Black Monday?

I’ll try to live-blog during the day on Monday in this space, but suffice it to say Monday looks like a day of financial disaster in the U.S.

Lehman Brothers is expected to file for bankruptcy, Merrill Lynch looks like it’ll sell its sell-the-good-silver self to Bank of America and AIG and Washington Mutual are on death’s doorstep.

Earlier in the day on Sunday, the U.S. government said it would not guarantee that Lehman would be allowed to continue trading in the markets. End of Lehman. Workers were seen Sunday night carrying boxes out of the building. Their jobs will disappear too.

There’s still plenty of money on Wall Street, the Wall St. Journal notes, and as careers end and stocks slide on Monday, it notes that Wall Street bosses are lining up to make a killing.

Still, it seems like a long time ago when the the brewing financial crisis was simply blamed on a few homeowners who bit off more than they could chew.

7:07 a.m. – Oil down to about $95. Dow futures down 348.

7:11 a.m. – Jim Rogers of Rogers Holdings on Marketplace this morning:

You are going to see more financial failures. You’re going to see less credit. You’re going to see a contraction of the American and world economy. Again, many people, many of us are going to have more difficult times. Some of us are going to do extremely well, but there will not be many of those.

7:15 a.m. – Was Lehman solvent when it handed out more than $5 billion in bonuses in 2007? Good question asked by the blog Credit Slips.

7:18 a.m. — MPR’s Chris Farrell will be on with Morning Edition host Cathy Wurzer around 7:54. His theme: The government… won’t save everyone on Wall Street.

7:54 a.m. – Farrell sees the more stunning news being Merrill Lynch (“the broker to the working class”). The significance of the moment is the line in the sand the feds drew. “They needed to do that after the rescue of Freddie Mac and Fannie Mae.” What do investors do? “My primary advice is don’t do anything. I can spin out all kinds of scenarios. Most of the time when people make a dramatic move in their portfolio at a dramatic time like this, it’s usually the wrong thing. Most people have gone conservative on their portfolios.”

How bad can it get? “Really bad,” he says. “When does this end? It doesn’t appear that anything the authorities are doing can stop it. The long-term concern is economic growth. We’ve taken on way too much debt and the long-term trend is moving back from debt. But the economy breathes on debt.”

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8:25 a.m. – The Silver Lining Dept. As long as Eli Manning is still the top story in the city that never sleeps, perhaps the Republic is safe:


8:37 a.m. – Dow down 103. That’s less than many thought, although it’s still early.

9:02 a.m. – So much for that. Dow down 337.

9:08 a.m. – Bank of America is having a news conference to talk about its buyout of Merrill Lynch. “Good strategic fit” and “absolutely no pressure from the government” are the key elements so far. See live archived video (CNBC).

10:38 a.m. – How does this turmoil play into the presidential race. The New York Times Caucus Blog notes Obama’s and McCain’s reaction today. Neither is in favor of federal bailouts.

11:07 a.m. – Updated time stamp on the post.

11:13 a.m. – Twin Cities’ mortgage expert Alex Stenback, who writes the Behind the Mortgage blog, says:

The immediate impact on main street will be lower mortgage rates, as money runs to the safe haven of (now Govt guaranteed!) mortgage bonds and other securities (treasuries also are rallying today) to wait out the storm

11:23 a.m. – Whoa! Huh? Wilbur Ross, chairman and CEO of WL Ross & Co. on CNBC says up to 1,000 banks may close.

12:20 p.m. – Worry? Don’t worry? I wish everyone would get on the same page.

Nouriel Roubini, of NYU’s Stern School and RGE Monitor, who notes there is already a “slow-motion run on retail banks” occurring nationwide.

That “run” could accelerate as people realize the FDIC fund has about $50 billion to “insure” about $1 trillion in assets at the nation’s financial institutions, says Roubini. “They’re going to run out of money” unless Congress acts soon to recapitalize the FDIC.

