Friday, September 12, 2008

To Bail or not to Bail, That is the Question

So today might actually be the last day of this space being a Lehman Brothers and finance blog and more of a poker blog, but not surprisingly given the situation, I've got more to say and much more on my mind about the situation today. So as of late Thursday, word is that the U.S. government is working overtime to orchestrate a sale of Lehman Brothers to whomever they can find to buy the beleaguered bank. Bank of America has been mentioned among the large U.S. financial institutions, and HSBC and Barclay's, long rumored to be Lehman suitors back when the company was actually worth something, lead the list of potential acquirors on the foreign bank side. Who knows where this will eventually end up.

One of the interesting rumors I read this morning is that the Fed, the U.S. Treasury and Lehman management -- somehow still the same motherfuckers who got the company in to this whole mess over the past several years and didn't do shit to get them out of it -- are exploring a possible three-way deal, selling the investment management unit to one party, the investment banking operations to another, and the mortgage assets to a third party. Now to this, I ask Who the fuck would ever want to buy those last two parts? We're talking about a combination of the investment banking business and the real estate assets that are valued at negative $5 to 6 billion right by in the market. I don't know the split between the two, but does it really matter at this point? It's obvious the company has or is currently in process of losing most of its investment banking clients. The capital markets (fixed income and equities) division of the company has been crushed by huge losses, poor trading volumes and a focus on fixed income which has seen about 90% of its revenues evaporate over the past twelve months. Who wants to buy those businesses now, without the crown jewel of Neuberger Berman to help cushion the blow? And now Lehman wants me to believe they might have a buyer for their distressed real estate holdings as well? Puh-lease. That one my friends, I'm not just not seeing.

But I have to say, I think the most interesting aspect to this whole talk of a government-orchestrated buyout of Lehman Brothers today is the notion that the U.S. government might once again have to step in with a bailout using public funds. This would be after a similar move with Bear Stearns back in March, and then just last weekend's government seizure and capital influx to both Fannie Mae and Freddie Mac. The Bear bailout basically involved the government standing behind and agreeing to take on the risk of the last $29 billion of the $30 billion troubled asset portfolio of Bear's that JP Morgan took on when the government "convinced" JPM to buy out Bear to keep it from officially going bankrupt. The Fannie and Freddie actions are even more socialist-sounding, with the government stepping in and flat-out taking over control of the two mortgage giants, at a total cost to U.S. taxpayers of potentially a couple hundred billion dollars. And now many people are saying the government should once again step in to bail out Lehman Brothers as well. Let's discuss.

First and foremost, I completely hate the idea of government bailouts in general, and especially government bailouts of public companies in the financial sector, whose greed and thirst for profits led them to make literally billions of dollars in profits and get all nice and fat -- for them and for their shareholders -- when things were fine, but then as soon as things go bad, then they need the government, and not the fat cats or those fat shareholders to bear the brunt of the losses. That shit to me is just plain sick. Frankly, this article right here I think sums up my feelings on the issue better than anyone else I've seen and far better than I could do it myself.

So all that above being said, I do need to point out for those who don't understand this, the government truly had no choice but to bail out Fannie and Freddie. Between them, these two institutions hold some 75% of all mortgages in this country. Think about that one for a minute. There is absolutely no doubt in my mind that the fallout from that kind of failure would compeltely crush the the average consumer, the debt markets and most other aspects of the U.S. financial system, probably for years to come, and the end result of all that would be far, far worse than if something was done to backstop the troubles. Of course, where the fuck was the government over the past 5-10 years to stop these two institutions from being in such a position that their failure could actually happen and could actually impact the system in this way? Nowhere, because the companies were making money. Greedy hand over greedy fucking fist. So that's a problem, and one that the current administration should defnitely have to answer to. But given where we were at a few months ago, there at that point was just no choice for the government other than to step in and take over. Those failures would crush the system, and like I said the effect on the U.S. economy and on the financial markets around the world would have been exponentially magnified beyond its true scope because of the fear, the panic and the general collapse that would have ensued.

The better question on whether or not there should be government bailouts I think relate to the investment banks. I think a strong argument can be made that, back in March, the outright failure of Bear Stearns over essentially a two-day period would have had a similarly crushing effect on the financial system and on the U.S. and global economy. Not truly similar in scope to that of Fannie and Freddie, which simply could not be borne by the U.S. or really anywhere in the world without a Great Depression-type of panic effect the likes of which no one reading this today has ever seen, but it probably would have been very, very bad. For whatever reason, I find it harder to swallow bailing out these investment banks though, because unlike Fannie and Freddie whose very existence has always been ultimately to provide mortgages to U.S. residents, a bank like Bear or Lehman Brothers only exists for one purpose: to make money. And that is exactly what they did, for many many years prior to Bear's failure earlier in 2008. I'm too lazy to go and add it up right now, but suffice it to say that Bear Stearns made billions and billions of dollars in profits over the several years prior to this year, and their CEOs made hundreds of millions, the stock grew by billions, the large shareholders got rich off of this profit machine, everything was driven by the huge sums of cash this business spewed out. That was the whole point. I just have a real fucking problem with the government stepping in when things go south because these greedy, hubris fucking bastards' investments all went south and suddenly the whole profit machine broke down.

