Folks, Keep A Close Eye on The Lehman Bros. Negotiations -- May Impact the Elections

[Yavin4]

If no deal is in place by 7:00 pm tomorrow night, all hell could break loose in the markets worldwide. In a nutshell, Lehman has $60 billion in toxic real estate mortgages and asset back securities on their books, and even though they have other more profitable sections of their business, no buyer wants to buy them unless the govt bails out the bad loans. So far, Paulson does not want to use the govt. to bail out this deal like he did with Bear Stearns earlier this year.


As I said, this could affect the elections. If no deal is in place by the time the Asian markets open, which is 7:00 pm EDT, look for a major down day on Wall Street. More than likely, they will have to halt trading on Monday. In addition, this may set off a chain of negative events. We may see more bank failures, more rapidly in sucession, as the Fed gets out of the bailout business. By the end of the week, we may be officially in a depression.

[bemildred]

1. So, nobody wants to be left holding the bag this time? nt

[roguevalley]

25. i am assuming as I sit here gasping with dread that the repugs will

carry the weight of the blame. right?

[DearAbby]

36. No...there will be some

in freeperville who will say:

"Pelosi & Reid are in charge, the Democrats have been in charge for 2 yrs. Why haven't the Democrats done anything?"

(of course this isn't a quote, you would have to fracture up the language some)

[mcctatas]

2. I was having a good night...

do you ever wish you could "un-read" a thread?


Thank you though for the useful, if depressing, info...

[calimary]

3. I wanna keep track of this one.

Thanks for posting. It is worth watching how the overseas markets react. But I'm sure that in a worst-case scenario we could wind up in a depression, there will be few experts and/or pundits willing to call it that. If so, they'll be couching it like crazy. We may even see a couple of new terms coined to express the lousy shape of the market and economy without calling it what it really might be.

[givemebackmycountry]

4. I've been watching this too...

If they go toes up on Monday, watch out.

It's going to be ugly.

[EV_Ares]

5. Isn't it pretty clear the government is not going to do a bailout. The last I heard it looked

like BofA was going to be the purchaser of them.

[Yavin4]

7. I've Googling All Weekend

BofA is lukewarm, and Barclays Bank is now in the hunt. However, it's a game of chicken. Everyone wants the Bear Stearns deal, But Paulson is saying "No", for now.

[beac]

9. Thanks for keeping us updated on this.

The-Mayan-Calendar-Ends-in-2012-Thus-We-Are-All-Doomed scenario looks more and more appealing every day. Yikes!

[EV_Ares]

12. I was looking for Barclays and BofA to split up the good assets and all of the bad

they would still have to figure out what to do with that. Possibly, they could spread the bad out among several banks.

[Yavin4]

16. Why Should Other Banks Swallow Lehman's Mistakes?

What on earth could the possible rationale be? Also, the bad may swallow up the good.

[EV_Ares]

20. There are banks that buy up bad debt all the time and incase such as this they all benefit

by spreading the debt out.It is a business decision that is done all the time.

WSJ:

"Under one plan, either Barclays PLC or Bank of America Corp. would buy Lehman's "good assets", such as its equities business, people familiar with the matter say. Lehman's more toxic, real-estate assets would be ring-fenced into a "bad" bank that would contain about $85 billion in souring assets. Other Wall Street firms would try to inject some capital into the bad bank to keep it afloat for a period of time so that a flood of bad assets don't deluge the market, damaging the value of similar assets held by other banks and insurers. The banks are also looking for the government to somehow financially backstop the bad bank."

[Ghost Dog]

27. This is Plan B. Plan A was to sell the bad bank

to the Nigerians. :(

[nadinbrzezinski]

21. If there is an agreement to swallow it, will come with the feds and

possibly the world bank... to avoid a world depression

[unblock]

22. the fed wouldn't be in on the talks if they weren't helping in some way

i suspect they're helping exactly the way they helped in the bear stearns case: not "bailing out" directly, but providing some level of guarantees for certain debts.

it does seem, though, that in the absence of someone (bofa?) playing the role jpmorganchase played previously, the feds are not inclined to take action unilaterally.

that position may be a bluff, though, because if it comes to that, they might be hard pressed to quietly witness the carnage.

[boomerbust]

43. Maybe

But wasn't Paulson ceo of Bear Stearns before Bush hired him?

[unblock]

46. he was ceo of goldman.

but the latest is that all talks have fallen through and it looks like they are letting leh fail after all.

[Tuesday Afternoon]

6. yeah...I have been wondering about this.

Things have the potential to get ugly.

