Lehman: Doomed By Short Term Funding
Amongst the items coming out of the FCIC hearings last week were new docs that revealed exactly how over-reliant LEH was on daily, short term funding to cover their longer terms costs. It was a recipe for disaster, a trailer park in search of a tornado.
Here is the WSJ:
“In looking last week at Lehman’s demise, the Financial Crisis Inquiry Commission produced testimony and documents that suggest the firm’s short-term funding was a serious problem well before its Sept. 15, 2008 crash. The new Lehman material is a brutal reminder of the flightiness of short-term debt. And it begs the question: Why didn’t Dodd-Frank do more to limit banks’ use of things like repo markets, in which banks take out short-term collateralized loans?
It was in the repo market that Lehman experienced stress from early 2008. J.P. Morgan Chase, which plays a central role in the “triparty” repo market, decided to introduce a reform in early 2008 aimed at making the market safer. The firm decided that borrowers would have to start providing collateral that slightly exceeded the intraday amounts it had advanced them. This extra collateral is called margin. When discussing the change, a Lehman executive called it “a problem,” in a February 2008 email contained in FCIC documents.”
There are many other factors that the FinReform did not address — I have a post coming up on that for the anniversary of LEH’s demise.
What has always mattered most to financial firms are base capital amounts and leverage. Plunging headlong into both residential and CRE funding in a mad dash for profits led to firm’s having too little of the former and too much of the latter. That, in the simplest of terms, is why Lehman died. Everything else written about the deceased is merely noise . . .
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Previously:
Grading Financial Regulatory Reform (June 25th, 2010)
Source:
Lessons of Lehman’s Flighty Funding
PETER EAVIS
WSJ, September 7, 2010
http://online.wsj.com/article/SB10001424052748703713504575475532391301148.html
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September 7th, 2010 at 10:23 am
not seeing much useful from the FCIC and a lot downright misleading.
like this.
no doubt liquidity fleeing and unreplaced was the coup de gras.
but the other side fuld etc just argued we were ONLY illiquid.
and “you” killed us by withholding liquidity you gave others?
sources for proof of Lehman insolvency are Valukis, Jim Chanos calculating $150 bio underwater, even Paulson conceding “capital hole. ” Bonds settling for less than 10 cents on dollar. thats the last word.
September 7th, 2010 at 10:43 am
Interesting point.
The Texas S&L crisis in the 1980′s was based upon very similar concept: they used short term debt to finance long term assets. That didn’t work out so well.
Will we ever learn? (Rhetorical question… my own answer to that is “no.”)
September 7th, 2010 at 10:45 am
but dont want to dismiss the repo market prob.
you are right there.
they were repoing garbage and JP morgan, who knows what its doing, realized they needed estra collateral.
September 7th, 2010 at 11:08 am
maybe, We should remember this http://www.businessweek.com/bwdaily/dnflash/may2006/nf20060523_2210.htm
MAY 23, 2006
Intelligence Czar Can Waive SEC Rules
Now, the White House’s top spymaster can cite national security to exempt businesses from reporting requirements
President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye. …
September 7th, 2010 at 11:45 am
Short-term funding to make long-term loans i.e. maturity mismatch is the profit mantra of any bank, isn’t? Why have precious capital tied up in long-term (and expensive) funding costs?
September 7th, 2010 at 12:05 pm
Barry: “Plunging headlong into both residential and CRE funding in a mad dash for profits led to firm’s having too little of the former and too much of the latter.”
Those two are the consequences of regulatory capture and accounting fraud. Fix that and you will never have “too little of the former and too much of the latter”
September 7th, 2010 at 2:08 pm
what? you mean Dick Fuld is – being disingenuous!? But…
“Fuld has consistently refused to accept that he did anything wrong at Lehman. [He] has previously said he would wonder “until the day they put me in the ground” why the US government allowed Lehman to go bust” http://goo.gl/dVNq
September 7th, 2010 at 3:16 pm
Fuld continued to increase his exposure to the risky assets in res/com RE thinking he was going to be positioned for a big win when the RE market stabilized and turned around — he bet wrong, he bet the company and he lost the company. Fuld hid LEH problems from the public, the regulators, the rating agencies and the analyst through the repo 105 off balance sheet manipulation.
The american people will wonder “until the day they are put in the ground” why Fuld and the other banksters are not in jail and debarred from holding an executive or director position at a public company until they are put in the ground.
September 7th, 2010 at 5:17 pm
[...] “It was a recipe for disaster, a trailer park in search of a tornado,” Barry Ritholtz writes at The Big [...]
September 7th, 2010 at 10:01 pm
The short term funding issue that LEH… and all other broker dealers and specialty finance companies, such as GMAC and GE, had. Maybe more pronounced in some cases than others. But I have no doubt that BSC, MER and LEH would have survived, if they had had access to Fed liquidity sources as GS and MS did. Remember that in those ugly days of October 2008, hedge funds were pulling their money out of GS and MS like crazy, a run on the bank. At least, John Mack had the humility to recognize past mistakes and appreciate the hand received from the govt. I think the question that Congress is conveniently avoiding is why govt decided to save GS and MS while forcing LEH into bankruptcy and BSC and MER into sales. Coming from Argentina, I have experienced a few banking crises and I have never seen such an unfair distribution of the costs as in the US. I’m still scratching my head when I see that some of the key players have not lost a penny in the worst financial crisis since the Great Depression. don’t get me wrong, Congress should hang Fuld, but by pointing our fingers to LEH, we’re relieving other players of their responsibility in this mess (including other bankers, geithner and bernanke). And if we do that, we’ll be just removing a tumor, not curing the cancer.
September 7th, 2010 at 11:56 pm
Cicero would ask “Cui bono?” ; Santo Trafficante, “Look to the survivors.”
Barclays gets the loot, a British -based institution which just paid $298 million to settle
( Aug 18, 2010 NYTimes)
Barclays was charged with violating the International Emergency Economic Powers Act and the Trading With the Enemy Act in its dealings that involved $500 million from 1995 until September 2006, according to court documents.
The United States has imposed sanctions and trade embargoes against Cuba, Iran, Libya, Sudan and Myanmar. Barclays was accused of hiding transactions on behalf of banks in those countries.
Sure there are reasons that you find safe to adopt, and they are blessed by the PR firms that massage the facts, but the facts and only are all that is real and remain.
The jungle you don’t know is behind the silk curtain.
September 8th, 2010 at 9:23 am
More interesting than Lehman’s short term profit motives bankrupting a 150 year old institution is the questions of: how do we change management compensation schemes to include the right risk aversion reaching their personal pocketbook, and second, the man is whining about his investment bank not getting bailed out by the u.s. government. That is the true measure of Fuld’s psychosis right there.