Posted by: Tobias | September 15, 2008

Is it over?

The ever excellent Felix Salmon has a feature on about whether we’ve seen the worse after today’s bankruptcy of Lehman Brothers. It doesn’t sound too reassuring:

So were all those end-of-the world headlines overblown? Is this the worst that happens when a major investment bank files for bankruptcy? Hard to see what all the fuss is about, really, let alone why the Federal Reserve felt it necessary to put up $29 billion to bail out Bear Stearns.

Of course, it's not nearly as simple as that. For one thing, it's not the stock market that everybody was worried about. This is a credit crisis, and American companies (the ones which weren't bought by private equity shops, anyway) tend to have low levels of debt. Some parts of the economy are highly indebted—investment banks and homeowners, above all. Most of the companies listed on the stock market aren't, and they should be able to weather a financial storm with relative ease.


So you think that we’ve dodged a bullet with the Dow still above 11,000? Just wait. This thing ain’t over yet. In fact, it’s barely begun.

Update: Here‘s more

The news — or lack thereof — from AIG is particularly worrying. Goldman and JP Morgan are being asked to lend the insurer $70 billion? Where on earth are they supposed to find that kind of money? I’m sure the idea is that they would syndicate it out, but is that realistic? AIG closed at $4.97 a share, which sounds like “zero” to me. (This time last year, it was in the mid-60s and rising.) So yes, AIG has collapsed, which was the other criterion I set last night for determining whether we were entering a meltdown.

And remember, we still haven’t had a Chapter 7 filing from Lehman Brothers (the brokerage). That means the liquidation of Lehman’s assets hasn’t even started yet — and already we’re down 500 points. There are lots of rumors going around that Barclays or even the Korea Development Bank might step back in to try to pick up the brokerage as a going concern; I do hope that happens, it would save a lot of pain.


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