Pelosi's Panic

Pelosi's Panic

Market Suffers Worst Single-Session Selloff in History as House of Representatives Fails To Pass Emergency Liquidity Measures.

World Markets Post Record-Breaking Losses

Faced with the choice of serving her country's best interests or stoking class warfare, Speaker of the House Nancy Pelosi chose the latter yesterday, letting loose a tirade of pent up anti-Bush non-sequitirs as the House of Representatives voted to let the financial system twist in the wind. The Speaker of the House of Representatives is its highest ranking and most influential member.

Deluded by the notion that they are somehow above consequences, and apparently infuriated that their biggest Wall Street benefactors will be unable to favor them with fat checks and "VIP" mortgages after losing their jobs, bonuses, and companies, democrats in congress threw them, the American people, and world markets under the bus rather than authorize a daring Federal intervention that would have prevented the largest single-session sell off in Wall Street history. At the close Monday, the Dow Jones Industrial Average was down over 777 points or 7%. World markets, desperate for US leadership that failed to materialize, posted historic losses.

``It was a failure to step up and exercise the will,'' lamented Chairman of the House Banking Committee Sen. Christopher Dodd, when asked how he and his colleagues failed to seize an historic opportunity to prevent the second Great Depression. His comments were an apparent reference to the custom in the Democratic party of the male members depositing their balls in the lock-box in the Speaker's office for the duration of their tenures.

Fortunately for the House of Representatives, its members cannot be sued for malpractice.

Citizens concerned about the Speaker's failure to act in their best interests and her irresponsible remarks can send her an email expressing their views.

Feedback Loop

Not long ago, I mused on whether or not history rhymes, as the saying says it does. Actually, the saying, is, "history may not repeat, but it sure does rhyme."

At times it has struck me that history echoes, or that it sings backup. Today, however, I came across something that led me to conclude that history actually creates a feedback loop which leads to ear-splitting, window shattering, crowd-maddening distortion.

Just to set up the illustration, let me use my favorite instrument, the guitar. When a guitarist strikes a note, the string vibrates, creating sound waves, the pickup (through the amazing principle of piezoelectricity) turns that vibration into electrical energy, and the amplifier amplifies that energy, so that you hear an energized collage of vibrations. If the instrument is close enough to the amplifier's speaker, the sound coming out of it that was just amplified will in turn vibrate the strings some more, which the pickups will turn into more electrical energy, and the amplifier will amplify again. With all this happening at something between the speed of sound and the speed of electricity, the effect can build on itself so fast that the result is an exponential increase in wave density (my colloquial analysis) -- a sonic mushroom cloud known as distortion or "feedback." If it weren't controlled, it would probably blow out the speaker (even if there weren't any eardrums left to hear it).

There are similar phenomena in all of nature, including in societies. The Salem witch trials, for example, can be considered a sort of "feedback loop" of paranoia. It reached its crescendo in the execution of numerous innocent and decent people. We have recently lived through a great feedback loop of real-estate asset prices.

A further example of a social feedback loop presented itself to me today in the words of the great Fr. George W. Rutler, Pastor of the Church of Our Saviour on Park Ave. I'll excerpt a bit of the piece that appeared in today's bulletin:

To bury the dead is one of the seven corporal acts of mercy. The human body is to be treated with respect from conception through death...

At the South Street Seaport, there currently is a display of 22 whole bodies and 226 additional organs and partial body specimens. "Bodies -- The Exhibition" is a version of "Body Worlds," which in recent years has exploited prurience in the name of scientific edification. The corpses are skinned, and the blood replaced with silicon polymers. These plasticized bodies are shown in various poses, sometimes whimsically. Dr. Thomas Hibbs, professor of ethics and culture at Baylor University, has called it pornographic.