1:05 p.m.– From The Sky is Not Falling side of the fence, Andrew Ross Sorkin, writing on the New York Times’ DealBook blog:

Things are tough, but the economy is still in reasonable shape. All of these troubles at Lehman, Bear, A.I.G. and WaMu are attributable to the housing crisis. If we solve that, we will begin to emerge from the woods. While parts of the country are stabilizing, others appear caught in a declining feedback loop. It would help most if we found a floor on the housing decline. To the extent the government is the answer here, then this is where it should focus.

1:07 p.m. – The Dow is down 295 points. We’ve seen a lot worse on a lot better days. By the way, have you looked at Northwest Airlines stock lately? Even with energy prices and a poor economy, the share price is down only $1.22 from what it was when its merger with Delta was announced.

2:45 p.m.– How big of a deal is the financial meltdown? Maybe not that big of a deal in the big scheme of things, but in New York City there’s talk that it may push the city into a recession. Thirty-thousand jobs may be lost in this mess, the Boston Globe says.

2:46 p.m. – Economic worries will take the spotlight of Sarah Palin and put the issue back in play in the campaign, says the Washington Post.

3:00 p.m. – Dow Jones is tossing Lehman from the 30 Industrials. The Dow (with Lehman selling for 20 cents a share. A year ago it was near $60.) is down 493 points.

3:11 p.m. – Is one of your mutual funds listed here?

* Fidelity Select Brokerage & Investment, 4.4 percent of assets

* Morgan Stanley Financial Services, 3.2 percent

* Legg Mason Partners Aggressive Growth A, 3.2 percent

* API Efficient Frontier Value, 2.5 percent

* Tanaka Growth, 2.4 percent

Those are the funds with the biggest holdings in Lehman Bros. Many funds dumped the stock, but not before the price had dropped, CNN reports.

3:14 p.m. – Oddest question of the day comes in a Chicago Tribune Q&A in which guy asks if the bonds in his UBS brokerage account are safe. The bonds are General Motors.

3:17 p.m. – Wall Street has saved the worst for last. Dow down 505 points.

3:20 p.m. – What does this mean to you? “If you’re in the market for a loan to buy anything right now, the banks are not interested in you,” says Diane Garnick, investment strategist at Invesco. She says the economy may still be tanking halfway through the administration of the next president.

3:35 p.m. – The CEO of Lehman Bros., was paid $22.1 million last year. I’d have taken the company into bankruptcy for a fraction of that.

3:59 p.m. The final word today goes to the Motley Fool:

As painful as it is, as painful as it will be, the fact that both the government and the financial industry let Lehman fail is ultimately a sign of confidence in our financial markets.

Think about it — all of the players involved knew quite well that the markets would absolutely tank if they didn’t make a deal. And it wasn’t that capital was unavailable; despite the credit crisis, there’s plenty of capital out there to bid — from the more liquid Wall Street banks, from sovereign wealth funds, or from private equity players like Blackrock (NYSE: BLK) or Blackstone (NYSE: BX).

And yet these players found the risk of financial Armageddon more palatable than the price they’d have to pay to take over Lehman. There will be plenty of collateral damage with this bankruptcy — and they still decided not to act.

  • As I’ve been noting in my blog for the last 2 months, the problem here is what happens when all the paper wealth suddenly disappears. We live on credit, and a complete meltdown of the mechanisms for delivering money will put a stop to everything. That’s what a Depression looks like.

    To avoid the liquidity trap, the Fed has to print money like mad. Paulson has said he won’t do that, meaning that he’s more interested in defending the buck than worrying about liquidity. I’m surprised by that, but at $1.50 or so to the Euro he doesn’t have a lot of wiggle room.

    This is some tough sailing. We can make it through, but it will be difficult. Fasten your seatbelts.

  • fasolamatt

    Best advice I’ve seen so far on reacting to this:

    “The short-term consequences of an unstable stock market are real and uncomfortable. More (and better) adult supervision would have gone a long way, imho. But we can’t control this, all we can do is focus on what matters.”

