Tuesday, September 9, 2008

Lehman Shakes

Here we go again. Lehman Brother's shares dropped 47% this afternoon shaking the stock market and bringing it down close to 300 points. There were talks over the weekend with a Korean bank to take over the faltering former giant of the mortgage industry. Those talks dissipated by this morning and the big question now is, why?

Did they find something on their books that scared them off? Did the Korean government, which is crossing headlines now, tell them to back away? Or did Lehman walk away because they felt they were worth more than what was being asked?

We'll find out as early as tomorrow morning. They have decided to release their numbers early to postpone a run on their assets, a la Bear Stearns. Why does an American bank not step in and buy them at their very low stock price, which was beaten down 47% today to around $6. Ah, now that's a better question.

Maybe the banks now understand that if Lehman were to stumble the Federal Reserve would immediately step in and purchase a significant portion of their debt and allow another bank to buy the remaining shares at a fire sale price. It's always more comfortable going into a merger with the Federal Reserve than go it alone.

So here in lies the great moral dilemma that you keep hearing about. Everyone sees that both the Fed and the Treasury have now played their hand. They will step in every step along the way and bail everyone out. We'll see what happens, but my guess is that helicopter Ben is working the phones tonight just as frantically as Lehman's CEO.

Good article written today about Fannie and Freddie from someone who predicted their failure years ago based on his strong understanding of finances and economics.

http://www.financialsense.com/fsu/editorials/schiff/2008/0909.html
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