The Long Crisis

Posts Tagged ‘long crisis’

On September 15th, 2008, the 158 year old investment bank, Lehman Brothers, filed for bankruptcy in Federal court. It was the biggest bankruptcy in American history and nearly brought down the world’s financial system.

CNN has complied comments from those financial executives who remember the panic well. A few of their comments follow.

Mohamed El-Erian : Chief Executive and Co-Chief Investment Officer of PIMCO:

“On the Wednesday and Thursday before Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.” We had long felt that the world was increasingly in disequilibrium, and by March of 2008 we decided that things were critical and that the unthinkable was thinkable.”

Meredith Whitney: Well known and highly regarded investment analysist: Shouldn’t have let Lehman fail:

“I don’t think they should’ve let Lehman fail. The rules didn’t seem uniformly applied. And it’s very hard to get individuals comfortable with investing if different rules are being applied to different people.”

Neel Kashkari: Former Assistant Secretary of the Treasury and supervisor of TARP: A real-life, terrifying experiment

“We were now forced to live a real-life, terrifying, financial-markets experiment: Would the failure of a major investment bank really lead to the catastrophe that we feared? When blue-chip industrial companies called us later that week, having trouble funding themselves, we learned that our worst fears were coming true.”

You can read the entire account at CNN under the title “ When Wall Street Nearly Collapsed”.

The big remaining questions are: 1.)How do things stand one year after the Lehman bankruptcy? 2.) Does the 50% stock market rally mean that we have restructured our financial system and reduced the risk of systemic failure?

By own view is that 1.) We have concentrated systemic risk, not reduced it, and 2.) no we have not, we have increased it.

The trillions of dollars that Treasury and the Fed have poured into the financial system have certainly supported a higher stock market as some of those dollars have flowed into stocks. However, the flaws in the system have not been repaired, only papered over.

And I do mean paper as the government has created huge amounts of new “money” out of a few computer keyboard strokes. This fiat paper money has been created by the issuance of huge amounts of new debt. As much of the problems within the financial system and the real economy are a by product of excessive debt it stands to reason that they can not be solved by creating even more debt. Then there is the risk that the creation of so many new dollars will send the dollar into a tail spin on the foreign exchange market. This could lead to a much higher inflation rate for the US.

Lehman was not the only investment bank to disappear, only the one the government let collapse into bankruptcy. Merrill Lynch was “saved” by a shotgun wedding with Bank of America. Then there was Bear. On March 24,2008 JPMorgan agreed to up the bid to $10 a share in stock and to purchase 95 million new shares of Bear Stearns, giving JPMorgan an immediate 39 percent stake in the collapsed brokerage firm. The deal, which closed May 30,2008 brought to an end an 85-year-old institution. You can read the full story at The New York Times.

Well established investment banking firms were reduced to rubble in the 2008 financial meltdown. Goldman Sachs, JP Morgan, and other financial firms, like AIG, were saved by government bailout funds. As a result, unfortunately, risk is now concentrated in fewer hands and it seems like at least some of the “too big to fail” firms are up to their old dirty use of excessive leverage tricks that helped to bring on the disaster.

The big money center and larger regional banks are still sitting upon a mountain of toxic waste mortgage assets that are likely worth only a fraction of the value that they are carried at on the banks books. In short, few if any of the structural weaknesses that contributed to the financial meltdown have been repaired. The risk of another emergency of some sort is still high. Very likely, since so much additional debt has been placed into play the next crisis will be even larger and more of a disaster than the last.

It is a time not for investors to rejoice but to be extremely cautious. One year after the Lehman Brothers bankruptcy many analysis and government officials think that the “worse is over”. However, remember these are the same guys and gals who didn’t see the financial meltdown coming until it was too late. As underlying problems have not been fixed the long crisis is probably just getting started. For example, the problems developing with the commercial real estate market are not reassuring.

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Boston’s Hancock Tower is a sad tale of how one commercial real estate complex ate over one billion dollars in a very short time frame.

But that’s exactly what happened with the 62-story building, as ownership changed hands four times in six years. In January 2009, an aggressive young commercial real estate operator defaulted on a portion of the building’s $1.3 billion mortgage just 24 months after buying it. In March, two firms that had purchased chunks of the tower’s second mortgage for pennies on the dollar assumed control, essentially rendering up to $400 million of debt worthless. The Hancock’s market value is now about $700 million. That is only about half of what it appraised for less than two years ago.