  • Bob Walser

    I’m struck by Chris Farrell’s comment that the economy lives on credit. If we are indeed in the midst of a ‘great de-leveraging’ perhaps that fundamental belief should be challenged… Does this economy, do we as individuals, need to learn to make an economy work based on saving and earning rather than borrowing?

  • Bob Collins

    Is it practical to live only on saving and earning? Can you sae enough to buy a house for cash? A car? A new bridge?

    At the very least, it’s already clear that borrowing will require more up-front cash. The greater downpayment requirement for a house, for example, should eliminate many people from home ownership. No big deal, perhaps, until you realize how many industries in the economy depend on selling stuff to homeowners.

  • Neal

    The problem has been building for the past couple years. The first public break-out in the public attention was last year and lead to a rapid drop in interest rates (which incidently spent all of its normal ammunition).

    At evey point, the situation has been described as “contained”. The problem is is that the container has been getting bigger and bigger. It now appears that the container is about as large as the US economy and part of the world’s.

    The problem with BOA buying Merrill is that BOA also bought Countrywide, a company that represented the wildest excesses of the whole mortgage fraud crisis.

    The agglomeration of companies with problems into BOA appears simply BOA’s attempt to rise to the “too big to fail” level. There are certainly enough big time-bombs built into Countrywide and Merrill, and even within BOA itself that could very well result in BOA having to go to Fed well for support. BOA perhaps thinks that its buying of the dogs of the day will stand it in good stead when its crisis comes.

  • Bob Collins

    Keeping in mind that I am not a school economist (and that I bought Yahoo at $390), would it have been better if the banking industry had stayed regulated by the states? In the “old days,” banks couldn’t take on all of these other roles, too. Banks were local. Were they better at managing risk then? How would things have changed, or not.

    I’m guessing there’s plenty of accumulated economic wisdom among the News Cut audience that can answer these questions and provide more insight into the situation.

  • Bill

    Not good but for the long term good of the system I’m happy to see the FED will not bail out everyone. If you’re interested in the longer term future of the economy go see I.O.U.S.A. It’s sobering. Good documentary, not political just the facts on what facing the economy.

  • You ask a good question, Bob. While it’s true that Warren Buffet advises investing in only what you can see, the old days had their share of panics and depressions, too.

    The modern global system is definitely more efficient at responding to the needs of a local market in many ways because it has more resources to bear. Banks can get money for the lowest rate and pass on the savings.

    However, these same institutions are not as good at evaluating risk – apparently. The system is actually based on risk assessment, not competition (despite what people tell you).

    I wrote about this a long time ago in my blog:

    What’s the trade-off between efficiency and stability? I think it has everything to do with understanding the situation well enough to manage risk properly, and having the kind of fear in your eyes that you don’t get from playing with OPM (Other People’s Money).

    That means that local banks have a big advantage over the long haul when it comes to stability, even if their resources are constantly strained. Individual banks may run into problems, but the system as a whole appears to be better at risk management when things are local.

    That’s my take, anyway. Your mileage may vary. Substantial penalty for early withdrawal.

  • bsimon

    The concerns about our economy being based on credit are very real & should be addressed.

    However, I fail to see why there’s this sudden panic about ML & LB. If Merril sells at fire-sale prices to BoA, who cares? Stockholders, to be certain; probably employees as well. But the rest of us? Same for Lehman. I can understand why wall-streeters are a bit shocked that such big players are going under. But isn’t that how the market is supposed to work?

    Of far more concern are the long-term ramifications of the debt load of average consumers in this country. Personally, I think we need a good round of wage inflation for low & middle class earners. Coupled with tighter credit markets, wage inflation would give people more leverage against their debt, with limited ability to rack up more.

  • bsimon: The problem is that all of this assumes an orderly market where everything is “liquid”, ie it can be exchanged in a normal manner. Lehman is big enough to trash that premise if they have to fire-sale everything at once.

