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Why 95% of Traders Fail

Lehman Bankruptcy and Engineered Financial Armageddon Real Story

Politics / Credit Crisis 2009 Sep 15, 2009 - 07:46 AM GMT

By: Nadeem_Walayat

Politics

Diamond Rated - Best Financial Markets Analysis ArticleDuring the last few days the mainstream media has been obsessed by Lehman's as though it caused the financial crisis, when all Lehman's was one crack in the credit crisis dam that was destined to burst following the August 2007 interbank market freeze when the game was up on the U.S. mortgage backed securities valuations that bank staff had inflated so as to bank huge bonuses on fictitious profits. From then began a process of ever larger financial collapses, starting in the UK with Northern Rock Bank, which I just so happened to warn of as having a high probability of going bust some 4 weeks before the event. Though of course at the time I had to mask my language lest I open myself upto legal problems.


The truth of the matter is that virtually all of the western banks were bankrupt as I warned of several times during the preceding 12 months, and most notably barely a week before Lehman's burst the credit crisis dam ( BANKRUPT Banks Wiped Out by Tulip Backed Securities) that was an inevitable outcome given the state of the bank balance sheets that required tax payer cash in the trillions as the $500 trillion derivatives market continued to deleverage following the crash of the housing bubbles.

It was systemic greed through leverage that killed Lehman's and bankrupted the whole banking system, long gone were the days of leverage of X10 capital, here were the days of leverage of between X40 and X60 capital which means a loss of as little as 3% could wipe out the banks whole capital base and hence making the financial institutions insolvent, the threat of which resulted in depositor / investor panic as we witnessed with Northern Rock in September 2007. Off course with investment banks we are talking about hedge fund depositors with billions that could in a matter of minutes bankrupt the distressed banks and considering that these hedge funds were also short the banks stock that is exactly what they did ! i.e. Short the bank stock, Pull the Cash out, and thus Bankrupt the Bank! We saw this time and time again right across the globe, Lehman's was not the first and not the last! In fact I warned of this some 6 months before Lehman's was targeted when Hedge funds first attacked HBOS, Britians biggest mortgage bank (Halifax (HBOS) Hit by Hedge Fund Short Selling and Emergency Funding Rumours).

Lehman's The Real Story

Lehman's was next inline after Bear Stearns went bust in March 08 which was gobbled up by its arch rival JP Morgan aided by a $30 billion Fed sweetner, when I asked the question in March 08 Lehman Brothers Next Wall Street Bank to Go Bust?

Would the US Fed Step in to Save a Collapsing Lehman Brothers ?

Well that would depend on whether the Fed considered Lehman Brothers failure would result in a cascade of failures amongst its derivatives counter parties.

So clearly the risk of a potential Lehman's bankruptcy posed to the financial system was NOT something that was an unknowable event as is now being alluded to. For governments on both sides of the atlantic had already bailed out several financial institutions to prevent a derivatives blowout. So the real story behind Lehman's is not that they did not know what would happen, but rather why was Lehman allowed to go bankrupt even if they (Paulson, Geithner et-al) KNEW what would happen!

The Lehman bankruptcy "story" that virtually all of the mainstream press has swallowed hook line and sinker goes that Lehman was NOT bailed out because Paulson could not authorise $25 billion of tax payers money to come to its rescue, conveniently forgetting that the Fed had just bailed out Freddie and Fannie a few days earlier which basically resulted in the under writing of some $5 trillion of debt on which losses were estimated at $500 billion, and that the Fed bailed out AIG to the tune of an initial $80 billion just a few days after Lehman filed for bankruptcy. The reason why Lehman was cut a drift by the ex-CEO of Goldman Sachs and U.S. Treasury Secretary Hank Paulson was to aid Goldman Sachs in the clearing the field of competition and so that Paulson could scare Congress into writing a $750 billion blank check within a couple of weeks, much of that money has since evaporated into thin air!

That is the real story of the Lehman sacrifice to aid the bankster's into defrauding more than a trillion out of the U.S. tax payers by scaring the politicians into writing blank checks and accepting the transference of toxic assets from the bankster's onto the tax payers, which has enabled the bankster's to return to profit and continue rewarding themselves huge bonuses whilst the consequences of their corrupt practices has resulted in a deep recession that hit main street as unemployment soars across the U.S. and UK towards 10%.

If you listen to the bankster's today, they will tell you it was a huge mistake to let Lehman fail! when that was the goal all along, for without a scare of what could happen the bankster's losses / bad debts would NOT have been nationalised.

That and the huge liabilities that tax payers have now been saddled with the consequences of which we will be felt in short order in terms of higher inflation, higher interest rates and stagnating economies. Yes, its NOT future generations that will PAY for the bankster bailout and mega-recession / depression debt but THIS generation, for the markets react to the current state of the nations balance sheet NOT conveniently delaying it for the next generation to grow up and take up the burden!

After the financial crisis dust has cleared we now have bigger banks that yield immense power which face less competition and are guaranteed not to fail regardless of the risks they under take as the governments are effectively being black mailed into under writing all of their past, present and future bad decisions as any risk of failure would trigger another financial collapse. Mission Accomplished for the Bankster CEO's!

Financial Armageddon Geopolitical Implications

The real damage has been to what is often called the US Hegemony, the geopolitical world has entered an increased state of flux much as that which followed the Great Depression 80 years ago, where it will settle is uncertain, what I mean by this is where will the power lie in say 5 to 10 years from now ? Clearly not in any single state but rather some new grouping.