The story of Boston’s Hancock Tower is hardly unique as the recession/depression finally spilled over into the commercial real estate market in 2008. With the national average vacancy rate now averaging 15% and climbing conditions are set to become disastrously worse. Many existing tenants are requesting reductions in rents and threaten to move out if building owners do not comply while others default on rent payments and eventually close their businesses.

Those investors who think that the worse is over for the nations economy should consider the following:

The nation’s banks have about $1.5 trillion of commercial real estate loans on their books. According to the Federal Deposit Insurance Corp., whose troubled bank list has expanded to 416 from 90 in March 2008, the value of real estate loans on which borrowers were more than 90 days or more past due spiked to $67.3 billion in the first quarter of 2009 from about $13 billion in the second quarter of 2007. In the coming months, the recovering banking industry will probably report billions of dollars in losses tied to commercial real estate loans.

During the boom times of 2006 – 2008 commercial real estate mortgages were securitized much like the subprime residential mortgages. Therefore the infection of mortgages gone bad is not limited to only the banks and lenders that originated the mortgages. Just as with the subprime mortgages there are plenty of hedge funds, insurance companies, regional banks, and private investors who have exposure to these commercial toxic assets.

We are only in a bounce moment of a more serious depression to come. The next down phase could well be triggered by a crisis in commercial real estate. If you live in a major city just look around you. The number of “for rent” and “space available” signs is probably valid advertising for the soon to come crisis.

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With the stock market well about 9,200 on the Dow and the S&P Index above 1,000 the green shoots con men and cheerleaders are about to pee in their pants from excitement. The recession is over or nearly over they say.

Apparently, none of the team Obama guys who didn’t foresee the popping of the bubble economy and are now so pleased over a second wave recovery move have any knowledge of a third wave. We are probably near the end of the second recovery wave now and the mother of all third waves will soon sweep over the market, much to the surprise and destruction of those still bullish or newly bullish on American stocks and the revival of the consumer driven American dream world economy.

Our cyberspace friend James Howard Kunstler has a few observations of his own to make this week about the neverland dream like vision of the recovery. He and a few other insightful reporters on the true state of America, like Bill Bonner and Robert Prechter, are pretty darn certain that the American dream is about to become a frigging nightmare, one worse than we can now even imagine.

For now I’ll let James Kunstler tell his story in his unique mind bending style.

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Hunky Dory
By James Howard Kunstler
on August 3, 2009 7:36 AM

Whenever the herd mentality lines up along a compass point leading to “permanent prosperity,” or a yellow brick road lined with green shoots, or something like that, I tend to see the edge of a cliff up ahead. We are now completely in the grips of the deadly diminishing returns of information technology. The more information comes to us about How Things Are, especially from TV, the more confused or wrong the conventional view gets it.

A broad consensus has formed in the news media and among government mouthpieces and even some “bearish” investors on the street that “the worst is behind us” in this tortured economy. This view is completely crazy. It will only lead to massive disappointment a few weeks or months from now, and that disappointment might easily transmute to political trouble. One even might call the situation tragic, except a closer look at the sordid spectacle of what American culture has become — a non-stop circus of the seven deadly sins — suggests that we deserve to be punished by history.

The reason behind this mass delusion is not hard to find: it’s based on wishing, especially the wish to retain all the comforts, conveniences, luxuries, and leisure that had become normal in American life. These are now ebbing away in big gobs for most of the population — while a tiny fraction of the well-connected pile on ever larger heaps of swag, enjoying ever more privilege. Those in the broad bottom 95 percent were content as long as there was a chance that they, too, could become members of the top 5 percent — by dint of car-dealing, or house-building, or mortgage-selling, or some other venture enabled by easy credit and a smile. Those days and those ways are now gone. The bottom 95 percent are now left with de-laminating houses they can’t make payments on, no prospects for gainful work, re-po men hiding in the bushes to snatch the PT Cruiser, cut-off cable service, Kraft mac-and-cheese (if they’re lucky), and Larry Summers telling them their troubles are over. (If I were Larry, I’d start thinking about a move to some place like the Canary Islands.)

