My background is in finance as a trader and I continue to remain fascinated by the turbulent events of Late Summer/Fall 2008 when the global markets entered a freefall.
As some readers may remember, September 2008 - March 2009 was an EXTREMELY volatile period. The fate of the global financial system was in doubt. Bank runs were beginning to form and a note of panic had entered the normally optimistic financial media. While we have survived (so far), what if things had gone a little differently?
NOTE- some background in economics and finance are required but I will attempt to simplify things into layman's language.
September 10, 2008
New York Federal Reserve
"Sir?"
A junior aide knocked on the office door. Hank Paulson, the former CEO of Goldman Sachs and current Secretary of the Treasury, glanced up from his place at the head of the table. The dark oak paneled room reflected the tense mood of the room's occupants. Virtually the entire pantheon of senior Wall Street leadership was present.
"What is it?! Can't you see we're busy?" he barked.
The staffer shrinked from the vehement tone of his boss' voice but gathered the courage to respond. "Dick Fuld is on the line. He requests an immediate audience."
Paulson swore softly. He had read the news. In fact so had everyone here. The media was having a field day with its apocalyptic headlines. But in fact, as everyone present knew, things were a lot worse.
Dick Fuld, CEO of Lehman Brothers, had just reported a massive loss for Q3 earnings of over $3.9 billion. The announcement had come a day after Lehman shares ALREADY lost 45%. Shares of his own former company, Goldman Sachs, had suffered a major decline, as had the share prices of the other present and former CEO's in the room. And that was just based off the publicly available information.
"I think we should hear him out." everyone's heads glanced towards the other end of the table. The speaker was a slight, bearded man but commanded an air of respect and calm. Ben Bernanke, Chairman of the Federal Reserve, spoke again, "Hank, I know we spoke before about not bailing out Lehman, but just think of it as another Bear Sterns."
"Another Bear Sterns?" rasped another speaker. Jamie Dimon, CEO of JP Morgan Chase expressed his incredulity. "Ben, you rammed that deal down my throat and now you want us to do it again with Lehman? Are you out of your fricking mind?!"
He turned to address the other occupants. "This man," he pointed at Bernanke, "is more responsible for the current mess than anyone else present. Your policy of cutting interest rates when you should've been raising them is now blowing up in our faces. Because of you we have Starbucks workers making $10/hour unable to pay off million dollar condo mortgages in Florida. And now you want the rest of us to pay for your mistakes?"
Ben sighed, "And your trading of naked CDS (credit default swaps) had nothing to do with that either I suppose? Or the naked shorting of each others' stocks? The fact is, as much as I hate to say it, Lehman is too big to fail."
"Too big to fail?" The next speaker turned to address those around him. Bill Gross, CEO of PIMCO, spoke, "AIG is the next problem and more might come. How much more funds can the Federal Reserve inject? They certainly have a limit and cannot be a saviour everytime. We should focus our attention on saving the Fannie and Freddie mortgages directly."
"You're just saying that because your fund holds millions in mortgage bonds," said the next speaker, John Mack, CEO of Morgan Stanley.
"Gentlemen, today is Thursday evening. Trading ends tomorrow. The fact is if we don't act now, Lehman will be declaring bankruptcy on Monday." Bernanke's voice cut through the quiet murmuring around the corners of the room. "The fact is, everyone here has an agenda, but together we hold the collective interest of America. In fact, we ARE America. Hank, I can't force you to do anything but I strongly suggest you drop old rivalries and step in to do something about Lehman."
Hank Paulson nodded to the staffer waiting patiently at his side, "Tell Fuld I will see him in exactly 1 hour. We need to draw something up by this weekend."
Thoughts anyone?
As some readers may remember, September 2008 - March 2009 was an EXTREMELY volatile period. The fate of the global financial system was in doubt. Bank runs were beginning to form and a note of panic had entered the normally optimistic financial media. While we have survived (so far), what if things had gone a little differently?
NOTE- some background in economics and finance are required but I will attempt to simplify things into layman's language.
September 10, 2008
New York Federal Reserve
"Sir?"
A junior aide knocked on the office door. Hank Paulson, the former CEO of Goldman Sachs and current Secretary of the Treasury, glanced up from his place at the head of the table. The dark oak paneled room reflected the tense mood of the room's occupants. Virtually the entire pantheon of senior Wall Street leadership was present.
"What is it?! Can't you see we're busy?" he barked.
The staffer shrinked from the vehement tone of his boss' voice but gathered the courage to respond. "Dick Fuld is on the line. He requests an immediate audience."
Paulson swore softly. He had read the news. In fact so had everyone here. The media was having a field day with its apocalyptic headlines. But in fact, as everyone present knew, things were a lot worse.
Dick Fuld, CEO of Lehman Brothers, had just reported a massive loss for Q3 earnings of over $3.9 billion. The announcement had come a day after Lehman shares ALREADY lost 45%. Shares of his own former company, Goldman Sachs, had suffered a major decline, as had the share prices of the other present and former CEO's in the room. And that was just based off the publicly available information.
"I think we should hear him out." everyone's heads glanced towards the other end of the table. The speaker was a slight, bearded man but commanded an air of respect and calm. Ben Bernanke, Chairman of the Federal Reserve, spoke again, "Hank, I know we spoke before about not bailing out Lehman, but just think of it as another Bear Sterns."
"Another Bear Sterns?" rasped another speaker. Jamie Dimon, CEO of JP Morgan Chase expressed his incredulity. "Ben, you rammed that deal down my throat and now you want us to do it again with Lehman? Are you out of your fricking mind?!"
He turned to address the other occupants. "This man," he pointed at Bernanke, "is more responsible for the current mess than anyone else present. Your policy of cutting interest rates when you should've been raising them is now blowing up in our faces. Because of you we have Starbucks workers making $10/hour unable to pay off million dollar condo mortgages in Florida. And now you want the rest of us to pay for your mistakes?"
Ben sighed, "And your trading of naked CDS (credit default swaps) had nothing to do with that either I suppose? Or the naked shorting of each others' stocks? The fact is, as much as I hate to say it, Lehman is too big to fail."
"Too big to fail?" The next speaker turned to address those around him. Bill Gross, CEO of PIMCO, spoke, "AIG is the next problem and more might come. How much more funds can the Federal Reserve inject? They certainly have a limit and cannot be a saviour everytime. We should focus our attention on saving the Fannie and Freddie mortgages directly."
"You're just saying that because your fund holds millions in mortgage bonds," said the next speaker, John Mack, CEO of Morgan Stanley.
"Gentlemen, today is Thursday evening. Trading ends tomorrow. The fact is if we don't act now, Lehman will be declaring bankruptcy on Monday." Bernanke's voice cut through the quiet murmuring around the corners of the room. "The fact is, everyone here has an agenda, but together we hold the collective interest of America. In fact, we ARE America. Hank, I can't force you to do anything but I strongly suggest you drop old rivalries and step in to do something about Lehman."
Hank Paulson nodded to the staffer waiting patiently at his side, "Tell Fuld I will see him in exactly 1 hour. We need to draw something up by this weekend."
Thoughts anyone?