[gblady]

8. I'm curious....

on how you think this would impact the election?

would it help/hinder Dems or Repugs?

[Yavin4]

17. This Could Touch Off A Series of Bank Failures

Merrill, WaMu, AIG, and others could down one after the other. This could imapct the election by putting the economy back on the front burner instead of the folksy hockey mom.

[Indiana_Dem]

10. Well, I'd rather have it go belly up before the elections not after--

What do any of you think about who would have the upper hand if the economy/dollar implodes? Obama or McCain?

I don't really think either one of them has economics as their expertise BUT I think Obama is more intelligent and has a good feel for who he could have help him in this area.

I've always thought to myself that the economy is going to be the most important issue--if it's really about the issues at all with some people, that is. In other words, if the election is not about color, gender or looks then the issue will be the economy hands down.

Agree or disagree?

[DogPoundPup]

11. They're all out of Money, YOU lose

[lonestarnot]

13. Isn't that the damn truth if I've ever heard it!

[louis c]

14. The last depression

brought us a generation of social and workers justice. It will be painful at first, but in the end, it may usher in another generation of "New Deal" Democrats.

It may be the only thing the average American will understand.

[mike_c]

35. ding ding ding....

This is an important response. I've been thinking a lot lately about the circumstance that McCain/Palin is a viable ticket-- in a rational world they'd be laughed off the stage, yet they're running neck and neck with the admittedly lukewarm dem opposition. I suspect that's because people just haven't had enough of the republicans and their social philosophy yet. Sure, folks at DU might rail against them incessantly, but much of the electorate is still not fed up enough to make their candidacy the non-starter that it should be.

Some real economic pain, spread around widely enough, might do the trick.

[lligrd]

51. I Knew That Was What It Would Take But Was Hoping

they'd felt enough of it already. Apparently not. Apparently it will take soup lines.

[Tallison]

53. Ain't that the truth

Sometimes I wonder whether thanks to Carter and Clinton, the US has barely felt the hard-core Republican social reality that Republican economics leads to, so thanks for articulating that.

[gordianot]

15. You have a keen eye, bingo.

End result; why would anyone want to be President of the United States?

[SammyWinstonJack]

34. Ego?

:shrug: I certainly with McSame that is the case.

[flamingdem]

18. Look out below and please keep us posted

yow

[nadinbrzezinski]

19. Yavin, pay attention to the Chinese

According to some sources in the foreign press (asia times online among others) they had a hand on Freddie and Fannie.

Something of an ultimatum

And you have a good eye... been following this and I have been saying for a while.. I expect a depression before long, the fundamentals are just right for that.

The only good thing about this is.... that the republicans will not be able to blame the dems for it, or at least shoudn't

[orleans]

23. (you're wrong you're wrong--you've got to be wrong--please be wrong) n/t

[flamingdem]

24. 60 billion smackers.. difficult to wrap my mind around the implication

Tomorrow got to check the pre markets..

[Hawkowl]

26. The depression started last year

A misconception of the Great Depression is that it started with the wall street crash of 1929. In actuality, it was a slow unwinding of the banking system that took several years to come to fruition. We are seeing the same pattern happening now. Many of the safeguards to the banking system, like the Glass-Steagal Act repealed under Clinton, have been completely done away with. Our banking system is nothing more than smoke and mirrors. Remember the tech stock bubble? Think of this as the banking bubble brought to you by the stupid, stupid, arrogant mother fucker Greenspan.

We are in a liquidity crisis right now with no end in sight. A liquidity crisis is when people are unable or unwilling to borrow money at any interest rate. Indeed, if prime interest is about 5%, and inflation is say 7%, that means banks are offering loans below cost and still can't get any takers. THE DEBT MARKET IS NOT BROKEN. IT IS SHATTERED. Deflation, and long term economic contraction are a very real possibility. The best we can hope for at this point is merely a recession on the scale of 1980-82. We are unlikely to get that lucky, because the federal government is running almost 1 TRILLION dollars per year. Many costs such as the Iraq and Afghan wars are carried off budget and not routinely reported in the deficit. This greatly limits the ability of Congress to bail out anyone. We should think of ourselves as Argentinians and go begging the rest of the world to help us with hat in hand. Maybe they will make us institute reforms and root out the kleptocracy ruling us.

If unemployment was reported using the same methodology as during the Reagan years, it would easily be 15%. Currently, once your unemployment benefits run out, about six months, you are magically no longer considered part of the unemployed workforce.

Now, don't despair we will get through this--if Obama is elected. By historical accounts the last depression was bearable IF you had a steady job. So hang on to your job and cut, cut, cut expenses! Live frugally and try to desire little material things. Good luck to us all.