The founder of "Body Worlds" is Gunther von Hagens, who invented the "Plastination" method at the University of Heidelberg. He is not culpable for his father having served in the Nazi SS in a perverse age when lampshades were made of human skin. That horrified people then. A generation later, more than 20 million people around the world have paid to view "plastinated corpses" for the thrill of it. Von Hagens moved to China in 1996 where bodies were more easily obtainable, some of them rumored to be the bodies of homeless or mentally ill people or executed prisoners. In 2004, bullet holes were found in two of the exhibited "sculptures." The anonymous bodies on display in Manhattan were taken from the Dalian Medical University in northern China. The New York State legislature this summer passed a bill requiring a declaration of the cause of death of the exhibited remains. Is it possible that if you visited this exhibition, you were looking at a Christian martyr?

Do you see the feedback loop idea? Any parent (that is, any parent with any sense) knows that what the parents tolerate, the children will embrace. We don't know, I suppose, if Mr. Von Hagens' father, in his capacity as a Nazi, was involved in making lampshades out of the skin of his Jewish neighbors, or something more or less unspeakable. But we do know that his son has fully embraced cold, utilitarian view of the human body that the Nazis had; that he treats not just the image of man but his very body as raw material to be exploited, as Fr. Rutler put it, and apprently to do so with the sort of success that those who pander to the base motives have from time to time enjoyed.

He may even view certain members of the human race as mere matter, and others as somehow superior to them. Would he want his father's or mother's corpse in one of his displays to help generate revenue? If not, why not?

The proposition is simple: either people -- all people, not just this or that race or nationality -- are material or they're more than that. Here's a clue how you can tell: if people were mere matter, something inside of all of us wouldn't wretch at the idea of human lampshades. Or human sculptures. Nor would morbid fascination be an effective marketing appeal.

In that post called "History Rhymes, " referring to Nazis, I asked, "have we become like they were?" In keeping with the theme of this post, I'll ask, "have we become an exponentionally dense version of them?"

***

I had a few things to say about the burial of the dead a couple of years ago. I'm sure I was not capable of having envisioned human-corpse sculpture when I wrote them. On the other hand, knowing that human lampshades are a historical fact, I might not have been surprised.

I dare you to think about it.

Moral Hazard for Dummies

Let's talk a little bit more about the VIX.

In the last post, when the VIX was at 36 or so, I said it wasn't high enough and indicated more shock was to come to equities.

Today, once more, the market eventually gave up and began its third major selloff of this week. Sure enough, the VIX spiked over the very significant 40 level mentioned yesterday. You'll note that it did so right around 1 pm est. Just then, two significant headlines scrolled onto everyone's Bloomberg screens.

The first was a release from Sen. Schumer that said, essentially, "The government has a plan." This was later elaborated on as a new Resolution Trust type entity to purchase mortgages from banks. The next was a story about the decision by the nation's three largest pension funds, Calpers, California Teacher's, and New York State Common, to no longer loan shares of major investment banks to short sellers. Either of these stories would have been a red flag to short sellers. The action taken by the funds may have forced a short covering scramble in the financials.

In the last discussion I alluded to the fact that, while it has certainly seemed like The Financial Apocalypse during the last week (and may have been), the VIX had been loitering in "ho-hum" territory. Until today, when it broke into "crisis" territory as the market sold off hard around mid-session. This, and the news releases, amounted to a clear signal to buyrightnow, and the VIX finished the day back in merely "tense" range.

It's conceivable that the Fed observes the VIX and has chosen 40 as its action level. As stated before, the VIX is a "fear index." A reading of 150+ was associated with the level of panic in the markets on October 19, 1987, and 40 is clearly crisis level. Whether by design or coincidence, action was taken before it had a chance to push into extreme territory, and an escalation of fear was avoided.

Observing the historical VIX chart below shows that no reading has begun to approach the extreme of October 19, 1987. And yet, in terms of fearful events, 9/11 dwarfs that day. And all the other ones, for that matter. What has prevented the VIX from making such a dramatic move in times of market crisis?