Too many disastrous things are lined up in the months ahead to insure that we’re entering a new phase of history: The Long Emergency.
Government at every level is worse than broke.
Our currency, the US dollar, is hemorrhaging legitimacy.
Inability to service old debt at all levels or incur new debt.
Bad (toxic) debt lurking off balance sheets everywhere.
The housing bubble fiasco is far from over.
Unemployment rising implaccably.
So-called “consumers” unable to consume consumables.
Crucial energy import supply lines fragile.
Food supply subject to energy problems and climate abnormalities.
A world full of other societies who would enjoy watching us fail and suffer.

When The Long Emergency was published in 2005, I said then that the greatest danger this society faced would be its inclination to gear up a campaign to sustain the unsustainable at all costs — rather than face the need to make new arrangements for daily life. That appears to be exactly what has happened, and it didn’t happen under the rule of some backward-facing, right-wing, Jesus-haunted crypto-fascist, but rather a “progressive” party led by a dynamically affable young man unburdened by deep cultural allegiance to Wall Street. Barack Obama has been sucked in and suckered. “Change you can believe in” has morphed into “a status quo you will bend heaven and earth to hold onto.”

Whatever else you might think or feel about Mr. Obama’s performance so far, this strategy on the broader question of where we go as a nation pulses with tragedy. What’s remarkable to me, to go a step further, is the absence of comprehensive vision — not just in the president, but in all the supposedly able and intelligent people around him, and even those leaders not in government but in business and education and science and the professions.

History is clearly presenting us with a new set of mandates: get local, get finer, downscale, and get going on it right away. Prepare for it now or nature will whack you upside the head with it not too long from now. Attempting to maintain anything on the gigantic scale will turn out to be a losing proposition, whether it is military control of people in Central Asia, or colossal bureaucracies run in the USA, or huge factory farms, or national chain store retail, or hypertrophied state universities, or global energy supply networks.

These imperatives are so outside-the-box of ordinary experience right now, that to drag them into the arena of politics can only evoke blank stares or nervous giggling. But whether we like it or not, these are the things that will really matter in the years ahead — not whether General Motors can ever make a profit again, or what Target Store’s sales figures are next quarter, or whether the latest high-rise condo-and-gambling complex in Las Vegas will be successfully marketed.

Here, in the dog days of summer, it seems to me that the situation in the USA is so fundamentally bad, so unpromising, so booby-trapped for failure, that I wonder if there has ever been a society so badly deluded as ours. We’re prisoners of our wishes, living in a strange dream-time, oblivious to the forces gathering at the margins of our vision, lost in a wilderness of our own making.

Anything can happen now. I certainly wouldn’t rule out international mischief as we arc around into fall. The air is so full of black swans that the white swan now seems like the exceptional thing. Whatever else happens, it sure will be interesting to see the public’s reaction to Wall Street’s announcement of Christmas bonuses. The folks at Rockefeller Center better be thinking about getting a fireproof tree.
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James Kunstler’s novel of America’s post-oil future, WORLD MADE BY HAND, is now available in paperback. He is at work on the sequel.

Honestly, until now for most of my life I’ve been an optimistic guy. I grew up in a rah, rah USA military family , was a boy scout, loved baseball and football, served in the US Navy Seabees, had a tour of duty in Vietnam, started my own business while going to college on the GI Bill, and in general have had an adventurous life while often being an expatriate American living in eight nations along the way. Until recently I thought America was a nation that could overcome any set of problems although the Vietnam War did give me reason to question the motives and judgement of our leadership.

No longer do I believe that we will emerge from our present circumstances as a stronger, better nation. The American Empire has peaked and we are on the slippery downhill slope. In order to solve a problem you have to identify the problem and take steps to fix the cause. I do not see that happening at any level of US government. The nation is flying off a cliff and as we have not hit bottom yet the green shooters and the cheerleaders are all saying no problem. They say as with one voice that we will soon fully recover and be in fine shape.

The real question should be “recover” to what? We are in the early stages of a depression with so many depressing factors involved (see Kunstler’s list above) the old American Dream way of life will not be recovered. Far from it. Read Kunstler’s essay again. Let what he is saying sink in. Then be smart and start working on your own survival plan. Don’t expect the same guys who brought you stage one and stage two to save you from the third wave and the long crisis. That is the stage of true destruction and it is not far away from descending upon us.

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