WORSE THAN A BANANA REPUBLIC?
One scary figure is that there were some $400 billion in Lehman CDS to sort out (still looking for confirmation of that notional / face amount). Felix Salmon reports, however, that nets down to a mere $5 billion. In other words, after all the you-owe-me-what-I-owe-you-back, the "real" figure 'at risk' for pay-up was circa $5 billion (some portion of which may or may not have been collateralized or hedged, already).
Now, I know there are people who think that Lehman should not have been allowed to fail. Frankly, my eyebrows raised. Lehman was no Bear, Stearns, afterall.
Still, from a systemic perspective, if the system cannot handle $5 billion in off-balance sheet exposures, if the financial system that supports our $14 Trillion dollar economy cannot handle that, then we are ... worse than Banana Republic. We are a Kumquat Republic.
It's true, nevertheless, that that $5 billion might have not been spread around "evenly" among financial institutions, with some having net amounts far greater than that. In that case, we'd be on pins and needles waiting, as we do seem to be, to find out who was ...a "winner" and who was a "loser", who was lopsided or ridiculously lopsided, since no one is forced to disclose their ... lopsidedness to investors.
Of course, the chief worry, I suppose, of those more disturbed about Lehman's failure was its impact on confidence, the blow it may have made to an already weakened system, a cascading blow, even, to the credit markets.
CONFIDENCE MAKER, NOT CONFIDENCE BREAKER
The jury is still out and that verdict is not in yet, I don't think. Clearly, there was a problem with Lehman top management. It cannot be a bad thing that their business and business risks are now concentrated in stronger hands, with managements who, presumably, are still standing because they have a better grip (and understanding) of the overall risks they are running...
Besides, we're learning from this failure, perhaps, how to set up a new financial system, one in which the overseers have a real-time picture of the 'systemic risk' in the system, including off balance-sheet risks, like swaps and so forth, and one that covers non-bank financials (i.e. AIG).
Saturday, October 11, 2008
Lehman Redux
