Monday, September 29, 2008

Case No. 08-13555: Lehman and the Norwegians

When Lehman Brothers filed for bankruptcy last week (case No. 08-13555), all of its equity value and most of the value of its bonds evaporated. So folks who had invested in those securities got a hefty dose of education on risk.

The Wall Street Journal reports:
Among the biggest [losers] was Norway's government pension fund, which invests the country's surplus oil revenue. As of the end of 2007, the most recent data available, the fund owned more than $800 million worth of Lehman bonds and stock.
But wait! there's more!

The web of interconnections among our financial institutions means that the demise of Lehman put insurers of corporate bonds in a sticky little bind: The WSJ article says one estimate had it that bond insurers had to find an extra $140 billion in collateral to meet contractual obligations after Lehman became an ex-corporation and its paper was only good for the recycle bin. (Or maybe an eBay curio auction) Our new national insurance company, AIG, happened to hold obligations to guarantee $400 billion in bonds, so the squeeze was on.

Guess what? We own it now. Only cost us $85 billion.

Well, a busy little AIG office in London helped us with the purchase. Yesterday, the NY Times reported that an AIG London branch called AIG Financial Products delivered tremendous profits to its parent company (and amazing sums to its managers, too). They delivered this money because of credit default swaps they entered into with institutions owning mortgage backed securities, and all was just peachy until it wasn't. The eventual collapse set in motion a chain of events that required AIG to come up with billions in collateral. Billions it didn't have and couldn't borrow because the collapse of Lehman (along with a lot of other things that stink in the American financial market) made potential lenders jittery about buying AIG debt obligations.

Together with the cascade set off by Lehman's collapse -- a cascade that injured the retirement accounts of Oslo office workers -- the crisis in AIG's London subsidiary made every US taxpayer into a stakeholder in the world's largest insurance firm.

The interweaving of the threads of this disaster are simply astonishing. The fallout hurts us all. We have to stop it.

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