I believe the answer is what is colloquially called "The Greenspan Put." In a nutshell, the term refers to the Federal Reserve's commitment, under the direction of then Chairman Alan Greenspan, to decisively inject liquidity into the financial system in times of crisis. It happened so often in his tenure (1987, Gulf War, Mexican Crisis, Asian Crisis, Russian Default/Long Term Capital, Y2k, Dot-Com Crash, 9/11 terrorist attacks) that it earned a nickname.

Mr. Greenspan became Chairman of the Fed just a few months before the crash of 1987, and stayed there until his succession by Ben Bernanke in January, 2006. Their combined tenure as Federal Reserve Chair comprise all but a sliver of the left-hand portion of the time series depicted in the VIX chart. The policy of being ever-ready with liquidity in times of crisis has continued under Mr. Bernanke, and is likewise referred to as the "Bernanke Put."

The reason the VIX hasn't since hit that early extreme is that the market learned that the Fed was, under Greenspan, and still is, under Mr. Bernanke, serious about preventing any kind of panic that would cripple the financial system. In other words, just as the chart indicates, panic has been mitigated by the Fed; the market has confidence that the financial system will not be allowed to collapse.

Or at least, it has thus far. As alluded to previously, we're still in early innings. What's happened so far has been largely systemic. By that I mean, the inability of the market to objectively price risk, coupled with a well-intentioned but disastrously flawed accounting requirement (FASB 157) , has forced a devaluation of assets by fiat -- an approach akin to saying, "if they can't be priced they must be worth a quarter on the dollar, a dime on the dollar, or worthless." This of course is ridiculous.

However, it has led to the current de-leveraging of banks and brokerages, resulting in huge and unnecessary business failures and mergers, and massive evaporation of wealth, loss of confidence, and demand for what capital is available. To call it an historic dislocation of markets is no overstatement.

But what still remains to be experienced is the writedown of assets that occurs not because of some market mechanism, but because indeed a recession has come -- spending shrinks, jobs are lost, GDP growth diminishes. When people have a hard time making ends meet, they have a hard time paying their credit cards. And there is a lot of leveraged credit-card debt in bank portfolios. And those assets resemble the mortgage-backed securities we just watched drive the VIX to crisis levels. One key difference is that credit-card structures aren't backed by anything as sound as real estate -- even overpriced real estate. Credit card assets are backed by pawn-shop fare.

And, too, are the $1 trillion in "Alt-A" mortgages in various portfolios. These are the so called "liar loans," interest-only teasers, and those facing interest rate resets. The Fed currently has control over about half of these, via Fannie and Freddie, and so these will surely be absorbed by this year's version of the Resolution Trust Corp. The good news is that, being backed by real property -- albeit overpriced real property -- they will retain a meaningful fraction of their value. It's even possible, though not likely, that the assets will appreciate, net to the taxpayer (by that I mean, using the cost basis incurred by agencies who bought them).

It will be imperative that the credit markets begin operating normally, and the mortgage assets now irrationally priced become properly priced, before the effects of recession are manifest. A recession severe enough (and is there any reason to believe a recession under current conditions will not be severe?) could trigger another round of mortgage and then credit card asset defaults, resulting in more of what we just lived through. The Fed has acted very wisely, in my opinion, by creating a vehicle to purchase troublesome assets until they can be priced fairly, thereby removing them from the markets temporarily.

There is one more nagging issue. When the VIX hit "Panic" in 1987, the Fed acted decisively, and calm was restored in amazingly short order. Presumably, the Fed hadn't exhausted all its resources in that action. Most likely, its very willingness to act inspired enough confidence in private capital to get back in the game.

This time, however, is different. Private and public capital has been coming into the game in substantial amounts for months. Fed loans this quarter to banking institutions amount to $194 billion, versus a historical average of $16 billion, in constant dollars, per quarter. Banks have raised $352.9 billion of capital (may overlap the Fed loan amount). If the VIX creeps back into "crisis," say, perhaps, if Alt-A's or credit-card master trusts start defaulting en masse, will there be capital enough to inject? And, if not, will the payments system lock up? Let's hope not.

