TILT!!!!!!
APOLOGIES FROM NOAH & ALL OF US AT URBAN DIGS
MARKETS WENT TILT & SO DID WE (disk overload).
Lehman evaporated into market history yesterday. Frankly, they went out with a whimper rather than a bang. The analogy I used with my partner yesterday morning was that when Bear Stearns went down the Feds showed up with fire trucks and brought out the big hoses to put out the fire. They did this because Bear was a huge counterparty in the under-regulated over-the-counter derivatives market. The Feds did not know what might happen as a result of a major dealer and counterparty, not being able to make good on contracts that helped other folks hedge out their risk. In the Lehman case, the Feds pulled up in fire trucks, took to the trenches that had already been built around the firm in the aftermath of the Bear debacle, and pumped a bunch of water into the trenches to keep the fire from spreading, but they let it burn down to the ground.
This approach seemed to work and briefly re-injected fear of moral hazard into the market. This was proved out in spades by Merrill Lynch's jump into the arms of Bank of America, before their house caught fire. It wasn't until around 2 p.m. that the markets started to fall apart. The culprit was AIG who reportedly turned down an offer from a group of private equity firms for a capital injection. Brokerage firms are not very transparent in terms of their assets and liabilities, but insurance companies are the ultimate in black boxes in my opinion, and one with a big credit derivatives business fuggedaboutit!. According to CNBC, there is potential for a federal role in the bailout of AIG. There is reportedly going to be no private capital solution. That's how scary AIG's black box is. Word of this pushed the market briefly into positive territory after opening with a thud following yesterday's 500 point decline.
The feeling that dominoes are falling is pervasive. The risk of a systemic rash of failures is real. We are on the verge of an environment where investors and financial institutions pull money from debtors causing them to fail, with the connection to fundamentals becoming tenuous. But don't let me fail to mention....FUNDAMENTALS SUCK!
On the positive side the VIX has gone ballistic indicating the kind of acute fear, which usually is a peak in uncertainty and often sets up a rally. In this case the question is, does it set up a long-term buy?
I have been hopeful that the underlying real estate market issues would begin to benefit from easier comparable statistics and the second derivative (the rate of change of the rate of change) in residential real estate could at least start to turn positive. But the infernal feedback loop of institutional failures, layoffs, securities markdowns and real estate financial constriction has got the economy in a bear hug.
The realization of this is credit collapse is being reflected in money market spreads. 3 Month LIBOR OIS spreads widened to 116 basis points overnight. The treasury Dollar/Eurodollar spread blew out to 175 basis points, the widest spread since March.
Sometimes it's best to admit that you have no idea what to do and not to make big financial decisions. I am in that camp for now. I certainly would not be buying real estate in New York City until the smoke clears a bit.
Posted by Fred
Tue Sep 16th, 2008 12:38 PM
to say AIG is a blackbox is an understatement. they will be uncovering losses for at least a year and that's in addition to their spiking cost of funds. the real issue is what's their business model going forward? AIG became one of the most bloated, under managed companies on the street. the company consistently turned down innovation and promoting from within in order to preserve the status quo of its inept upper management. i feel the next step will necessarily be a massive downsizing and sale of all non core business units, especially global investment. they may do this by just selling units at the individual country levels but the company will be a very different animal in short while (perhaps it could become a primarily Asian company again). it might be a while before we see any ads boasting of their investment management expertise. not.
Posted by jeff
Tue Sep 16th, 2008 03:10 PM
I remember meeting Hank Greenberg years ago and wondering how a single person so focused on details could run such a sprawling enterprise. Seeing the way people cowered in front of him it was clear it was a one man show. I guess with that man gone they had nowhere to go but down. It was around that time that finite insurance started to get very popular as did insurance companies investing in and even seeding hedge funds. The derivative seeds that brought them down were being planted.
Posted by Anon
Tue Sep 16th, 2008 03:48 PM
Barclays buying LEH's investment banking (broker-dealer). Very big news. Will forestall many (if not most) layoffs.
Posted by uwsider
Tue Sep 16th, 2008 04:07 PM
With barclays being a traditional bank, does this affect the compensations of the Lehman unit? Goodbye to crazy to the crazy bonus?
Posted by Anon
Tue Sep 16th, 2008 04:26 PM
As far as bonuses are concerned, I imagine they will need to be competitive. What that means in this environment, of course, is anybody's guess. There may be retention packages as well. This is the best possible news for LEH bankers. It will not, however, make up for the fact that many employees' savings were wiped out.
Posted by jeff
Tue Sep 16th, 2008 08:03 PM
Looks like the Barclays deal will save 8,000 to 10,000 jobs according to the Telegraph with Asian and European jobs less certain...my guess is there will be some leakage of non-franchise type players and activities, but far better than an outright liquidation. I wonder if they threw in the building in the $2B price tag. Irony of ironies is that the insurer on a CMBS deal which included a long-term lease on Lehman's Canary Wharf building in London was reportedly......AIG.
