Wednesday, September 10, 2008
washington mutual, lehman crowding death's door
so there is some cognitive dissonance over lehman brothers, which apparently finds itself on the brink of collapse. what is driving lehman down if they aren't going to be cut off from the discount window?
i have to speculate that there simply isn't enough proper collateral available to lehman to fund it through the fed in the event that it cannot find overnight financing in the private market. yves smith notes that speculation about lehman's solvency is loud and growing louder.
washington mutual is another such case. the stock is falling apart for the second straight day. solvency is a major issue here too, per dick bove via calculated risk. AIG, one of the world's largest insurers, is also tanking.
with the economy now undeniably in recession and a coordinated global recession looking very likely, there seems to be a recognition -- call it an emergence from denial -- that is spreading across financial markets. the credit crunch isn't going away. this really is an issue of widespread insolvency, and one so dire that banks earning their way out via a steep yield curve (as they did in the early 1990s) is not a pragmatic solution. there is a nascent debt-deflation gathering force as financial institutions now resort to asset sales. banks need to be recapitalized, and government measures so far have consisted largely of mere liquidity provision. to the extent that these loans/asset exchanges may be considered recapitalizations by virtue of being infinitely renewable, there is a growing chorus -- stretching from the bank of england via london banker to ken rogoff via yves smith -- reinforcing the notion that these lines of liquidity cannot be everlasting without ramifications for central banks and currencies. and, unlike bear stearns, there are no obviously strong private parties left to drive a large failing bank into.
the upshot is that there is a feeling circulating that some measure of failure has to be allowed. lehman and wamu have the misfortune of being next in line at a time when government charity and credibility is being increasingly questioned.