I guess what I'm trying to say is that, at the time I was in favor of the government stepping in to guarantee $29 billion of Bear's troubled debts, because at the time -- and perhaps this judgment is clouded a bit by my working directly in the investment banking industry myself when it happened -- but it seemed to me that a Bear collapse would have been catastrophic enough to parties all around the world, big and smaller, rich and poor, to warrant the government preventing the calamity from happening.

But now I think I see the error of my ways. In retrospect, which of course nobody knew at the time, but in hindsight it is clear to me now that the government should have let Bear fail, and taken on the risk of whatever fallout there was from the 5th largest investment bank in America collapsing. The unwinding of transactions, the massive losses for some of the institutions and other companies and parties most affected would have been tremendous. The losses to Bear's counterparties would have been in some cases catastrophic, and the shock to the financial system at large would have been felt far and wide to say the least. Surely the stock market would have tanked unlike anything else seen so far since the credit crunch happened. But you know what? It should have. The whole house of cards has come crumbling down over the past several months in this country, and a collapse like this, with the unimaginable lack of foresight and oversight from this country's financial leaders and current administration -- and that means idiot Bush and the laughable Congress over the past several years -- when it comes right down to it, is worthy of having caused a huge correction in the stock markets, plus a lot of associated panic and fear to go along with it. We should have been afraid, we should have been panicked back in March. But the government stepped in to stop the full effects from being felt, and look where that got us. That $29 billion backstop from the Federal Reserve back in March to cover Bear Stearns' further losses on their horrible loan portfolio ended up just being the tip of the fucking iceberg, with the government now an additional $200 billion in the hole (of taxpayers' money, of course) to prop up the whole consumer morgage system in the country, on a bailout that believe you me really had to be done.

But now the vultures are circling again over Lehman Brothers, and once again the socialist bitches in this country who don't even realize how socialist they really are, are crying out for the government to step in and backstop Lehman Brothers' debts and losses for whichever financial institution they can convince to buy Lehman on the cheap here. And frankly, without a government guarantee or some form of government protection, there is a decent chance that nobody wants to go near the shitstorm known as Lehman's global mortgage portfolio and the company simply falters, dies and ends up bankrupt in a matter of days. And you all know if you've read here this week how broken up the whole situation and that whole thought makes me, having many of my good friends, hard-working and truly top-notch people and employees, people I myself hired over just the past several months, still stuck there right now inside that building I can see right out my window here. To think of those people all losing their jobs with the company that I know and love going completely kaput in a matter of a week is unsettling and nauseating to say the least.

But you know what? I don't want to see the government step in. I truly hope for the best for Lehman Brothers the company, and for every single person I know there who does not deserve to be burdened and affected by all this bullshit. But I've come to the conclusion over the past 24 hours or so that another government bailout is the worst idea I can imagine right now. Right now the last thing we need is more government action in private enterprise, and more taxpayer money being used to backstop the nasty effects of the greed and hubris of a small number of super-rich asshole leaders who should be jailed for their horrible actions over the past year or two. The U.S. people already don't realize the tremendous price they're going to pay over the coming years as we all -- every one of you out there reading this -- struggle to pay for the ridiculous cost of these bailouts in the form of higher taxes and lesser services from the government. $229 billion dollars and counting just isn't easy to come by or just overlook -- and believe me, there will be more bailouts, with companies like Washington Mutual, the nation's largest thrift bank, already essentially finished -- and we will be paying for this for a long, long time in this country. So I don't even want to think about the government stepping in to back any the $60-70 billion of distressed mortgages on Lehman's books. If they can't find a buyer for this dog at $3.50 a share or whever the stock opens today, then I think, sad as this makes me, the government ought to let market forces drop the stock to $2 a share, to $1 a share, or lower. Eventually, make the price of buying Lehman Brothers cheap enough, and someone will probably be willing to step up and take on the risk. And if worst comes to worst, and nobody wants to take on that admittedly unquantifiable risk for any price, then I think the only real choice is to let Lehman go away. It's a horrible outcome for all the people I know and respect and care about over there, but what else can I say. Now is not the time for another governmental bailout, at least not of Lehman Brothers. Six months ago when Bear collapsed, governmental intervention seemed at the time like a necessary evil to me. Right now, it's just not. Sad but true.

Oh and by the way -- and I know this probably opens a whole can of worms here from all the diggheads who've been arguing politics for the last few weeks on their blogs -- but if the American people elect a man as President who thinks raising taxes on anyone right now is the right move, then they will get what they deserve. It's fine to vote blindly party-line like basically every single person I've seen writing about the election on their blogs seems ready to do, but if you vote blind and without thought, you will elect a blind and without-thought leader who will act blindly and without thought. Please, I urge you, try to use your eyes and your brains this November.