Posted by Anon
Tue Sep 16th, 2008 08:24 PM
I don't think there was ever any realistic expectation that all of Lehman's NYC employees - or even most of them - would be unemployed. Clearly, there was demand for them at a minimum from Barclays. Just a question as to whether Barclay's (or someone else) would (i) buy all of LEH, (ii) buy the investment bank only (which they are doing) or (iii) go after the employees or teams of bankers individually post-liquidation. I guess they reached the conclusion that hiring teams scattershot post-liquidation would be inefficient. Probably right, although I figured they might have gone that route.
Posted by prague-noah
Wed Sep 17th, 2008 05:36 AM
so I see the feds bailed out AIG to prevent a bankruptcy and eventual credit event that would have resulted in CDS payouts, that would have caused systemic risk.
Crazy how this fed move occurs after they allowed lehman to fall. Clearly, if you are not big enough or intertwined enough, you will not be bailed out. That in and of itself in my mind will provoke moral hazard and encourage more intertwining wayyy down the road when this crisis is over and regulation is in place.
The world as we knew it is over. Welcome, to the REAL WORLD, neo!
Posted by prague-noah
Wed Sep 17th, 2008 06:02 AM
the more I think about this AIG bailout, the more I worry. Is 85 bil enough? Where will the money come from? Selling treasuries? Damn, how much treasury issuance will all these bailouts come to? Im not a smart man, but it seems to me that all this supply might have a negative end result? No?
Can someone with bond market expertise please explain to me what a flood of selling treasuries may ultimately do to the bond market in general over the course of the next few years? All I know is, there are no free lunches...crazy world.
Posted by Anon
Wed Sep 17th, 2008 08:00 AM
There should be value in a break-up of AIG. There are considerable businesses within AIG that do well, that should not be affected by the credit crisis. Perhaps the Fed's plan involves carving out the tumors, leaving intact the remaining sound insurance businesses (which would have had a catastrophic impact had they been allowed to fail). That begs the question as to whether the "tumor" businesses can be liquidated in an orderly fashion or allowed to fail such that the taxpayer doesn't lose nor does the world come to an end.
Posted by prague-noah
Wed Sep 17th, 2008 08:39 AM
got a break for 30 min as wifey shops. Anon, im not too concerned about the shareholders of AIG, the break up value, as much as I am about what the fed is taking on and how it will be funded.
The feds $800bln balance sheet is probably 75-80% used up now in an attempt to ease this severe credit crisis.
Im beginning to get very interested in shorting longer term treasuries, especially if fed eases and the treasury prices rise a bit more.
We all know that the bailouts are not done and WAMU is next, and Wachovia after that. Then the auto industry perhaps? Consumer confidence effect when WaMu falls? Run on other banks? These are my worries near term...
anyone still drinking the kool-aid has some pretty damn strong self defense mechanisms to blind them from reality
Posted by prague-noah
Wed Sep 17th, 2008 08:42 AM
Jeff, if possible can you do a piece on where you think we are in this asset cycle, in terms of confidence, and whether you think this go around can even apply past historical cycle trends?
I dont think so at this point. We are in unchartered territory and Im starting to really worry about runs on other banks, especially if wamu fails. this is becoming a global crisis of confidence very quickly.
Posted by anonymous
Wed Sep 17th, 2008 10:57 AM
The government is not focusing on stopping this vicious cycle but rather seems to be treating the side effects. These financial institutions are failing due to toxic assets whose underlying values are derived from 1) properties and 2) mortgages on those properties. If the government could figure out a way to prop up the values of these homes and curb this cycle, then wouldn't that be a better solution? Otherwise, what we'll see is history repeating itself a la the early 90's. A bunch of banks will get wiped out while a few other organizations with cash in hand at the right time will profit from their downfall. The beta is illusory while the alpha is very real.
Posted by brenda
Wed Sep 17th, 2008 11:00 AM
Noah,
I don't know all of the terms, but this really seems to be the equivalent of a bankruptcy proceeding with the gov as trustee. I'm fairly certain they're going to make AIG spin off their highly lucrative insurance companies (Warren is probably looking at some balance sheets as we speak). AIG wasn't insolvent, it was worth about a trillion, so this seems to be one instance where a company was taken over by the gov without any real benefit to the company. Which to me seems ok, and which is probably one of the reasons the market isn't so happy right now (or is that the housing starts, the money market fund, who knows?) My real question is, is this legal? Is Greenberg preparing to file for injunctive relief as I type? Interesting, and distressing, times.
Posted by brenda
Wed Sep 17th, 2008 11:03 AM
Calculated Risk has a bit on the TED spread, 2.76. Holy mother.
Posted by Chris
Wed Sep 17th, 2008 11:59 AM
The collapse of several regional banks is probably the next phase. Should offer interesting shorting opportunities - SEC permitting.
Posted by Antoine
Wed Sep 17th, 2008 12:01 PM
The collapse of several regional banks is probably the next phase. Should offer interesting shorting opportunities - SEC permitting.
Posted by prague-noah
Thu Sep 18th, 2008 09:41 AM
HOLY GOLD! when did that happen! YAYYYYYY!!