Big Firms Have Tough Time Admitting They’re Worthless
By John Tiffany
“Black Monday,” Sept. 15, 2008, was one of the most dramatic days in Wall Street history. Suddenly, mighty Lehman Brothers was bankrupt and headed for liquidation.
The venerable firm was founded in 1850, and (obviously) survived the Great Depression. On top of that, another top securities firm, Merrill Lynch, agreed to sell itself to Bank of America for roughly $50 billion to avert a growing financial crisis. Stock indexes plummeted—the worst fall seen since 2001. Worse, it is unlikely that the “crash” is over on Wall Street. Some have even compared it to the onset of the Great Depression.
Indeed, the past six months or so have been rough on nearly everyone. In March the government and the Fed amazed the world by underwriting the takeover of Bear Stearns. And just a recently, Fannie Mae and Freddie Mac needed a government bailout. But Uncle Sam, apparently tapped out and bankrupt himself, refused to bail out Lehman Brothers. Insurance giant
American International Group was bailed out on Tuesday. Mortgage giant Washington Mutual is next on the hot seat.
At the heart of the current crisis are “derivatives” and denial. Derivatives are a complex phenomenon—financial instruments whose values change in response to changes in “underlying variables.” Denial on the other hand is easy to understand. It is like the homeowners who bought their houses during the housing bubble and now find themselves stuck with residences that are worth far less than they were a year ago.
The homeowner has a hard time accepting this reality. Similarly, the honchos of Lehman Brothers such as Richard Fuld, chief executive of LB, were in denial about the relative worthlessness of the derivative securities their firm was holding.
Merrill Lynch’s boss, John Thain, more realistic and less emotional, was able to face the fact that his company was only worth a fraction of what it “felt” like it should have been worth, hence he was able to find a buyer before it was too late.
Says Joe Nocera of The New York Times:
“Ever since the crisis took hold last summer, most of the big firms have been a day late and dollar short in admitting that their once triple-A rated mortgage-backed securities just weren’t worth very much. And, one by one, it is killing them.”
John Tiffany is the copy editor for American Free Press. He is also the assistant editor of THE BARNES REVIEW (TBR) historical magazine. For a sample copy of TBR (editor’s choice) send $3 to TBR, P.O. Box 15877,Washington, D.C. 20003.
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(Issue # 39, September 29, 2008)