In summary, then, today the VIX hit "crisis" territory, and was brought back by the Greenspan/Bernanke Put, just like it has been for the last 18 years. If it tests "crisis" again, will lack of Fed and private capital force it into "Panic?" As of this writing, I do not believe the action of the VIX has fully registered the magnitude of the current crisis. While I hope the Fed Put did its job, I am not yet convinced we've seen all the market fear we're going to see. Preparing the removal of troublesome assets from the books of publicly held banks until they can be rationally priced by the market, as done by the Fed today, is a wise move. It prevents a massive, systemic drain of wealth from the market. It is essential that real assets are rationally priced in the event of a recession, which will surely test capital adequacy with regard to defaulting credit card master trusts and Alt-A mortgage assets.

Putting Market Mayhem into Perspective

We talked briefly about CDS. We might mention them a bit more here, for there is a great deal to say about them, and their role in the current credit/equity crisis. We'll go on to discuss our opinions on what the next-next big thing might be. But for now, let's get the current equity picture into some perspective. This is instructive, because a "debt crisis" is a crisis ultimately because of its impact on equity.

Allow me to reintroduce the CBOE VIX Index. The VIX is a measure of expected near term market volatility, as implied by the S&P Index options market. Because volatility is a proxy for uncertainty, and uncertainty, in large enough doses and especially in matters financial, is synonymous with fear, the VIX is affectionately known as the "Fear Index."

Here's a chart of all the VIX data there is, from January 1986 through today, September 17, 2008. Every spike in the index is associated with an adverse market event. The spikes over 40 in the recent past are still familiar to us all. The grandaddy of all spikes is the one that occured on October 19, 1987, when the S&P 500 lost over 20% in a day.

Now, to where we are, and aren't, today.

We are in the midst of a major turmoil. In their efforts to describe it, the best and brightest in markets and economics have taken to using terms like "credit market seizure," and "once in a century event (Alan Greenspan)." Yet the VIX is still in ho-hum territory.

I think the VIX is highly instructive because, beginning with Bear Stearns, the financials equities have collapsed. In the case of Bear, the question of whether or not a "bear raid" took place -- that's predatory short selling with the aim of driving a stock as far down as possible -- led to the discovery of massive options trading on the stock just before and during its collapse. This options activity is what keeps the VIX so relevant. Even if by some as yet inexplicable mechanism the volitility is somehow distributed through derivative markets, the ultimate effect on US equity as measured by the S&P 500 Index will register in the VIX. And right now, it's just not showing a "once in a century" reading. This suggest some more shock to come.

Cause and Effect

Purchasing put options (a bet on the decline of a stock) causes the market-maker of the option to hedge his short option position by shorting the stock. In the normal give and take of market activity, there's nothing in that to be concerned about. The market maker will hedge the sale of a call with a long position, and things remain in a sort of balance. However, a large purchase of puts (a sale of them by the market-maker) will entail a large short sale of stock for hedging purposes. And if the stock declines substantially, his hedge ratio will increase and he'll need to sell more. In extreme cases, a self-reinforcing decline can take place.

There's been much talk about predatory short selling being responsible for driving firms' equity prices down. A collapse in equities prices can cause a firm's trading counterparties to question its ability to post more capital or rollover existing debt, something that would threaten its very ability to endure in a capital intensive business. Lenders may therefore balk putting more capital into what they see as an increasing risk. At the very least, they will charge far more to do so, which can have a substantial adverse impact on earnings expectations and therefore, equity values. The credit question then becomes a self fulfilling prophecy, and that's what kicks the CDS effect into gear.

A CDS is a position on the health of a company's debt. A CDS transaction occurs between a seller of protection and a buyer of protection. The seller is insuring the principal of the debt for the buyer. If the company defaults on the debt issue in question, the seller must pay face value of the debt to the buyer. The buyer, in turn relinquishes ownership of the defaulted note to the seller. The buyer pays the seller a premium for the "protection." So, the seller sees cash flow, the buyer sees safety of principal.

