Lehman rescue fails, BofA seen buying Merrill


NEW YORK - A failed plan to rescue Lehman Brothers was followed Sunday by more seismic shocks from Wall Street, including an apparent government-brokered takeover of Merrill Lynch by the Bank of America.

This doesn’t look good. It amazes me how it all happened because of one really bad idea - lending money to people who can’t afford to pay it back.

John Williams
Executive Editor, Shadow Government Statistics
Hyperinflationary Depression 2010
April 12, 2008


Williams was right 6 months ago when he predicted these bailouts were just getting started. Hope he isn’t right about his 2010 prediction following all this.

Forbes: Worse Is Yet to Come by A. Gary Shilling

Its times like this, when government regulation is appreciated and a good lesson as to why private investment of social security into the stock markets, is a bad idea.

Unfortunately for folks like myself, who had a 401K invested in Lehman, its water over the dam.


What types of regulation would have prevented Lehman from falling? If you limit risk taking than you will prevent a lot of people from making money. Remember when the SEC said you couldn’t short financial stocks? What good did that do? 3 of the stock protected under this ban went bankrupt. It seems that government regulation doesn’t help anyone.

Well, perhaps preventing mortgage lending to people who have no hope of paying it back would be one regulation that would have helped.

for people who are properly diversified this is just a bump in the road, also 401k’s and investments are protected, the money for 401ks is kept separately and is not tied to the stock of the company. Unless you were shortsighted and invested all your money in Lehman stocks.

from CNN tips.blogs.cnn.com/2008/09/15/what-the-lehman-brothers-bankruptcy-filing-means-to-you/

  1. Your accounts are protected

If you have a brokerage account with Lehman, you will be protected up to $500,000 by the Securities Investors Protection Corp. The Securities and Exchange Commission has strict rules about keeping the brokerage’s money separate from your investments. So even if the firm goes under, your money should still be there.

Great info Doug. Thanks.

This type of lending was encouraged I remember seeing on TV. Many politicians wanted poor people to be able to afford homes. I don’t have all the facts on this, but it is likely that the government encouraged subprime lending.

Except Congress imposed regulations forcing Mortgage lenders to make loans to poor credit risks. The idea was to lenable low income families to own a home.

I’m sure this is what happend. I would like an expert to talk about this publicly. It’s obviously in the intrest of elected officials to put everybody in a home in order to please the masses. I wish the politicans would stop blaming wall street for the entire thing. They new the banks were making 30:1 leveraged loans.

That is one heck of a bad idea though! lol

It’s like throwing a rock into a pond and seeing hundreds of ripple effects. Just one rock…but the consequences were far reaching.

I never cease to be amazed by how greed can cause such big problems. Greed (of private companies) cannot be blamed on government, and I don’t believe that our tax dollars should go to bailing out private businesses. Maybe the CEO’s and all of the other top heavy mgmt folks who are grossing millions in these companies, should sell their golden parachutes:rolleyes: on ebay…to save their companies. Just a thought. :nerd:

Hi bob–can you provide some backup info on that? While there were regulations surrounding subprime mortgages, the mortgage brokers were not checking employment, etc…and mortgage brokers get paid commissions for every app sent through…again, spell greed anyway you like…this is about greed. And the government’s regulation wasn’t a bad idea, per se, but the private mortgage brokers who were handling subprime, and the companies (big ones) who were buying the loans back…now are crying over their own greed? It was a gravytrain here in Florida before my husband and I moved here…and I have compassion for the homeowners…who lost everything, believing in a dream that was never theirs to dream.:frowning:

For whatever it’s worth, I think there is a lot of blame to lay around. First, on Greenspan who kept interest rates abnormally low for too long a time. Second, on lenders who took advantage of cheap money markets to leverage a “spread” with that cheap money, and didn’t care too much how they did it. Third, on unrealistic consumer aspirations. I don’t know how many times I have read how “the consumer” is the foundation stone of our economy. Unfortunately, not all the over-borrowing was due to home buying. Much of it was incurred in other types of credit that made it impossible for people to also pay their mortgages. Fourth, there is, and has long been, a phenomenon I think of as “appraisal creep”. Appraisers are usually independent contractors who are hired by lenders. An appraisal who kills off too many potential loans finds his telephone doesn’t ring anymore. Also, all appraisers use “comparable sales” as their value indicators. The more housing goes up, the higher are the “comparable sales”. It spirals up unless lenders affirmatively put brakes to it by refusing to accept appraisals uncritically. Fifth, since the destruction of the savings & loan associations, nobody makes home loans as “shelf loans” anymore. They all get sold to, e.g., FNMA, FHLMC or some other “securitizer” that knows nothing at all, independently, about the value of the underlying collateral. So there is no incentive for the original lenders to be conservative. Sixth, financial deregulation, which dates from the Carter years, removed a significant segment of lenders from federal oversight. Seventh, massive proliferation of financial institutions and branching has led to “overbanking” in much of the U.S. Finance is so competitive, that many lenders “compete” by being lax in their lending standards. Some, who are well thought of now (and I could name names, but won’t) are looking very good on the market only because they passed the lion’s share of risk on to “securitizers” and the government through FSA, FHA, VA and SBC guarantees. There are huge losses ballooning for those agencies right now, and they are not on anybody’s radar screen.
Eighth, there really has been a negative impact caused by the “Community Reinvestment Act”. Long ago, when I was in banking, I recall being severly criticized by examiners who determined that I was not making sufficient numbers of loans in an area that I knew was a “zero equity” buying area. The majority of “comparable sales” were “rent to own”, owner-finance type arrangements, and I discounted those appraisals to “rent capitalization” values. Nothing doing. I was forced to accept “zero equity” sales as “real indicators of value”. Things like that were among the reasons I got fed up with banking.

