Sunday slaughter on Wall Street

Monday, Sept.15,2008 2:20 pm


Lehman brothers is no more. Its collapse was witnessed by the leading players from the giant financial firms and government leaders from the US Treasury department and the United States Federal Reserve who were engaged in meetings all day Sunday to see if there was some way to find a buyer for Lehman without any government money being involved. In the end despite their efforts 2008 did not yield an equivalent leader to J. P. Morgan who rescued Wall street from its excesses in the crisis of the early twentieth century in 1907. A lot has changed since then . But what clearly has not are the limitations of the financial system when it becomes too unregulated and too driven by greed.
Lehman brothers whose CEO Dick Fuld was paid $40 million in compensation last year had blundered into exposing itself to sub prime mortgage bets that were four times its equity. When these markets went sour as they did over the past year it was only a matter of time before these excessively leveraged bad investments came home to roost. Lehman employed 25,000 people world wide and one must feel some sympathy for them. Lehman as the fourth largest investment bank on Wall street was a giant and its failure has gigantic consequences. Many banks and financial institutions including CIBC were involved in financial derivatives with Lehman. This is particularly so in terms of credit default swaps, a form of debt default insurance that developed into a market of its own in the trillions of dollars.

These kind of financial derivatives and esoteric products that investment
banks have developed are the source of considerable potential instability because they largely escape the attention of regulators. Secretary of the Treasury Henry Paulson while refusing to "use taxpayers   money to bail out Lehman"   has stated in Washington today that an overhaul of the regulatory system is   needed and greater authority over non bank and non federally chartered financial institutions is essential. The call for greater regulation and an end to the casino like quality of Wall Street was echoed by Senator John McCain and Senator Barack Obama on the campaign trail.

In addition to the collapse of Lehman brothers the purchase of Merrill Lynch by Bank of America is a major event in itself. The purchase price of $50 billion may turn out to have been on the high side considering the liabilities that come with it but time will tell. Without such a purchase Merrill was destined to follow Lehman to bankruptcy. Now as part of Bank of America it stands a better chance of survival. Also teetering on the edge is the largest insurance company in the US AIG insurance. Again time will tell how it fares.

The fallout thus far on the stock market is substantial but not yet catastrophic as the market has fallen by over 400 points by 3:30 p.m. this afternoon.But by the close the Dow was down over 500 points.The rest of the week and the weeks to come will be the true measure of how disasterous these destabilizing events will prove to be.(The only positive news is the fact that oil prices have now fallen to below $95 a barrel just as I predicted in July. In fact Brent oil is selling at just above $90 a barrel. I suspect that oil prices will now fall below 90 and possibly even into the $75   range in the coming weeks.)

But however all this turns out in the medium and long run the Sunday slaughter will enter the history books as the most disturbing financial failure since the Great Depression. The big bubble in value that was based on extracting wealth from over valued real estate and forcing underpaid working people into higher and higher risk exposure while huge fortunes were being accumulated on Wall street has burst once and for all. The return to greater regulation, greater equality of both opportunity and condition and a great role for state intervention and Keynesian fiscal and monetary policy is now inevitable. even the Republicans are now publicly calling for some of these reforms.