Greed; Giving Nothing For Something

Greed; Giving Nothing For Something

After last week’s initiation to the world of the bloggers I decided it was time to write my second one. Each week we are going to have a magic word. This week it’s all about corruption. We are going to discuss about one of the most prevalent economic bubbles in the modern history; Lehman Brothers’ collapse and the bubble that was pertained to it.

Let’s get into action, shall we?

The following info is based on the documentary ‘’the last days of Lehman Brothers’’ (2009) directed by Mr. Michael Samuels. The bankruptcy of the fourth biggest investment bank took place on the second weekend of September. Why on the weekend? Well, because the stock markets are closed then so no turmoil can be caused by speculation. After months of unprecedented loss-over 75% plan in the stock value- Lehman brothers had reached a crucial point. The bank, owning as much as 600,000,000,000$ worth of assets, was on the verge of the cliff because it was both under-collateralized and under-capitalized. As such a bankruptcy would cause a ‘’domino effect’’ to the whole financial system the Federal Reserve System summoned a meeting with the heads  of Wall Street’s leading investment firms. The main discussion was to find a way in order not to ‘’pull the plug’’, since the government didn’t have the liquidity to bail out Lehman brothers.

At the moment there were two potential buyers: Bank of America and Barclays. The talks with the first rapidly appeared to an end as Lehman brothers’ portfolio processed too many toxic assets.(The following day Bank of America announced the purchase of Merrill Lynch, which was rumored to be the first bank to be struck by the ‘’domino effect’’ ,for 50 billion dollars). Simultaneously, the ‘’wolfs ‘’ of Wall Street came to an agreement. The plan was to spin off two new companies; one with the good assets (CleanCo) and one with the toxic worthless ones (SpinCo) .They decided to assist Lehman Brothers to overvalue their portfolio, by investing billions of dollars on the second one. Thus, for a moment there was a glimpse of hope, since negotiations with Barclays had reached an oral agreement. Nevertheless, by the end of the night the deal fell through as the British government refused to allow the transaction, quoting some details in the regulation.

So Lehman Brothers declared bankruptcy…

What happened next? Well in order to underline the severity of the situation some statistics will be used.

Firstly, unemployment rose sharply from 5% to 10%.Secondly more than 6.5 million people lost their homes in three years’ time. To be more precise, 3.4 trillion dollars were lost in real estate. Thirdly, the trust both on regulators and institutions was shattered. Nowadays, loan are not easily approved to both individuals-one out of ten is approved- and businesses .These effects, could even be worse if it was not for the US Treasury to invest 700 billion dollars in order to bail out insurance and investment companies. Lastly, we must point out that the Great Recession of 2008 did not affect only the U.S. One in four European banks has folded since 2008. Added to this, countries like Spain, Greece ,Italy and Iceland who were mainly affected by the crisis ,produced negative growth rated; Eurozone growth rate in 2009 was -4,20%)!

To conclude, if we have to point fingers towards someone we must not only blame the banks for selling ‘’nothing for something’’. Without a shadow of a doubt, they bribed a lot of employers in order to sell worthless assets, while sacrificing all their ethics-by selling mortgages to people with no income- in the altar of easy profit. However, what did the Financial Conduct Authority (FCA) and all the other policymakers did to prevent this from happening? Not enough certainly.

I just hope that this bubble will provoke the global authorities to emphasize on a stricter, more efficient macro prudential regulation.

Until next time stay safe.