There is no limit to the amount protection that can be bought and sold. A firm may have $100 million in debt outstanding, but many multiples of that amount may be bought and sold in protection on that debt. The effect is to leverage the risk and returns in the CDS market.

There is much to say about this fascinating market, but what we wish to focus on at the moment are the incentives for the buyer of protection. A conservative fund with a portfolio of corporate debt is a likely buyer of protection. Often, the sellers have been the major investment banks; when mortgages began defaulting, sellers of mortgage CDS protection were forced to post additional capital as collateral on their obligations. In the case of major banks, the assets were written down in order that the balance sheet would reflect actual values as much possible -- they were marked to market. The problem there is that the CDS market is both negotiated and illiquid, and therefore marking to market is often an excercise in futility: the market may simply not reflect real value. This doesn't necessarily mean that the securities have no value, only that their value is temporarily impossible to objectively ascertain.

But we've been through that part, at least for the worst of the mortgages, and for the biggest of the banks. On the horizon, of course, are the "less worst" mortgages, and credit card securites, too. But that's another post.

Getting back to incentives, if a firm's equity value starts detiorating markedly, either because of predatory short selling or legitimate selling or overall market conditions, the firms debt risk increases. The CDS market, being frequently highly leveraged, realizes a multiplied effect from the debt risk. Certainly, the buyer of protection stands to gain, but only if the seller can pay the buyer's claim. The seller realizes losses that must be written down, creating a demand for capital -- in a highly leveraged market, lots of capital. Hence the "credit crisis."

As a CDS portfolio at one firm loses value, its credit condition is affected, and the seller of protection on that firm's debt is also faced with writedowns, creating the need for capital. Counterparties to those trades will get cautious, and that firm may be left without refinancing capabilities in a capital intensive business, and the cycle repeats.

To complicate matters, the buyers of debt protection have an incentive to see the reference firm default -- and the sooner the better. If they are in a position to influence that eventuality, would they be tempted to? We've already seen how naked short selling can cause just such a downward spiral. Fortunately, the SEC finally reinstated restrictions on it today. But in between August 12, when the previous restrictions came off, and today, Fannie Mae, Freddie Mac, Lehman Brothers and AIG have entered some kind of massive reorganization, thier equity value has dropped to pennies per share, Merrill Lynch sought a merger, the bond and commodities markets have been in the paroxysms of a flight to quality. The horse is a long way out of the barn.

And we haven't even gotten to the seventh inning stretch yet.

source data: CBOE VIX Website

CDS: the next big thing

How big are the Credit Default Swap haircuts going to be? Well, you can't say, because it's Over The Counter (as opposed to exchange listed). The market is a negotiated one (as opposed to an advertised one), and with the basis as volatile as it is, nobody commits a real price until they're ready to deal, because fair value is very much a moving target.

In fact, with trades driven by necessity rather than value, "fair value" is basically a nice concept, but not necessarily where a trade will be done. When the market is Volatile (capital "V"), and so many underlying pieces have values contingent on so many unknowns, it can't be easy to know what anything is truly worth. Markets can price any amount of bad news. But nothing torments a market like uncertainty.

With regard to the CDS market, buyers of protection are probably, by and large, happy clams. But for every buyer, there is a seller, and they are the unhappy clams. How many clams will be lost when the trades are settled? It depends on..what things are worth. And we're not too sure about that. But if they lose enough clams, there'll be another round of protection sellers who are unhappy clams, because they sold protection on the first bunch of clams.

It's a reactionary, defensive, back-against-the-wall kind of thing. One might say that it seems as if capitalism itself were under some sort of attack, if one had a poetic bent.

Today was not a good day in the market. It's never good when the stock market closes on its lows. It's really not good when the lows it closed on were the result of a single-session decline that is larger than all but the one between 9/11 and 9/17, 2001.

There we go with the terrorism theme again. Just keeps rearing its ugly head. It's that time of year. Financials crumbling like clockwork. Sworn enemies with mega-tons of cash, and world markets now connected by networks, arbitrage, and funky securities called "derivatives." But I digress.

