The purpose of this blog is to share information about the MFE program at U-M but I feel compelled to digress and rant about what happened with Lehman. What happened enraged me on several levels. First and foremost I am very upset that my friends, acquaintances, and other people I know are faced with a very difficult time in their career and their lives. Yes I know that Barclays bought the IB and S&T divisions and the operations that support S&T, but even so many people in these divisions do not really know what to expect. And outside of these divisions thousands will probably lose their jobs.
On another level, the way that Lehman went down really ticks me off. Lehman was brought down by shorts with an assist from a predominantly ignorant and panic-stricken market and a screen by the sensationalist financial media. After Bear fell, the shorts moved on to Lehman. Some shorts may have actually understood the balance sheet and the bank’s operations, but many I’m sure did not. Regardless, they shorted Lehman and saw some good price action because the majority of the market would rather stay away from something they did not understand. The path of short-sellers was made easier by the media who immediately after Bear’s demise started yapping: “Bear Stearns, one of the biggest investment banks in the US, has fallen. So who’s next? Is it Lehman?? Let’s ask our experts!” Enter “experts”: “Lehman has got a lot of toxic subprime debt on its balance sheet, I wouldn’t touch it with a ten foot pole” (I love the usage of the toxic adjective here; it conjures up an image of a disease or poison spreading through and ravaging the company, and of course you wouldn’t want to touch something like that); or “Lehman has billions of dollars of mortgage-related assets on its books, just like Bear did, and we all know what happened to Bear. We are in the middle of a mortgage crisis, and its not out of the question that another big bank fails” (a completely simplistic and qualitative statement, and equating the situation at Lehman to that at Bear is just wrong; Bear came out and said that they had a liquidity problem, whereas Lehman as a matter of fact had ample liquidity).
Now be clear that I am not criticizing anyone for not understanding something. What I am criticizing is that any old schmo gladly plays analyst these days (when I say schmo, I am not evaluating the entire person but rather the person’s expertise and understanding of the particular situation). How many “experts” who were called upon by the paper, electronic, and TV media to proclaim their esteemed diagnosis of Lehman (or any other investment bank) did a real analysis of the company, using actual numbers and actual facts? I would guess maybe one in a hundred, and I don’t think I ever heard that one guy. Yet with confidence they voice their assessments, when really the assessments made by these schmos are largely based on assessments made by other schmos (this is obvious just by how they all say almost the exact same things in almost the exact same way without ever citing any quantitative information or sharing anything new that they haven’t heard others repeatedly say).
But part of the reason that the health of Lehman remained a topic in the news was a continual stream of false rumors that were going around ever since the takeover of Bear. Rumors such as those that purported large counterparties had stopped trading with Lehman when they hadn’t. In my opinion it is obvious that many of these rumors were perpetuated by certain short sellers.
Negative rumors + sensationalist media + herd of vocal schmo analysts + preponderance of short selling (with probably some collusion between certain hedge funds here) + lack of resistance to short selling due to lack of general market’s understanding of balance sheet --> crisis of confidence in the stock and the CDS. Perception affected reality more and more as the stock slid further and further. Something like this would not have happened in the case of, say, a car manufacturer. Everyone can understand a car-makers balance sheet, very few understand a modern investment bank’s (I doubt that any one person in an investment bank fully understands his own company’s balance sheet). Short-sellers could not move a car-maker's stock from the 40’s to $4 in the absence of a single material event; buying would come in way before.
The final destruction of the stock price during the week of Sept 8 (as well as the blow-out of credit spreads), which is by this time reflective of the general and all-out crisis of confidence in Lehman, prompts counterparties to stop doing business with the bank and/or to post more collateral. There is a run on the bank. Perception finally becomes reality. The reflection in the mirror now starts moving the object. That weekend, as I understand, Lehman could not find a buyer willing to buy without a federal insurance program like the one offered to JPM, which the government refused to provide this time.
I am not saying that Lehman was a picture of health, and I am incapable of even trying to understand what the company was worth before counterparties started ditching. But what I am saying is that Lehman did not go bankrupt, it was made bankrupt.
Abrupt end to rant.
