Imminent Financial Collapse?

[QUESTINY]

Imminent Financial Collapse?
Roubini has accurately anticipated almost every leg of the developing financial crisis. He's now predicting imminent collapse. This is consistent with my concerns about the Grand Supercycle Crash in the days adn weeks ahead.

If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system
Nouriel Roubini | Sep 13, 2008

It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

Let me elaborate in much detail on these issues…

This bail-in of investors is the opposite of a bailout of investors like the one that was done in the case of Bear Stearns and Fannie and Freddie. It is thus akin to the bail-in of investors that was done in the case of LTCM in the summer of 1998 and the bail-in of the interbank creditors of Korean banks in the winter of 1997. I wrote in 2004 with Brad Setser an entire book titled “Bailouts versus Bailins: Responding to Financial Crises in Emerging Markets” that discusses these policy tradeoffs in financial crises where you have runs on the liquid liabilities of either illiquid and/or insolvent countries. Those were the international equivalent of the banks runs and financial crises that we are now seeing in the cases of Bear Stearns, Lehman and Fannie and Freddie.

Since government bailouts put at risk public money and create moral hazard Treasury and the Fed decided that they need to draw a line somewhere after the bailouts of Bear Stearns creditors, of Fannie and Freddie and all the other actions aimed at backstopping the financial system. These actions have included the creation of the TAF, TSLF, PDCF, the use of the FHLBs to provide liquidity to distressed mortgage lenders, the provision of Treasury liquidity to the FHLBs, the outright purchase of agency MBS by the Treasury, the swapping of two thirds of the safe Treasuries of the Fed for toxic illiquid securities of banks and non banks, etc. So after having created the mother of all moral hazard with their actions (including the biggest bailout of all, i.e. the rescue of Fannie and Freddie) the Fed and Treasury are playing a chicken game with the financial system. Tim Geithner told clearly to the heads of all the major Wall Street firms that if they pull the plug on Lehman and Lehman collapses they are next in line for a run on their institutions. So if a buyer for Lehman is not found (or even if it is found and the counterparty lines are still pulled) not only Lehman will collapse but the run will extend to all of the other major broker dealers and banks that are the counterparties of Lehman.

The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: afterall Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).

The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.

But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found. Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case).

Paulson and Bernanke and Geithner (the troika managing this financial crisis) have all made public statements in the last few month to the necessity of finding an orderly way to close down – rather than bailout – a major and systemically important non bank financial institutions: the embarrassment and losses for the Fed that the bailout of the creditors of Bear led made it paramount to avoid another Bear like bailout. That is why they are now playing tough with Lehman and its creditors. But in this game of chicken the Fed and the Treasury may end up being the ones to blink. Faced with the risk of a generalized run on the other broker dealers they may decide that greasing again a deal for the purchase of Lehman may be less costly and less risky than testing whether the system can orderly work out a collapse of Lehman (something that is highly uncertain). Even in the case of the Bank of America purchase of Countrywide such public subsidy was significant (the FHLB of Atlanta lent to Countrywide over $50 billion and Bank of America has most likely received plenty of tacit forbearance from the Fed to support its takeover of an insolvent Countrywide). So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.

The trouble is that, in spite of all public statements regarding the need to provide an orderly demise of large broker dealers, the Fed and the Treasury have done nothing to create such insolvency regime for such broker dealers. So the only option for Lehman – if a buyer is not found - will be the one of ending up in Chapter 11 and trigger massive losses on its counterparties that will in turn trigger a run on such counterparties.

In February of 2008 I predicted – in my “12 Steps to a Financial Disaster” – that one or two major broker dealers would go bankrupt. A month later Bear Stearns went bust and the collapse of the other ones was avoided for a time by the most radical change in monetary policy since the Great Depression, i.e. the creation of the PDCF that extended the lender of last resort (LOLR) role of the Fed to non-bank systemically important broker dealers (i.e. all of the bank and non bank primary dealers of the Fed).

I next argued in June that such action would not prevent a run on other broker dealers such Lehman as to avoid a run you need both deposit insurance and unlimited and unconditional access to the Fed LOLR support. I also discussed why Lehman was next in line for a collapse and why the PDCF would not prevent a run on Lehman.

I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.

The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.

What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.

This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.
__________________
God Bless,

-J. Adams
The Spirit Of Truth Page
http://www.spiritoftruth.org

[ophiuchus]

that's a hard act to follow!

[Zarathustra]

Questiny,

great article! One should also go to Youtube and listen to Bob Chapman being interviewed by Alex Jones on the 11th. His website, www.theinternationalforecaster.com, and Peter Schiff's site, www.europac.net, are good places to get the truth on the economy, not the nonsensical fluff you get from the mainstream news media. Chapman agrees with that article completely in its essence. Where Chapman will go further is in pointing the finger at those at fault and calling them what they are - traitorous criminals.

[QUESTINY]

Originally Posted by Zarathustra

Questiny,

great article! One should also go to Youtube and listen to Bob Chapman being interviewed by Alex Jones on the 11th. His website, www.theinternationalforecaster.com, and Peter Schiff's site, www.europac.net, are good places to get the truth on the economy, not the nonsensical fluff you get from the mainstream news media. Chapman agrees with that article completely in its essence. Where Chapman will go further is in pointing the finger at those at fault and calling them what they are - traitorous criminals.

Thank you Z. You always have great links and research points.

[Zarathustra]

Originally Posted by QUESTINY

Thank you Z. You always have great links and research points.

same to you

[mntruthseeker]

I am having major eye problems and even some words are hard to figure out. Can I say that I am a little bit naive?