Where was I...oh, yes. Not a good day. Closed on the lows. If this were just a bad day, someone could announce a merger, or the Fed could make some comments about interest rates, or something, to calm the markets and assuage fears. But what can the Fed say now? "We'll loosen up money?" That's all they've been doing all summer. That's not going to restore anyone's confidence.

And this is no ordinary bad day. This is, according to the statisticians, the worst day in years, by one measure. But the measure doesn't communicate the context: this is also one of maybe a half-dozen really, really bad days in a really bad year. And the professionals are walking around saying really unprofessional things like, "we don't know what to do, we've never been here before," and, "we have no idea what the CDS market will do." There's a very large "herd" contingent in this business; people studying one another from the corner of their eyes, trying to anticipate the other guy's next move. True leadership is rare, indeed.

This is the bad side of leverage, everyone's figured that out by now. And of course, everyone in the game was supposed to know better. Leverage is marvelous in a liquid, transparent market. But tip an inverted pyramid a bit too much, and....

So, the next thing we need to get our heads around is the CDS liability. The non-bank CDS liability. Banks have had to attempt to value these securities and taken huge writedowns associated with them. But hedge funds, who very often hold the aggressive other side of the trade, haven't. At least, not publicly. Watch the hedge funds. Maybe they can dodge a bullet. But there won't be any bailout for them.

Wall Street has many sayings. One of them is, "Money always returns to its rightful owners." That's what happens in a credit contraction. All that money that came out of nowhere goes right back there again.

Bank of America acquires Merrill Lynch

so says CNBC.

$29 per. A large (70%) premium to the close of Friday. The world apparently will not end this week.

So, the south rose again, after all. Meanwhile, did John Thain tapdance on Dick Fuld's fingers, as he clawed the rocky ledge? Perhaps, more likely, when Lehman was left without a partner, the Fed leaned on Merrill to shore itself up (suggested by Rich Yamarone of Argus Research).

I say the deal legitimizes Lehman's value, unless they are underwater in toxic assets.

Let's hand it to John Thain (yes, of course, a Goldman Sachs alumnus). He's the guy that woke up the NYSE to the reality of electronic exchanges and merged them with ARCA, before it was too late.

Today he pulled off a shoring up of Merrill Lynch at a premium to market. This might just be the turning point for Wall Street. Not that the pain is over, but that the wolves are on the run.

Nice work, Mr. Thain.

If the deal gets signed, that is.

Change partners again.

It's speed dating from Hell.

Bloomberg is now reporting (a euphemism for "rumormongering," apparently) that, in a huge smackdown to Lehman Bros, Merrill Lynch is in merger talks with BofA, who only last night was reported to be the likely lead buyer for Lehman Bros. in a consortium that also included JC Flowers and CIC:

Sept. 14 (Bloomberg) -- Merrill Lynch & Co., the third- biggest U.S. securities firm, began merger talks with Bank of America Corp. after its share price fell by more than a third last week, people with knowledge of the negotiations said.

Furthermore, Bloomberg reports that AIG is now "in talks" with KKR and JC Flowers, seeking additional capital, which of course everyone needs tons of.

Capital. In a credit contraction, capital isn't just in short supply, it's in ever-decreasing supply. Formerly inflated asset values come down to earth with varying velocities. You've heard the saying, "A banker is someone who lends you money when the sun is shining, but demands it back when it's raining." "How unfair," you think. "I'll bet they don't live by the same rules." Ahh, but they do.

Merrill's smart. Nevermind that they didn't need any additional capital two times in the past two months. The time to talk merger is before your stock drops 77% in a week. But still, Merrill Lynch? That seems to have the potential to be psychologically devastating, a real shaker of "investor confidence." No wonder S&P futures are down 2.3% overseas.

And what about Lehman, who Barclays walked away from, who was supposed to be on the "to buy" lists of BofA, JC Flowers and CIC? Who knows? As of this writing, they are drawing up a bankruptcy filing. If they can't get a bid that's fair, this apparently is the best move. However, it ain't over 'til it's over.