Most of the world today is obsessed by the rise of China, however there are a couple of wild cards out there that could result in a changed world view and those are Russia and Germany. Just as in the past both countries have turned the geopolitical world upside down, so maybe the financial crisis of 2008 has set in motion a chain of events that will result in some new World order that could for instance tear the European Union apart. Especially as German Reunification is barely 20 years old, perhaps a little history lesson is in order to remind readers to one of the prime reasons of World War 1 being German Nationalism due to the fact that Germany at the time was only 40 years old and was obsessed with unification into a single German identity.

Still for investors the financial crisis did present a golden opportunity to accumulate in the mega trends of energy, population growth and emerging middle classes, in response to which many of the related markets have soared, except Natural Gas, one of the few remaining golden mega-trend opportunities that remains depressed as a consequence of the financial crisis.

Revisiting Financial Armageddon 2008

Sunday 14th September 2008

Monday 15th Sept.

  • Lehman's declares bankruptcy, serious risk of default on country party derivatives result in central banks pumping in $100 billion into the money markets which follows the announcement of $70 billion on Sunday as they attempt to contain the impact of Lehman's bankruptcy.
  • Bank of America takeover of Merrill Lynch for $50 billion, the worlds third largest Investment bank to prevent a Lehman's style bankruptcy.
  • HBOS, Britain's biggest mortgage bank crashes 30%, after being targeted by short-selling hedge funds that sought a similar fate for the bank as Northern Rock. I was probably one of the first to break the news of an hedge fund assault on the bank as a similar attack of March this year was still fresh in my mind, therefore had a head start on the scrambling mainstream media that only started to connect the pieces together some 24 hours later.
  • The worlds largest insurer AIG seeks bailout cash, with speculation that the insurer seeks a loan of between $30billion and $75 billions from the Fed.
  • Stock Markets Crash, Dow Jones ends down 504 points.

Tuesday 16th Sept

  • Money markets freeze with the interbank rate (LIBOR) jumping to 6.75% due to the extreme risk of counter party default.
  • No US interest rate cut, despite calls and speculation that the Fed could cut by as much as 50 basis points.
  • AIG, the worlds biggest Insurer bailed by the Fed for an initial $85 billion for an 80% stake in the insurer.
  • Stocks bounce on AIG bailout, Dow Jones rallies 142 points.

Wednesday 17th Sept

  • HBOS taken over by Lloyds TSB for £12 billion amidst a stock price crash of 66% in 3 days. The shotgun wedding was to prevent another Northern Rock style collapse and nationalisation, precisely the possibility warned of on Monday. My analysis called for restrictions on short-selling to give distressed financial institutions room to breath.
  • Gold as a safe haven soars by historic one day move of $85 following the news of the AIG nationalisation, and Lehman's continuing impact on counter parties with no end in sight to the crisis.
  • Russians shut down their exchanges fearful of a similar collapse to that which followed the LTCM crisis a decade earlier.
  • Stock market slide resumes as the market lines up the next financial dominos to fall, investors fearful of capital losses dump financial's. Dow Jones ends down 450 points.

Thursday 18th Sept

  • Lloyds TSB takeover of HBOS confirmed for £12 billion ($21 billion) or £2.32 pence per share in a all stock deal.
  • Central Banks around the world flood the markets with over $250 billion more cash as the interbank markets freeze sees the money market rate surge to above 6.75%
  • Morgan Stanley the next big investment bank to be targeted, with expectations of merger with Wachovia.
  • UK FSA announces a ban on short-selling of financial stocks, I suggested this as a necessary move some 24 hours earlier. This and the central bank extra liquidity is seen as extremely bullish on a short-term basis at least, as short covering will lead to a strong rally as well as speculators jumping on the band wagon.
  • US Stocks soar in late trading following speculation of further restrictions on short-selling and a huge bailout. Dow Jones ends up 410 points.

Friday 19th Sept

  • US Treasury announces the Mother of All Bailouts - Stocks soar across the board on the intention to allocate an initial $700 billion and probably countless trillions more to buy up much of the financial sectors bad illiquid debt. the UK FTSE rockets higher by 8%.
  • SEC also expands short-selling restrictions to 799 financial stocks, which contributes to the short-covering rally that leaves the Dow Jones up 369 points.
  • Washington expands the "mother of all bailouts" by guaranteeing money market funds that invest in high risk instruments like commercial paper.

What's the Answer ?

The bankster's will NEVER learn or change their ways, after all their prime consideration is to maximise short-term profits, not to help anyone and therefore will always be one step ahead of inept incompetent imbecilic regulators that KNEW what the problem was right from 2006 but FAILED to do ANYTHING. A possible answer is to heavily tax the banks into a different business model, a Bankster tax of say 75% on profits over $X billion and salaries (including bonuses) over $200,000, would put a real cap on bonuses and result in a change of culture. It would also go part way towards repairing the balance balance sheets of Britain and America as both countries are running huge unsustainable deficits as a consequence of the actions of bankster bailouts which have lumbered each UK tax payer with liabilities of an estimated £43,000 each that will resolve towards higher inflation AND interest rates ! Yes we have deflation now but this is very temporary as a consequence of bad debts forced deleveraging.

Robert Prechter shares Five Tips for How To Trade Successfully, as part of his Free 47 page Ebook

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 300 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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