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Generational Dynamics Web Log for 10-Sep-2008
Two days after Fannie/Freddie crisis, another crisis looms at Lehman

Web Log - September, 2008

Two days after Fannie/Freddie crisis, another crisis looms at Lehman

Lehman Brothers Holdings Inc. share prices fell a record 45 percent on Thursday, as rumors swirled that the investment bank might collapse. Lehman is scheduled to report third quarter earnings next week, but to prevent further speculation, Lehman has rescheduled the earnings announcement to today (Wednesday). Lehman will also announce "strategic initiatives" to remain afloat.

Tuesday's 45% fall in Lehman stock prices occurred on a day when Wall Street stock indexes all fell 2-3%, pretty much reversing the euphoric, giddy gains of Monday.

Lehman has previously announced $8.2 billion in writedowns of assets in its portfolio -- mortgage-back securities and other near-worthless securities. On Wednesday, Lehman CEO Richard Fuld is expected to announce further asset writedowns, and make rosy promises about the future.

The problem is that you'd have to be crazy to believe anything that Fuld says about the future. As I wrote yesterday, and many times before, open lying has become the norm on Wall Street, increasingly as Generation-Xers and Boomers have taken senior management positions over the last decade. If Fuld believes that Lehman is about to fall off a cliff on Thursday, he'll still make up a bunch of lies on Wednesday to claim that everything is OK. Making up a bunch of lies is the norm these days.

Bear Stearns had to be rescued in March because a bankruptcy would have caused an international systemic financial crisis, according to later testimony by Ben Bernanke.

The crises appear to be coming faster and faster, now. There was the Bear Stearns rescue in March, and then things seemed relatively calm until the Fannie and Freddie bailout last week. Now we potentially have a Lehman crisis.

It's not surprising that the crises are coming faster, since the worldwide deflationary spiral is accelerating. There's less money in the world than there was yesterday, and companies have to compete with one another over what's left. It's the opposite of what happened during the credit bubble, when the world was being flooded with new money. Even stupid decisions were rewarded with riches. Today, financial institutions are playing a kind "musical chairs" game with liquidity: each time the music stops, the one without the liquidity collapses.

The funny thing is that there's no way to know what's going on. Will Lehman collapse tomorrow, Friday, next week, or not at all? If Lehman goes down, will it cause a worldwide financial crisis - a stock market crash?

I feel fairly certain that there isn't anyone in the world who knows, or who even thinks he knows.

To say that we're in uncharted territory is an understatement. Nobody has a clue what's going to happen next.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (10-Sep-2008) Permanent Link
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