This mess has been gathering steam for almost thirty years, and now the chickens have come home to sit a spell.

It is going to be very painful. But the phony capital created by excess credit is going to get squeezed out of the economy. Unfortunately, it is giong to hurt a lot of people who assumed it was “normal”. The Federal Reserve is now caught between a natural desire to “inflate our way out of it” and an entrenched fear of inflation itself.

And yes, Congress and every administration from the Carter administration on, share in the blame. I fear that no matter who is elected in November, the real underlying causes will not be addressed and the cycle will start up all over again. Its resumption will be barely noticeable, but noticeable, sometime in 2010, unless I miss my guess. Destroy enough wealth, and it is sure being destroyed, by the trillions, and inflation abates, people get more careful for awhile, and lenders act to save whatever bacon they have left. But it will start up again.

:bowdown: WELL SAID.

I agree, very well said.

I might add one more thing, though many would mightily disagree with it. Years ago, every state had “usury laws”. Interest rates were capped by law. Also, bank and S&L savings rates were capped. Both were preempted by changes in federal law back in the Carter years. At that time as well, branching and acquisition laws were liberalized, resulting, it almost seemed in a “bank on every corner”. Supposedly, the public would benefit from “increased competition” in rates and the presence of financial institutions. Of course, the government declined to regulate alternative lenders and depositories like brokerages, mortgage companies and many others.

The present arrangement does allow rates to “float” with the market. And, it is believed to be more realistic than the old “usury and savings rate caps”.

Back when the caps existed, if money got tight, it got tight. It was not a matter of money costing a lot, it was simply not very available. But the “spreads” for financial institutions were largely maintained. Since financial institutions were very little leveraged then, their own loan repayments provided sufficient liquidity for operations even if new savings dried up, which it never really did.
In a pinch, banks and S&Ls could borrow from their regulatory lender entities at fairly reasonable rates, putting up loans as collateral. Those loans had to be perfect to be accepted, and “seasoned” too. Since lenders were not “on every corner”, they could be selective in the loans they made, and the amounts they would lend. Most home lenders were “neighborhood” institutions and had a pretty good grasp of what values were doing in their areas. Generally speaking, back then, there were not a lot of “whole loan sales” without recourse to the original lender, but “participations” in which other lenders would “buy” a piece of a package of loans they would then go inspect themselves. But the original lender was always on the hook if the loan went bad.

So, while it did cause credit crunches from time to time, it did not cause the wild instability we are seeing now.

There might be all kinds of reasons why financial deregulation was a good thing, and I might just not be sufficiently sophisticated to see it. But I have never seen anyone demonstrate that it actually did do anything for the economy other than make some institutions “too big to fail” and some executives tremendously wealthy.

Oddly enough, though all that deregulation was supposed to benefit the consumer through “competition”, new charter banks have been popping up like mushrooms after a spring rain. So, if all this giantism is so efficient, why can new charters do just fine with the same spreads?

Finally, in my opinion, money is not a “commodity”, though the present system treats it as one. Commodities have a finite intake capacity; that is, you can only put so much gas in your car and eat only so many steaks. There is no end to the amount of money a person can spend, so there is not a finite use for it that caps its utilization or cost.

No doubt much smarter people than I am can show me why I’m wrong. But in my opinion, we went down some wrong roads a long time ago.

I cut out most of your comment because I didn’t want to clutter things. Now, here is my issue with your comments. The system you described worked reasonably well in an era where there were significant transaction costs to moving money around. People went to their local banks because that worked best for them, there was little incentive to shop around for a better rate.

However, these regulated thrifts, in the late 70’s had to compete with money market funds, which could pay whatever interest rate that the market was offering. People, including myself, took money out of local banks, and put the cash in money market funds to get an interest rate that was twice as high. The old regulatory market was unsustainable when it had to compete with less regulated competitors.

Now of course, that led to additional hazards. The presence of FDIC insurance gives people no incentive to investigate or even care how sound the bank is where they are making a deposit. For example, I recently had a CD with Indymac bank, and I didn’t know they were in trouble until the day before the FDIC took them over.

I am not sure of the total solution to this problem, but the old ways of doing business won’t work in this environment.

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