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Blogger 1Queens Up1 said...

Personally I thought it was fgunny on Tuesday how I was reading that the f-ups from Fannie and Freddie wanted to know about Severance.

Wait wait wait. So you royally screw up a company where you paid exhorbant amounts of money, you DONT have to pay any of that back. And when the Government uses public funds to save the company, you want to know what you'll be paid in severance?

How about offering no jail time as severance?

I dont know about you but i got overpaid to do my job and I trashed my buisness unit within a company I dont think I could muster the cajones required to say heygive me a severance package...

Dont even get me started on the fact everytime the government is taking over all these companies, China looks more independant...

10:49 PM  
Blogger Astin said...

Bear was the right move at the time. If Bear at been allowed to die, Lehman would have been the next day, and every small brokerage firm and bank would follow, probably along with at least one more big name. The market panic would have been devestating.

Fannie and Freddie was also absolutely necessary due to the huge volume of mortgages. Those two companies should never have existed in the first place though, as they were GSEs that hindered the free market in regards to mortgage lending.

But Lehman? It should be allowed to fail. It's collapse wouldn't have the same effect as Bear's would have because the market is more braced for it now. Same goes for WaMu and any other troubled financial institution from this point forward.

WaMu will be bailed out though, because FDIC doesn't have the cash to insure the accounts of a major bank collapse. There are trillions in bank accounts, but only around $50 billion in insurance for those acccounts. I think that's called insolvency.

There's a problem with taxes though. Neither candidate thinks raising taxes is a good idea, but the government needs money right now. Expect lean times for the next few years as programs get cut and things like infrastructure gets hurts in an attempt to avoid hiking taxes. Eventually, they might even cut military budgets.

11:08 PM  
Blogger Hammer Player a.k.a Hoyazo said...

Great points, both of you. I agree with mostly all of it. I'm still not 100% sold that bailing out Bear was necessary like bailing out Fannie & Freddie clearly were, but at the time I certainly agreed that the government needed to prevent Bear from just going bankrupt.

11:36 PM  
Blogger Julius_Goat said...

Interesting report in TIME -- apparently, Douglas Holtz-Eakin, a former Director of the Congressional Budget Office and current chief McCain economic advisor, admits that McCain will raise taxes.

"Douglas Holtz-Eakin, a former Director of the Congressional Budget Office and current chief McCain economic advisor, is an honest man--which means he's something of a liability on the Straight Talk Express. A few months ago, he admitted to my colleague, Michael Scherer, that Barack Obama's economic plan would reduce taxes for most people. And now, in a forthcoming book by Fortune columnist Matt Miller, he makes it clear that the next President is going to have to raise taxes."

-Joe Klein

Take it as you will . . .

2:01 AM  
Blogger 1Queens Up1 said...

I think the bigger question is now that we've crossed that line, where does it end?

How many more failing banks/brokers/whatever will the government keep bailing out? While I understand the B-S bailout and the F/F bailout, it set an awful precedent.

2:04 AM  
Blogger Irongirl01 said...

How in hades did Lehman go from being a blue chip investment banking firm (I mean first tier, lead underwriter etc) to a has been. Obviously it was over a number of years and I am out of step with the finance world but there is a book in the making on this one.

Interesting thought on the banking/mortgage issue. Beal Bank (you know Andy's company) apparently bought tons of sub prime loans etc. Supposedly he was a master of valuation and had no issues taking on questionable properties. Wonder if he is busy minding the store and why he hasnt been in touch with Doyle and crew for a rekindling of the big game.

2:44 AM  
Blogger Fuel55 said...

Just eliminate taxes and borrow all government needs from the chinese.

12:31 AM  
Blogger WildDuces234 said...

I'm blown away at what is going on at the heart of the financial district in this country! this is the second collapse of a major corp bank this year! I have heard things about wash mut not having good numbers either. say good bye to your national currency America!

9:18 PM  
Blogger Chef said...

Hey man, you ever read Liar's Poker? I can't remember the author's name, but the story is about his coming up back in the 80's. A lot of it explains how this all started.

Great article on this, wifey likes reading the wall st stuff (she's VP compliance in the city) and I dig the poker writings. Great blog

2:24 AM  
Blogger Dean said...

Yes but what does any of this have to do with poker?

I think what we need is to elect Barack Obama. He is a smart guy and a savvy poker player. He'll turn the economy around and all of this will be a distant memory.

That is until the rich get fed up with paying so much in taxes and force another war monger into the white house!!

5:41 AM  
Blogger Irongirl01 said...

Im literally speechless right now over 100 yrs of history destroyed. Was looking for your thoughts on the latest.

1:11 AM  

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