumes, that he couldn't bear a competing shining star. McCain, of course, has no such worries. He is who he is, and Palin cannot challenge that. But she is proving so popular, if the raft of recent polls are sustained, that she is becoming a big political figure in her own right. At the moment, she is still a political stunt, but a successful one. In their first ad featuring Palin, the GOP shows the pair together and an announcer proclaims, "They'll make history," a not-so-subtle message that she could be the first female vice president.

She is the anti-Clinton, opposed to every domestic and social policy for which Clinton has worked for decades, yet she is pulling away hordes of white female voters who refused to settle for Obama after he dumped Hillary.

Gender may have an initial appeal only, but it could last if Palin proves to be clever and softens her hard-line anti-abortion, anti-stem cell research, anti-gay rights, anti-everything modern positions of the past. She's running for the second spot, not the top one. We'll see. The oddest thing about Palin's candidacy is that motherhood has suddenly moved into a top priority for political leadership. This is brand new, and a reflection of the fact her religious-right supporters want to promote her "family values," which differ from the standards of the past.

Sexual abstinence before marriage, for instance, has been dropped from the list of moral imperatives for the feminine ideal, given unmarried teen Bristol's inconvenient pregnancy.

This is just....stupid. Sarah Palin softening her positions? Mahahahahahahahahaha *smack* SHUT IT.