Another bank with its chin in the dust Lehman Brothers
Their bank losses shake financial markets WORLDWIDE
but they were the MINE CANARY that warned us, and nobody heard the desperate tweet.
By Andre DamonLehman Brothers announced a projected $2.8 billion second-quarter loss back in SPRING 2008 its first since going public in 1994. The Wall Street firm concurrently announced its intentions to raise $6 billion of capital and reduce its reliance on borrowed funds. THIS WAS THE SIGN of what was coming. A MINE COLLAPSE and the CANARY that whistled watch out was the FIRST TO GO. A FEW ECONOMISTS SAW THE COMING CALAMITY AND RECESSION. NICK BEAMS, JOSEPH STIGLITZ, ROUBINI and 6 others
Both Moody’s and Fitch Ratings downgraded Lehman’s creditworthiness in response to the announcements. The investment bank’s stock had fallen sharply
The losses at Lehman’s were coupled with an announcement by Standard & Poor’s that it had cut the AAA credit ratings of bond insurers MBIA and Ambac Financial Group, effectively lowering the credit ratings of some $100 billion in debt. Analysts, meanwhile, announced that they expect Washington Mutual, the United States’ largest savings and loan association, to suffer mortgage losses of some $21 billion over the next three years. The firm’s stock had tumbled by 34 percent over the twp past weeks.
OH THEY COVERED ! Erin Callan, Lehman Brothers’ chief financial officer, played down the current risks to the bank’s balance sheet, but said that
the capital-raising was engineered to “end the chatter about Lehman Brothers.” The “chatter” is persistent speculation that the firm was teetering on the brink of insolvency.
At the time of the March 14 bailout of Bear Stearns by the Federal Reserve Board, it was widely believed in US financial markets that Lehman Brothers would soon follow Bear Stearns into bankruptcy. The Fed’s decision to extend direct loans to investment banks—something unprecedented since the Depression of the 1930s—was in part prompted by fears that a Lehman failure would trigger a wave of Wall Street collapses and a general
Lehman, the smallest and most vulnerable of the major US investment banks, was among the major beneficiaries of the new
Fed policy, and used the loans to temporarily stabilize its positions.
Lehman Brothers was attempting to trim its leverage—the ratio of its assets to borrowings—from 32 to one to 25 to one. The
firm had previously been able to provide high returns to its shareholders by using the easy credit conditions that then prevailed
to make very large investments with borrowed money.
This approach had become un-viable as credit has dried up, leaving Lehman with what appears to be a crisis of both short-term
and long-term profitability. Within financial circles there was talk that a further deterioration of credit conditions could result in
more bank failures along the line of Bear Stearns, and Lehman Brothers is generally considered to be the most endangered.
Of the big Wall Street investment banks, Lehman remains the most closely tied to mortgage-backed securities and speculation in leveraged corporate buy-outs—two markets that have imploded since last summer. The firm’s announcement served as a rude awakening to markets that the banking crisis is by no means over, and that more Federal Reserve bailouts may be in the offing.( NOW in 2019, we see that indeed there were bailouts coming but by the US TREASURY!)
The Federal Reserve made clear its intention to prevent the failure of major Wall Street firms, ultimately with public funds. There are those within the financial establishment who see large-scale bailouts as detrimental to financial stability in the long run.
A criticism along these lines was put forward June 5 by Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who observed: “The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater risk-taking, which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central bank lending.”
Lacker’s public dissent, coming on the same day as a major speech by Fed Chairman Ben Bernanke, is highly unusual, and underscores the internal tensions and divisions fueled by the ongoing financial crisis.
The cheap and abundant credit injected into the financial system by the
Fed’s policies has contributed to an inflationary upsurge
in the United States and internationally and accelerated the fall of the
dollar relative to the euro, the yen and other major
currencies. This depreciation has in turn fueled the eruption of oil prices
and rampant speculation in commodities prices.
In a speech delivered June 3, Bernanke said that the Federal Reserve would
take measures to fight inflation and prop up the
dollar. This led to a temporary strengthening of the US currency, but by
Friday markets panicked in response to the release of
higher-than-expected US unemployment figures. Investors dumped dollars and
poured into commodities futures, driving the
price of oil up $10 in a single day.
Bernanke again attempted to take an anti-inflationary stand on Monday
evening, telling a conference in Massachusetts that the
Fed will “strongly resist an erosion of longer-term inflation expectations,
as an un-anchoring of those expectations would be
destabilizing for growth as well as for inflation.”
Asian markets tumbled at the announcement on Tuesday, with China’s stock
index falling 8 percent. China’s currency is
unofficially pegged to the dollar, and is especially responsive to US
policy. The country is also experiencing significantly higher
inflation, which has reached an annual rate of 8 percent and has resulted
in negative real interest rates.
The European Central Bank (ECB) showed no signs that it would cooperate
with the Fed’s new exchange rate policy. Last
week, ECB President Jean-Claude Trichet indicated that the central bank
would raise its interest rate by 0.25 percent,
undercutting a short-lived rally of the US dollar on currency markets.
The conflict between the Federal Reserve and the European Central Bank is
in many ways unprecedented. As Wolfgang
Münchau of the Financial Times noted, “In the past, European central
bankers tended to follow the US Federal Reserve,
often with delay, never perfectly, but generally in the same direction.”
A major and common aim of both the Fed and the ECB is to soften the laborLong-term layoffs have increased significantly over recent months,
market through job-cutting, in order to prevent
the development of a wages movement by workers seeking to offset soaring
fuel and food costs. The US unemployment rate
has increased for five straight months, culminating in last week’s
announcement that the official jobless rate jumped from 5 to
5.5 percent during the month of May.
spearheaded by job cut announcements at major airlines,
which have eliminated 22,000 jobs this year alone. The trend is by all
indications accelerating, as indicated by recent figures
showing that planned layoffs increased by 15 percent in May over April.
* * * * * * * * * *
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