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Thursday, March 12, 2009

 

setting the record straight on lehman


sam jones at ft alphaville, contra economist john taylor, john carney and others, correctly surmises the truth about the failure of lehman brothers and its fallout.

The collapse of Lehman did create panic among the world’s financial institutions, and it did significantly increase “risk” in the system, not just redistribute it. And it seems likely that it did indeed make it more reasonable to expect that other institutions would fail - because it created generalised panic in the funding markets which every bank - irregardless of their pedigree or resilience - was dependent upon.

After Lehman collapsed, Morgan Stanley and Goldman Sachs very nearly did too.

While a Lehman bailout would not, as Gapper, Carney and others have noted, have solved the solvency crisis that faces banks currently, it would have averted the extremely violent - though short - liquidity crisis that the financial world experienced in September and October. ...

It was thus in context that the decision to allow Lehman to collapse was a failure. A Lehman failure didn’t have to spell disaster - it could, perhaps should, have occurred alongside an announcement of a generalised guarantee on money market funds - as well as a broad commitment from the Fed to extend its liquidity facilities. That such announcements in reality, came a week later was no good.

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