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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Lehman Brothers Dead Bank Walking Seeking Rescue

Companies / Credit Crisis 2008 Sep 12, 2008 - 09:23 AM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleFollowing the bust off Bear Stearns back in March 2008, the US investment bank that next topped the list of most likely to follow Bear Stearns into financial oblivion was Lehman Brothers. Lehman Brothers was America's 4th biggest bank that has seen its share price collapse by more than 70% in recent days, and more than 90% over the last 12 months. The bank over the last few weeks has been desperately seeking to sell off many of its assets ahead of this weeks results so as to reinforce its balance sheet, however losses still came in at the worst end of expectations with a further write down of $8 billion of assets resulting in a loss of $4 billion.


The panicking Lehman board of directors has been speculated as buying the banks own stock as hedge funds fought to profit from its anticipated demise by shorting the stock much as transpired during the Bear Stearns collapse, i.e. hedge funds with accounts with Lehman's short the stock and then close accounts with Lehman's forcing the bank to repay funds which is does not have and hence the bank collapses and hedge funds profit from the decimated share price. In March of this year hedge funds were suspected of a similar attempted run on Britain's biggest mortgage Bank HBOS - 19 Mar 2008 - Halifax (HBOS) Hit by Hedge Fund Short Selling and Emergency Funding Rumours. However recognising this problem the SEC restricted short-selling of a number of financial institutions in July which includes Lehman Brothers, so the ongoing situation is not clear.

Lehman as well as the regulators will be eager for the bank to be taken as soon as possible, to be rescued in some shape or form to prevent a cascade of failures from happening due to Lehman defaulting on its derivatives obligations. Therefore as the US Fed gave a $30 billion sweetener on the Bear Stearns deal to JP Morgan, the expectation is for a similar if not larger sweetener for the likes of potential buyers such as Bank of America, possibly this weekend.

The first phase of the credit crisis saw escalating losses, the current phase of the crisis is increasingly seeing the banks going bankrupt with only one of two options available, either nationalisation or takeover by another bank at virtually zero valuation coupled with tens of billions of loan guarantees. The total world wide banking losses to date are estimated at $600 billion, which has left many of the big banks capital bases decimated. However we have yet to pass the half way mark as the eventual losses look set to pass $1 trillion on the way through $ 2 trillions, the impact of which will result in a huge deleveraging of the $500 trillion derivatives market as crippled banks are forced to liquidate positions and assets at huge losses to reinforce their balance sheets.

In such a crisis climate the worlds banks are least willing to take on new debt hence the credit crisis is and will continue to hit the wider economy for several more years that looks set to tip many of the western economies into recession by the end of this year.

Recent Analysis of the Credit Crisis -

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

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 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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