[Kartius]

28. Very Brief Summary...

BofA and Barclays at first was considering purchasing Lehman if the Fed would guarantee some of the losses on the books, similar to the Bear Stearns deal. Paulson baulked, so both reportedly have withdrawn from negotiations.

Now they are trying to split Lehman into two entities one carrying all the bad assets such as their collateral debt obligations and mortgage backed securities. They are looking to try to get 10-15 banks to possibly guarantee up to 30 billion in losses from this "bad" Lehman.

These banks are considering taking on the losses because a Lehman bankruptcy would require a liquidation of all assets including the bad stuff. The large wave of available securities would cause the price to fall off a precipice and these banks would then have to write down the value of similar assets they have on their own books i.e. mark to market.

The value of all their assets they have on their books will shrink while their debt would remain the same. This leads to more under-capitalization problems, causing them to either find new infusions of capital (hard to do in this market) or sell their own assets which further exacerbates the problem. There is also the over the counter (OTC) derivatives issue that needs to be considered.

Will the banks step in to share the losses? Don't know. Will the gov't give a sweetheart deal again? Don't know. Will this solve our financial problems? Most likely not.

Fannie and Freddie is a different situation. They were "quasi" gov't entities and the market believed that there was an implicit guarantee by the gov't of their debt. As a result, many nations including China, Russia, Japan, and the oil sovereigns purchased Fannie and Freddie debt. These nations also happen to own A LOT of US treasuries. If Fannie or Freddie defaulted, these nations would be dumping US debt causing the dollar to plummet and inflation to rocket. Thus sadly, we have what many term as the necessary bailout.

There is no simple solution to our economic problem and electing any new President will not magically "change" the course of our economy. Their actions may determine the length and severity of the recession. Final point, there is no political gain large enough to justify the pain many Americans feel.

[EmilyAnne]

29. Sort of off topic, but do any of you have suggestions for an Economics 101 sort of book??

I have absolutely NO clue about economic workings. No grasp of even basic cause and effect. Zip, zero, zilch nada.

Well, I do know that we can't just print up a bunch of dollars to pay off the deficit. But, seriously, that's the extent.

I feel like an idiot just reading this thread and an even bigger idiot for having to admit this.

Can anyone suggest a book or a website that can help someone like me self-educate on this topic? I really want to understand this stuff. I feel like there is a giant blank spot in my brain that needs to be filled.

[Kartius]

30. Try reading the business section of the newspaper everyday.

Its wonderful that you want to learn more about economics because I think it helps a lot with personal finances. Check out nytimes.com and there business section. Spend whatever you can daily reading the main stories and anything that may interest you. They generally do a good job at explaining what is going on. If you are confused with the terminology just google/wiki it and don't worry if you don't get everything at first. Osmosis and repetition will improve comprehension. Also might worth looking at Paul Krugman's articles in the nytimes opinion section. He is brilliant and does a great job simplifying the issues.

[EmilyAnne]

31. Thank you! I will take you advice! n/t

[MsLeopard]

39. The Stock Market Watch thread here at DU

is the best source of information around. It's in LBN every weekday. I've been reading it for years and they are way ahead of the curve on identifying what's happening, it provides valuable links to economic sites all over the world. If you want to learn about economics, it's a great place to start. Cheers!

[MrsCorleone]

40. Here is a graph that I send to family & friends

to help them understand the enormity of the problem. Sometimes a picture really does say it all:



In a very quick nutshell, the massive deregulation of the lending industry & investment banks, along with almost non-existent oversight, has led to the incredible juicing of the housing & commercial real estate markets.

Basically, a very large number of loans were given to anyone with a pulse, regardless of income or ability to pay. In some states, these loan sizes were incredible ($500K+).

Mortgage brokers across the board were actually encouraged, by way of much larger commissions, to push home buyers into risky mortgages, mortgages with limited fixed rate periods, even when the borrower qualified for traditional (safe) mortgages. When the risky mortgage fixed rate period ends, the borrower's monthly payment, in most cases, jump anywhere from a couple of hundred to thousands of dollars. This often leads to default and foreclosure if the borrower cannot pay the new monthly payment.

