Monday, September 15, 2008

More pig lips

But who gets the pig-lippy prize?

The NY Times reports tonight that both Merrill Lynch and Lehman Brothers will cease to exist tomorrow:

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, said it would seek bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

To this assessment I hasten to add the clarification that the "bad mortgage finance and real estate investments" were basically idiotic bets on derivatives that were structured in such a way that small down turns in mortgage valuations were multiplied to toxic levels. And the contracts involved will be around for a long time.

In the coming news cycle we will hear plenty about how the blame for this debacle ought to be spread around to both political parties and their policies devoted to maximizing home ownership. Okay. But it is imperative that all of us be aware first of the distortions to the market made possible by a system of finance that offered incentives to mortgage originators who were not in the least concerned about customers' ability to actually pay for what they bought. And second we must hold in our minds the lax oversight that allowed turd mortgages to be bundled into derivatives that were then sold with no clear understanding as to their real underlying value.

This shitstorm did not happen as a matter of course. It is not the result of forces of nature. Securities traded on the American financial markets are alleged to be scrutinized by agencies charged with assessing their worth. And we were not served well by either our government or the private sector.

It is with grim humility that I acknowledge that my earlier prediction of a government rescue of Lehman was wrong. Holders of their bonds now hold pieces of paper.

A year ago, Lehman was worth better than $67 a share. It closed Friday at $3.65. Monday it'll be almost worthless.

This all has real implications for anyone who is saving for retirement via mutual funds. The loss of wealth involved is staggering, and anyone connected to the markets will be affected. That would be anyone with a pension or a job or a 401(k). Even if you don't own Lehman equity, you likely own something that will decline in value when Lehman is worth nothing.

Wamu and AIG next?

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