Lehman's Demise Triggered Cash Crunch Around Globe - WSJ.com

Lehman's Demise Triggered Cash Crunch Around Globe - WSJ.com:

"Lehman's bankruptcy filing in the early hours of Monday, Sept. 15, sparked a chain reaction that sent credit markets into disarray. It accelerated the downward spiral of giant U.S. insurer American International Group Inc. and precipitated losses for everyone from Norwegian pensioners to investors in the Reserve Primary Fund, a U.S. money-market mutual fund that was supposed to be as safe as cash. Within days, the chaos enveloped even Wall Street pillars Goldman Sachs Group Inc. and Morgan Stanley. Alarmed U.S. officials rushed to unveil a more systemic solution to the crisis, leading to Sunday's agreement with congressional leaders on a $700 billion financial-markets"

Andreeson's Prescient Reading from 2007

Flash back to September 2007...  I was preparing to travel to CSC's annual Connect Conference.  Mark Andreeson's Blog was on the long list of subscriptions I browsed through daily via google reader.  His entry on that day was a quote from The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Robert F. Bruner and Sean D. Carr.  The quote, from the introduction of the book, caught my eye and piqued my interest.   I picked up the book for the flight down to Orlando.... couldn't put it down and continued to read it every spare moment away from the conference.

The author's describe a "dramatic story of panic" but more eminently relevant to today is the description of a "perfect storm" in the financial markets and the seven elements that drive it.  Still more interesting was the fact that the crisis was keenly felt in European financial centers.  It was truly an international economy even then, but bound by the speed of existing international communication of the time.

Flash forward to today, I am again preparing to travel to the latest CSC Connect conference and now reminded, even more poignantly, of that incredibly interesting book.  Definitely a relevant read considering current events. Check out Andreeson's original blog entry , then pick up the book.   I Highly recommend it.

Working Overtime to Keep Money Moving

Debt Market Distress Spreads - WSJ.com
"There is so much mistrust in the markets that banks and funds aren't extending credit to customers even for a few hours during the day, as they usually do. Instead, lenders are waiting until the last possible moment to release funds, creating a logjam at day's end when they wire money to branches, subsidiaries or other accounts. The backup of cash transfers has led the Federal Reserve to keep its money-transmission system open late, said a Fed spokesman."

Say Goodbye to Wall Street as We Know It

Goldman, Morgan Scrap Wall Street Model, Become Banks in Bid to Ride Out Crisis
"It had become increasingly clear to Fed officials in recent days that the investment-banking model couldn't function in these markets. Investment banks depend on short-term money markets to fund themselves, but that had become increasingly difficult, particularly in the wake of the collapse of Lehman Brothers. As bank holding companies, Morgan Stanley and Goldman Sachs will be allowed to take customer deposits, a potentially more stable source of funding."
The ascendancy of commercial banks largely reflects their use of customer deposits to fund much of their business. Retail depositors tend not to yank their money out, even in turbulent times, thanks to backing by federal deposit insurance. Even at Washington Mutual Inc., a Seattle thrift-holding company battered by mortgage losses, deposit levels are basically unchanged so far this year

Government Fire Sale?

FT.com / In depth - Stocks soar on rescue hopes
"...The US Treasury said the meeting discussed a “comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets....

...Treasury and Fed officials discussed the idea of creating a government-sponsored vehicle to deal with toxic assets...

...it appears that the terrifying events of the past week may have changed the political landscape so profoundly as to make RTC-type legislation possible...

...Many expect further giant liquidity operations in the coming days. “It really felt like we were teetering on the brink of absolute disaster yesterday and it was still pretty grim at the start of today,” said a senior liquidity manager at one large European bank."

Worst Crisis Since '30s, With No End Yet in Sight - WSJ.com

 "Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth."

As the Markets Plunge, Bernanke and Paulson Gamble Depositor’s Money

"This has been coming for a long, long time. For years Wall Street made record profits, many multiples of GDP growth and higher than other industries' profits. What they were doing is using heavy leverage, ignoring actual default risk, assuming that housing prices would always rise, and booking future profits in the present as income. Imagine if you could say 'well, I think I'll make 1 million over the next 10 years, so I'll just sell that money to investors now, pay them later, and book the sale price of 900K this year.' Works, till it doesn't."