Also, there was *a lot* of fraud! In the bubbliest regions, homes were bought & sold amongst family/friends/straw buyers over short time periods. Here's a simplistic example of just one type of scam that was prevalent in CA, NV, AZ, etc:

Person #1 buys house for $300K with risky, short-term mortgage (very low monthly payment). Person #1 sells to person #2 (in on scam) for $400K a couple months later. Person #1 & #2 split the $100K profit. Person #2 then sells to person #3 (in on scam) for $500K & person #2 & #3 split the $100K profit. Eventually, either the last person to buy the property defaults on the loan immediately and slinks away with the divied up profit or some poor, unsuspecting home buyer is stuck having purchased a grossly overpriced home. This was all made possible by completely *deregulated* appraisal processes & lenders that looked the other way because it was massively lucrative. Scams such as this pushed home prices into the stratosphere, with no reality based justification.

Since wages have been stagnate for years, homeowners have also been extracting money from their homes, in the way of equity loans. I have friends who have taken out $30K, $40K, 50K+ over and over again. Scary. This was a way to artificially juice the economy. Homeowners used their homes as ATM's to purchase goods/services. A very great many now owe more money on their mortgages + equity loans than their homes are now worth. Unable to sell, coupled with loan resets (increased monthly payments), borrowers are defaulting in massive numbers.

Reality has now set in. The money has vanished. Down goes the economy.

There is so much more about what is going on, way too much to cover here, but you get the idea.

[MrsCorleone]

41. here's another Case-Shiller graph

[agentS]

32. Great Job, McMoron! Way to sink the World Economy!

Yes, this crap leads back to McCain, and his butt-buddy Phil Gramm.
Phil Gramm (AKA "nation of whiners") is the man responsible for writing the bill that gutted the legislation that deregulated numerous industries that lead to the mortgage meltdown and thusly this Lehman Bros mess.

The Obama camp or a 527 should have an ad ready to go by Monday night if this company can't be sold. It should include many images of McCain and Gramm and connect the dots type info
"Who cost you your job? McCain."
"Who torpedoed the global economy? McCain."
"Who is most responsible for your stagnant wages? McCain and his financial adviser Phil Gramm."
"McCain/Palin; financial weapons of mass destruction."
Good Job, McGramm. Doing a heckuva job!

[kayell]

33. It's STILL the economy.

Repeat this at gas pumps, repeat at work, repeat in the grocery stores.

"OMG, look at these prices! Everything has gone up so fast these last 8 years. *sigh* Everything but my paycheck. How are you doing? I'm starting to think Republicans really aren't good for the economy."

[AngryOldDem]

37. Is this even being talked about today?

The implications of this are staggering, and the silence on it is deafening.

[Yavin4]

38. If No Deal Is Done Tonight by 7:00 pm

It will be topic number one on Monday.

[Doctor Cynic]

42. There are TWO HOURS to go

before the New Zealand Stock Market opens for Monday.

Time is ticking.

[roamer65]

44. Barclay's has pulled out of the negotiations.

I expect Paulson to backtrack and fund a deal.

http://www.reuters.com/article/ousiv/idUSN0927996520080914

[lonestarnot]

45. Waiting and watching!

[eleny]

47. Watching the Bloomberg channel on cable now...

.... and waiting. :(

[lonestarnot]

48. Have to run out again. Will check when I get back!

Thanks eleny!

[Odin2005]

49. Get ready for "Black Monday"...

:scared:

[Liberal_in_LA]

50. update

http://money.cnn.com/2008/09/14/news/companies/lehman_brothers/index.htm?cnn=yes

Race against the clock
Investors are anxiously awaiting an announcement regarding what is next for Lehman. The hope is that some solution can be agreed upon by Sunday before financial markets open in Asia and Europe.

A source with knowledge of the meetings told CNN that representatives of several major financial institutions have been meeting with Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and New York Federal Reserve Bank President Timothy Geithner to discuss Lehman and the volatile state of the financial markets.

[Yavin4]

52. Personal Update

I actually went down to the Fed. Reserve bank here in NY. There were four reporters out in front, and it struck me that there are probably more reporters outside of Britney Spears' home.

[FogerRox]

54. 67 billion in ciurrent writeoffs

http://bankimplode.com/

My Lehman post

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x3995602

Its a shame you and I only got 36 rec's between us. Merril Lynch is next.

[orleans]

55. so i'm gonna kick this again just because. n/t

[and-justice-for-all]

56. I can not understand how this and the election are tied together...

and how could this be bad for Obama? It is the repigs mess.

[KillCapitalism]

57. It all depends on timing.

If the whole house of cards collapses before Jan 20th, 2009, it's Bush's fault. After Jan 20th if Obama is elected, it's all his fault of course.:crazy:

[and-justice-for-all]

58. Thats absurd...

of course this is the result of shrubCO bullshit economics.

So, repigs know they are on the losing end and to allow this financial crisis to carry through, would only leave a scare on the Obama Administration before they even clock in for day 1?