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

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