Now Hear This!

Gang,

Just two brief items for you to consider:

Item #1:

If Lehman collapses... by Nouriel Roubini.

This article is a must read. It talks about the upcoming collapse of Lehman Brothers, the fourth largest American Investment Banking house.

The economist writes:

... The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: after all Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).

The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.

But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found or put capital into a bad bank that would take the toxic assets off Lehman's balance sheet.

Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman or fork new money to support a bad bank full of junky toxic waste. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case)...

In English...

The Federal Reserve, the Treasury Department, and other concerned government agencies are caught between a rock and a hard place.

Since they recently bailed out the GSEs (Frannie and Freddie); Fedgov doesn't want to have to take over another company. It doesn't look good politically, don't ya know!

And the Wall Street firms (many of whom are in the same predicament as Lehman), aren't trying to buy into a bank that is insolvent already... unless Fedgov is willing to make a sweetheart deal akin to the Bear Sterns debacle.

However, at the end of the day, Lehman brothers is going to get bailed out by We the People. There's simply no choice. A Lehman failure would set off a vicious chain reaction that could bring the whole (extremely fragile) system to its knees.

No matter what happens, I don't expect this crisis to be resolved until there is significant blood on the streets. Nobody wants it, but that's what's going to happen.

Change is coming, whether we want it or not.


Item# 2

Is America going back on the Gold standard??

Check out this post at Itulip for more info.

Will it pass?

Not yet. But you see, the fact that a Congressman other than the Honorable Ron Paul has submitted a (less than perfect) proposal for consideration speaks volumes.

Somewhere out there, somebody understands that the future legal tender of this country will either be backed or measured by Gold.

This is yet another example that significant shifts are in the making. And they will come like a thief in the middle of the night.

Are you prepared to take advantage of the new reality? Serious students of MGTOW need to focus less on Political Feminism. Those rejects from Women's Studies class are yesterday's news.

I would humbly suggest that Men get themselves ready to ride the waves that will soon be breaking upon the shore.

The future looks bright!

Toku.

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Update:

According to Bloomberg, it looks like Lehman is going to file for Bankruptcy.

What will the fallout be on the U.S. financial system?? Only time will tell.

But in the meantime... another corrupt Investment Banking house bites the dust!!