Seperately, can anyone think of who might be enjoying the world premier of "Nightmare on Wall Street, part IV?" It kind of begs the question, "what do bear raids and bank runs have in common with hijacked jets and skyscrapers?"

Note the respite in the run on publicly held investment banks since Bear went down lasted about as long as the temporary moratorium on naked short selling, which expired Aug. 12. Almost immediately, financials sold off, according to MarketWatch. First, Fannie and Freddie were in the cross-hairs. Once they were out of the way, Lehman, then AIG and Merrill.

For now, that's as far down that road as I'll go.

Does Bloomberg pay its staff by the headline or something? They seem to take the buckshot approach to publishing them: fire enough and something meaningful might result.

In case of bankruptcy

According to Moneymill, which we just discovered but seems like a reasonable commentary, Bloomberg is reporting that ISDA (International Swaps and Derivatives Ass'n) is conducting a "netting transaction" in anticipation of LEH bankruptcy filing.

To wit:

“ISDA confirms a netting trading session will take place between 2 pm and 4 pm New York time for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and return to ISDA.”

Note that this is a preemptive administrative operation and will have no meaning whatsoever if LEH reaches a deal to be acquired or recapitalized, or otherwise manages to avoid a bankruptcy filing before the 11:59 pm transaction deadline.

We could find no odds of such an event happening on Intrade, curiously. However, given that Barclays has walked away from the table, according to Bloomberg, the odds have certainly risen. However, it has been observed that Barclays, like your average flea-market browser, has been on the potential aquirers list for a few banks but has yet to pony up for anything.

It is often repeated the Lehman is a solid franchise, a leader in their niches, and is not facing the liquity starvation that Bear did (LEH hasn't been downgraded by bond rating agencies yet). One analyst put it this way, in a Bloomberg story:

A Lehman sale may be possible without government backing, an analysis of Lehman's distressed mortgage assets shows. In a worst-case scenario -- with the assets discounted more deeply than in recent distressed sales -- a buyer could write off almost half of Lehman's mortgage holdings and still have $7 billion of equity left in company, based on figures the investment bank disclosed when it reported third-quarter financial results last week.

The wolves are surely circling, but it doesn't sound like a bankrupt operation. However, if the wolves do nothing but circle (read: prance and pose and whine for government backing of risk), then a ratings downgrade, said to be imminent, could change the picture drastically, causing cascading demands for additional capital by counterparties, and making a bankruptcy necessary.

Let's hope the wolves can pull themselves together and price the booty reasonably.

Maybe even Goldman Sachs isn't big enough

...to cushion the fall of Lehman Brothers by itself.

From The Financial Times of Sep 14:

Christopher Flowers, a former Goldman Sachs partner who is close to BofA, manages about $3.2bn of CIC’s money in a fund dedicated to taking stakes in financial institutions.

Looks like they need some reinforcements. Good thing they have these not-so-distant cousins at CIC (The China Investment Company) in the Rolodex.

The FT piece reiterates the same lineup for the spoils that has been circulating for a couple of days:

Bank of America is seen as the leading candidate to buy Lehman. It is considering a possible joint takeover bid with JC Flowers, the financial investor, and China Investment Co, the Chinese sovereign wealth fund.

Recall that BofA earlier absorbed soon-to-implode Countrywide Credit, and authored the study that became the inspiration for the Mortgage Protection Act, discussed a bit more at the link.

Lehman Bros, as seen by Wall Street.

I'm not sure which former GS partner runs JC Flowers (or if he's related to Christopher), but given how "in the loop" they seem to be whenever a legacy Wall Street bank fails, they sure are on someone's "A" list.

With connections like these, who needs a government bailout?

And incidentally, we don't see this as a bad thing, necessarily. Conspiracy theorists will foam at the mouth while sharing their suspicions about Goldman, The Fed, and the perils of forsaking the gold standard. And granted, there may be grains of truth that can be spun into compelling plots of financial sci-fi.

