Lehman Brothers Files for Bankruptcy

(source: The Globe & Mail. Photographer unknown)


Lehman survived the Great Depression but couldn't make it through this housing bust. Lehman Brothers filed for bankruptcy after being unable to raise capital and fearing a run on the bank. Lehman Brothers, along with Bear Stearns, was one of the two largest players in mortgages. Given the huge housing bust unfolding in the US, it is not a surprise that a company dealing with mortgage bonds is going bust.

I think bankruptcy declaration is the proper thing to do. I believe it is in the shareholder interests if no other viable solution is available. I like this idea much better than the take-under Bear Stears deal. A bankruptcy will rock the markets but if you believe in free markets, it's the cleanest way of cleaning up the system. From a shareholder point of view it also ensures orderly liquidation rather than some back-room deal that may or may not benefit shareholders.

The bankruptcy will also test the financial system, particularly the massive derivatives market. Working with the problems now is much better than wondering whether a stress will bring down the whole financial system.

It's all over the headlines so I'm not going to add much to the discussion. There are also other stories on Wall Street, including the takeover of Merril Lynch by Bank of America, and the clobbering that AIG is taking. A good blog reporting on the happenings of the day is the Financial Times Alphaville blog.

If anyone is brave (foolish?) and wished they invested in something like Ambac (after the final big plunge of course), here is your chance. AIG is worth considering if have high risk tolerance. AIG stock price can drop a lot more but it depends on a lot of factors. What is hurting AIG (CDS on mortgage bonds) is precisely what hurt the monoline bond insurers. AIG is more diversified and can sell off assets to raise capital. But my impression is that their mortgage underwriting is worse than the leading monolines (and we all know how "good" the underwriting of the leading monolines were :( ).

Comments

  1. AnonymousSeptember 15, 2008 at 4:08 PM

    Those who wish they bought Ambac can still do so. Ambac sold off considerably today and may sink further in the coming days as AIG and WaMu rock the markets. The opportunity to buy for $1 may not come back, but picking up the stock for $5.5 or so still looks good compared to $10 just last week.

    ReplyDelete

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Charlie Munger: Stock market as a pari-mutuel betting system

The model I like to sort of simplify the notion of what goes o­n in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market . Everybody goes there and bets and the odds change based o­n what's bet. That's what happens in the stock market. —Charlie Munger, "Art of Stock Picking" Although I don't share the same views on politics, I am probably closer to Charlie Munger than Warren Buffett when it comes to how we view the world. Warren Buffett is almost singly focused on business and investing, and is not very opinionated, indeed possibly not knowledgeable, in other areas. In contrast, I am closer to Charlie Munger in the sense that I have diverse interests—you can probably tell by the articles I link to or write about—and have an opinion on almost anything. There is one big difference though: I am not into the field of psychology quite like Munger. So it may be surprising to see me rarely
✖ READ MORE >>>