Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold: Lose a Battle to Win the War - 14th May 21
Are You Invested in America’s “Two-Hour Boom” Fast Shipping Stocks? - 14th May 21
Gold to Benefit from Mounting US Debt Pile - 14th May 21
6 Solid Signs You Should Have Your Smart Device Repaired Right Away - 14th May 21
Ways to Finance Your Business Growth - 14th May 21
Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
How Much CHIA Coins Profit from 100 Plot 10tb Farm? Hard Drive Space Mining - 13th May 21
Stock Market Bulls Getting Caught in the Whirlwind - 13th May 21
Legoland Windsor Mini land and Sky Train Virtual Tour in VR 360 - UK London Holidays 2021 - 13th May 21
Peak Growth and Inflation - 13th May 21
Where’s The Fed? Watch Precious Metals For Signs Of Inflation Panic - 13th May 21
Coronavius Covid-19 in Italy in August 2019! - 13th May 21
India Covid Apocalypse Heralds Catastrophe for Pakistan and Bangladesh - 13th May 21
TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
Gold Price During Hyperinflation - 12th May 21
Stock Market Extending Phase Two? - 12th May 21
Crypto 101 for new traders – ETH or BTC? - 12th May 21
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

No Bailout for Lehman as Fed Awakens to Bond Market Crash Risk

Companies / Credit Crisis 2008 Sep 14, 2008 - 10:58 PM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleMy Fridays commentary closed with expectations that the weekend would see the formerly worlds fourth largest investment bank, Lehman's Brothers taken over by one or a consortium of bidders at mere peanuts of its former valuation further sweetened by a healthy subsidy from the US government / central bank. However the noises emanating from Hank Paulson at the US Treasury department over the weekend of having drawn a line against an effective bailout of the bankrupt investment bank, this will not live up to bidder expectations of providing tens of billions of tax payers money so as to enable a relatively risk free takeover by other banks, this therefore results in suitors in advanced talks such as Barclays now declaring their withdrawal from a possible weekend bid for the bank and indicates that Lehman's is now heading directly towards bankruptcy.


Lehman's which survived the 1929 crash, survived Sept 11th (having offices in the World Trade Center), was taken down by its exposure to Tulip backed securities through huge positions in the over the counter derivatives market at huge leverage, the bank has been teetering on the brink since March this year following Bear Stearns collapse. Its decimated stock price having lost some 94% of its value reflects the banks true financial state as it prepares to disappear into the history books.

However the bank is not alone as competing banks right across the globe have their own derivatives and tulip backed black holes to contend with, comprising of assets originally booked at several hundreds of billions with true real market valuations of perhaps less than 30%, therefore the a stream of continuing huge losses amongst virtually all large financial institutions on a quarter to quarter basis claiming more bankruptcies in the future.

US Treasury Drawing a Line?

After the huge unprecedented bailout and de facto nationalisation of Fannie Mae and Freddie Mac, that effectively saw the US take on and give Treasury Bond status to $5 trillion of Fannie and Freddie debt so as to prevent foreign investor panic, and therefore in the process devaluing the whole US Treasury Bond Market with the likelihood that the eventual losses to the tax payer being far above the $25 billion indicated at the time, with the UK Northern Rock example implying losses of as high as $500 billions. In the interests of self preservation the US Treasury said NO., We are NOT going to risk the collapse of the US Treasury Bond market as foreign investors reappraise the credit worthiness of US Treasury Bonds and therefore the US dollar in the face of a stream of bailouts of $30+billion dollars per week!.

However, this decision would not have been taken lightly, as it now leaves the financial markets facing a huge crisis due to Lehman's now being in default on its derivatives exposures which impacts on its counter parties. Lehman exposure is put at over $200 billions which now risks a cascade of failures rippling throughout the financial markets as the financial system adjusts to the increased risk of default amongst Lehman's counter parties.

Is this the End of Bailouts ?

I doubt it, as the apparent action NOT to bailout Lehman's is actually a panic move, under normal circumstances the US Treasury and Fed WOULD bailout Lehman's but the in the current climate of the likelihood that the US government will have to start bailing out other distressed industries in some shape or form such as airlines, insurers and auto manufacturers, though probably not going so far as to nationalize them but rather to make huge loans available to corporations much as the Japanese government did during the early 1990's which resulted in Japans Great Depression.

Already it is being reported that Bank of America is eagerly sniffing around Merrill Lynch as a better candidate to takeover following Lehman's bankruptcy, will they get a sweetener form the US Fed?, despite announcements of no tax payers money, they probably will.

Whilst the focus is on the US, the bailouts and unprecedented loans being made available to financial intuitions is not just limited to the US Fed, Central banks right across the globe will be flooding the markets Monday in an attempt to prevent a cascade of failures amongst banks that have already lost their capital bases over the last 12 months and therefore are teetering over the edge.

Meanwhile the architect of the whole crisis through a series of blunders which includes cutting and keeping US Interest at 1% for several years and therefore igniting the derivatives bubble as investors and financial institutions took on far more risk so as to generate returns, was again doing the rounds on US media such as the ABC network, stating "We will see other major financial firms fail, but it did not need to be a problem. It depends on how it is handled and how the liquidations take place, And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

What Does this Mean for Investments ?

The short-term response will be an immediate bloodbath on the equity markets Monday morning, with asian markets already sharply lower in the order of 4%, will we witness a crash ? Probably a crashette in the region of 4 to 5% , that more importantly threatening a trend towards a possible break of the July lows right across the worlds stock markets, once those support levels go then that will signal the NEXT LEG of the STOCKS BEAR MARKET, as both investors and deleveraging distressed financial's continue to liquidate assets in the face of increased counter party risk and potential losses.

Expect scared money to flow into traditional safe havens such as gold and precious metals, however the problem with the US Dollar as a safe haven is the risks associated by a potential stream of bailouts, nevertheless as the worlds other economies continue to crumble the US Dollar will be seen as a relative safe haven of sorts.

In conclusion, we are witnessing panic moves by the US government and worlds central banks on literally an hourly basis in the face of a potential wave of bank failures as I have pointed out several times over the last 6 months that most of the big western worlds banks are bankrupt, insolvent, and the only thing thing that will keep them afloat is a flood of tax payers money with all of the economic consequences associated with running huge budget deficits at the same time as the credit markets contract, which implies economic depression.

Monday Morning Update -

  • Lehman said it intends to file for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.
  • Bank of America buys Merrill Lynch for $29 a share at a value of $50 billion. As Merrill rushed to prevent itself following Lehman's path to bankruptcy.

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.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jaques
17 Sep 08, 03:47
AIG - Heading for the Hills

Paulson didn't "draw a line" as he hasn't a clue whether he is coming or going, as evidenced by the decision to effectively take over AIG. What a farce as he changes direction almost from day to day! Nor does this supply the slightest degree of confidence as we face financial armaggedon, that we are in the hands of the very same people, our adored and respected leaders, who created the fiasco in the first place. It is also ironic that the 'nutters' and raving tinfoil exponents turned out to be right all along, as it is very clear now we are heading for disaster. Me, I'm heading for the hills with my gold, and I couldn't care a hoot about its silly gyrations, as even a village idiot can see that this is what you need and not dollars.

Jaques


Post Comment

Only logged in users are allowed to post comments. Register/ Log in