    Other big houses have a lot of paper assets, tied up in various instruments sold by the market. If those decline in value, everyone has to raise whatever cash they can by selling whatever they can. That means we don’t have a normal market, we have a panic.

    Liquidity is the real concern here. This isn’t all about competition for $$$, this is about cooperation to have a functioning market. The loss of a very big playah can be a very big deal for everyone.

  • bigalmn

    It all comes down to greed. To make more and more money these companies built a house of cards with a poor foundation.

    Lehman gave out all those bonuses because it looked like they made lots of money. If you look at how people evaluate companies, they don’t even give it a quarter’s worth of earnings anymore.

    No one examines the foundation, just the tricks that made this quarter’s results meet expectations. Well to do that, the companies pulled out part of their foundation and replaced it with mud.

    When the rains came the mud washed aways and the building fell down. We probably won’t learn much from this, but we have the opportunity now that it is visible to everyone.

    Let wake up and build for the long term and not turn our expectations on who is breathing hard today.

  • Beryl K Gullsgate

    Over at “The Three Balls Pawn Shop”, 1600 Penn Ave:

    “Knock, knock”

    George: “Who’s there?”

    “Lehman Brothers”

    “Which one?”

    ” Hey, forget it.”

  • Paul

    This is what you always get with faith based economics. This isn’t a glitch, it isn’t a bump, this is what the markets do. Markets are essentially sociopathic entities, the only thing that drives them is profit. Markets do what we design them to do, they are not products of natural evolution. For twenty years market economists have promoted greed as a solution to all of our problems, markets are magic, just let some of the smartest, greediest, most sociopathic people in the world run the economy without oversight, don’t worry about it. Without even trying the markets will just accidentally produce the best results for the whole economy, the markets can’t help themselves.

    Put this on your refrigerator for future reference:

    There is no such thing as magic. We have to make rational public policy based on facts, not faith. The next time someone says: “let’s just cut taxes and wait for the magic to happen”, don’t vote for them.

    Greed is not the solution. You can’t trust the smartest and greediest people in our society to make good policy for everyone. They won’t, not even by accident. They will just take a bunch of money and leave.

    We have seen deregulated economies with no oversight before. We built regulatory structures for a reason- see: Great Depression.

    You can’t build an economy around investors alone. They are parasitic entities who build nothing, produce nothing, create nothing. No country in the world has ever had a population that just lived off their investments. You need jobs, you need living wages, you need infrastructure, you need actual economic activity.

  • Donica

    What are your predictions about the dollar? It’s been gaining some speed the past few weeks against the Euro. Do you think it’ll start to go down again?

  • doodman

    economy: wait and see. hedging your bets? might want to buy up some candles, matches, lima beans, and wood, and lay off the starbucks and itunes

  • Paul

    “What are your predictions about the dollar? It’s been gaining some speed the past few weeks against the Euro. Do you think it’ll start to go down again?”

    the dollar will probably lose it’s status as the worlds reserve currency. If that happens all bets are off, the dollar could end up looking like the Mexican peso. By the time this is over, the US will no longer be the economic center of the world, it can’t be, we’re broke.

    Had Greenspan intervened years ago we might have been able to avoid this but he simply doesn’t believe that “markets” produce bad results, they just “swing”.

    As far as the economy running on credit is concerned, the problem with that is creditors need to be able to afford the payments. Wages and salaries for most Americans have been flat for almost twenty years now. I know it looks like inflation has been low but those figures don’t count housing, tuition, and medical expenses amongst other things. If you factor those things into the economy Americans have been working harder for less money for decades, that’s why everyone was racking up so much debt in the first place. Economies can’t “run” on credit, they’re supposed to run on commerce, because at some point the bill comes due. So…. what do you think the odds are of increasing wages and salaries at a time of high unemployment (much higher than the official figures reflect) and failing financial systems? It’s a double whammy. Good thing the banks got those bankruptcy reforms through when they did eh?