Before they go too far with their tales of peril, however, they should consider the wisdom of having a Goldman Sachs office in Beijing, which is drowning in dollars and owns about a 20% of foreign-owned US debt -- second only to Japan.

Who's afraid of sovereign wealth funds? If the local Goldman branch happens to answer affectionately to the name "China Investment Corp," no matter, as long as it's "dedicated to taking stakes in financial institutions" and the reigns are held by someone who speaks the same language as Treasury, aka Hank Paulson, former Goldman CEO.

The bottom line as we see it is this: If you don't have an "A Team" when times get tough...you're screwed.

History Rhymes

Or does it? Whether it rhymes or not, like a poem, a song, a novel, a really bad movie, or even an advertising campaign, it keeps hammering home its point until it's over. And it's not afraid of invoking repetition for emphasis.

With that understanding as a backdrop, I sat down to my breakfast beneath a wall-mounted television set at The Diner. I never sit in the back room, where the set is, unless I have bad luck and the place is full. I never watch television, either, unless it's forced on me, temporarily.

On that television, placed to catch one's attention, I observed a drag race, only one of the cars, travelling at somewhere between a hundred and two hundred miles per hour, veered into a guard rail and disintegrated in a ball of flames and flying debris. One couldn't help but be convinced of the driver's tragic fate.

And after that, a clip of a bicycle race, with one unfortunate cyclist, again, hitting a guard rail, and tumbling limp down to the center of track, where the camera trained on his twisted, motionless body.

It was a bit gruesome, actually. And it got more so: a road racer losing control and driving straight into a crowd of spectators. No cut, no edit; it was all there for unhindered consumption.

I began to get the idea. The name of this piece of "entertainment" was "Whacked Out Sports!," and it's function was to deliver videos of gruesome, tragic sports accidents for your viewing pleasure. One or two more: some genius on an ATV speeding over a jump ramp placed at the crest of steep, grassy hill. Airborne, the vehicle flips, the operator is thrown, the vehicle lands squarely on top of him before rolling on down the hill. Skateboarders attempting tricks on public planters, stairways, etc. These are people without any protective suiting, and they're playing around on concrete. This one I don't watch for a few moments, dreading what will be televised. A bit later, a motionless body in a public pathway, with curious onlookers passing by. All on camera.

This show was repulsive. A libertarian amoralist would admonish that I should simply not watch, if I don't like what I see. Fair enough, notwithstanding the valid arguments against having a barrage of potentially offensive graphic images situated in public and private gathering places. I ceased watching. I turned to my breakfast. To my thoughts. And to the newspaper in front of me.

I ate my breakfast. I thought about all the effort that goes in to making a television show. Planning. Talent. Somebody has to find those awful videos. Do they pay for them? Do people have incentive to shoot them? Talent and airtime don't come cheap. Who finances this show? Why? Why is something so morbid, presumed to be profitable?

I thought, what motivated people to promote as entertainment, the graphic, explicit destruction of human life? I wondered what that said about us as a society, that we might be so inclined to consume such fare for...entertainment! In a previous stanza of history, chariot races, coliseum events with lions and people... I wondered, "are we becoming like they were?"

In the newspaper in front of me, an aged, black and white photo: A man hanging from a rope tied to a high branch in a tree. His tongue is out. On the ground, a group of Nazi soldiers smiling at the camera. The picture turns my stomach, but the caption assures the reader it's a "staged hanging." That means it was set up for the camera, for fun. For...entertainment, Nazi style.

Are we becoming like they were?

***
I finish my breakfast, flipping to the sports page. On the way there, an interview with a film-maker, famous for a TV series about the funeral business. Undertaking. Dealing with the dead. His latest "creative effort:" something about a 13 year old girl who loves sex, a pedophile next door, clueless parents, and vampires.

Who are these people, I wonder, that apply their heart and soul to the exaltation of violence, death, destruction of innocence, victimization of children, promotion of myths; more so, who are the people who pay up to consume it?

Have we become like they were?