Sunday, 14 September 2008
Lehmans, Darling & Financial Misregulation
Lehman Brothers, the 4th largest US Investment bank, stands on the edge of bankruptcy this weekend. In the last few months, the US Federal Reserve has bailed out Bear Stearns and then the mortgage companies, Fannie Mae and Freddie Mac.
Yet there appears to be no bail out for Lehmans. Structurally the threat to the CDS market (which is insurance bets from financial services companies against each other) is the same, if not worse than Bear Stearns. But after swallowing a $5,000 billion bail out of Fannie and Freddie the US Federal Reserve can't create the funds for another bail out.
So Lehamn's will be a new first for the credit crunch, a huge mega-bank that might actually fail. perhaps A large Private Equity house could risk taking on the bad debt, we will see this week. That HSBC and Barclay's are thinking of doing so should not re-assure UK residents as to the sanity of their respective managements in terms of understanding risks to their business. HSBC has a terrible record in the US and Barclay's has none at all.
However, the Left, in the form of Guardian Commentators, see the US as having had prescient and strong leadership, compared to our poor old Alistair Darling. How wrong they are, bailing out Fannie and Freddie is a very socialistic policy, I am not surprised the Left support this. Bailing out banks full stop is itself crazy. Northern Rock should have been left to die peacefully and order be restored. Markets are a harsh mistress and should be obeyed. Playing with them is likely to burn the surgeon, in this case governments armed with our children's money (i.e. future tax revenues).
This week will be crucial, if Lehmans goes without a world-wrenching destruction of the financial markets (which may NOT be the case) then many of the bail-outs we have seen will be shown to have been Government's panicking to save rich bankers. At the next ballot box opportunity we can decide if we want this sort of behaviour to continue.
UPDATE: Looks like this is going to happen. Barclay's have dodged a bullet; glad to see people reading this stuff at last and taking note.
Merrill's & Bank of America discussing merging too. We said there would be a third leg to the credit crunch, here we go...