My questions is this.....Do I want to save any of my funds or just immediately buy what I will need to start over? Such as seeds, long lasting food and vitamins. Soap or whatever?

I want to be positive but then I read things that make me want to just buy it all.

So the funds that I get from SSI and my pension are good for nothing or I just have to pay more to someone else?

Please answer as I just put my brain in a tizzy over all the US currency stuff. Thank you

[Zarathustra]

truth,

That is a question that is difficult to answer, primarily because I do not want to be in a position where I am making financial decisions for someone else. Investigate Peter Schiff, www.europac.net, who essentially predicted this current situation a decade ago. He wants his clients to remove their assets from the dollar as fast as they can. Read his commentaries and watch his interviews on Youtube. Read Bob Chapman, www.theinternationalforecaster.com, and watch his videos, particularly his appearances on the Alex Jones show, where he has free reign to speak his mind. Jim Rogers is another person to check out. There are many more, I'm sure Questiny can add to that list.

Then you must make up your mind what is the smartest thing to do with you money. The only advice I can give with surety is that you must prepare yourself for a situation where the dollar has little or no value.

[murnut]

I have been posting about this since last December here

http://lucianarchy.proboards21.com/i...lay&thread=288

[mntruthseeker]

Thank you both so much. I really appreciate it.

I will watch the videos

[Mizar]

Questiny;
Don't you ever sleep? your posts are all well thought out, and I agree 115% with this one. I have been telling all for several years that this was about to happen, and advising;
Get out of Debt
Get some cash in a safe place
Get an escape plan.
Grocery stores will soon demand a FICO score at the door.
M

[Pinktip]

Murnut, I've been reading your posts for months at OMF.

Thank you!

[murnut]

Your Welcome Pinktip!

I am glad you checked it out.

Not many post there.

This week is going to be very ugly.

VERY UGLY

I posted this in another thread here....but here is a link

PROTOCOLS FOR ECONOMIC COLLAPSE IN AMERICA

http://lucianarchy.proboards21.com/i...88&page=5#2175

[Adarajones]

Hey Friends,

Question: What if you CAN NOT get out of debt?, what if you owe over 25K in credit cards?.

Does it matter if you continue making those minimum payments????

What could happened to you if you stop making them?


Yikes, I know people want to do the right thing, but things just keep getting much worse!.

Love to hear your input!

Blessing to you ALL

[murnut]

It is possible the creditors could sue you, and obtain a judgment.

If you own real estate, it attaches to property.

title search will turn up the judgments.

If you own no real estate, not really an issue, unless you want to buy a house...

Then again, then creditors might not sue.

[Mizar]

Adara;
If it does go T##ts up, just repay with worthless $.
Use your real dollars that you have to stock up on stuff, anything, even kitty litter. This forum is not meant to instill fear into anyone, just to extend a hand to those who are not already in the lifeboats. Meanwhile, do keep making those payments, the reason that this is unfolding is because so many others have not been making their payments!
M

[Rocky_Shorz]

BofA just announced they are taking over Merryl Lynch...

[ktm]

The collapse seems upon us. The question is what is going to be our reaction?

a). Run for the Hills.

b). Stay where you are, bury your head in the sand like an ostrich.

c). Keep calm, arm yourself, make a survial plan for your family.

The financial problem that we are witnessing is overwhelming. We have been in a recession for two years already. Most middle class families have no savings to move out of their homes and even if they tried to sell their homes the market is so soft that buyers are few and far between and want a bargain.

Most Americans are up to their necks in debt. We are forced to look within ourselves to learn who we are. Are we going to panic or are we going to calmly live day by day? The is another problem, too. How are you going to deal with family members that dont want to hear the truth about the current economic situation?

After carefully reviewing options, I personally have decided to arm myself. I am creating a exit strategy n secret. I live in Southern California, the key is where can I get my family to in a State of Emergency?

I'm currently looking for a shelter within 100 miles of Los Angeles wherein I can have an unlimited water supply, which is easily defended(on high ground), and self sufficient. Of course, i don't want to sound paranoid, but everything that has been proported as coming down is occurring on a rapid and excellerating pace. Are there any suggestions as to where to go?

I have done a cursory review and it appears that Idywild is a possiblility...

[Mizar]

KTM;
i lived in SoCal for the first twenty years of my life, believe me there is nothing with 100 miles of ground zero for you. Do you have a Pilot's license? Can you sail a boat to the North?
I really really hate to be negative, especially on this forum, but get an escape plan going that is not dependent on collapsing freeway overpasses.
Nobody from California will be welcome in Mexico, don't plan on going there, that carpenter and gardener that someone else stiffed on their pay will be waiting for you.
The good news? nothing will happen and it will be business as usual for a couple of years so you can plan to get out.
M

[Pinktip]

http://www.globaleconomicanalysis.blogspot.com/

Great economics blog........Underlining concensus is "this isn't the big one." yet.....

[murnut]

Originally Posted by Pinktip

http://www.globaleconomicanalysis.blogspot.com/

Great economics blog........Underlining concensus is "this isn't the big one." yet.....

I love Mish.

Strange indeed though...what was BoA incentive to close on Merrill now, when tomorrow it would be half price or so?

Could the bleep be hitting the fan?

How much more bad news will it take?

Is it not obvious that the house of cards is collapsing?

[jaydee]

Just heard on the news Monday morning in Australia that Lehman is bankrupt...i would like to reiterate that this isn't about fear but being INFORMED. Trust yourself in what you need to do.

[dolphin]

wow, questiny, you do amazing posts...always informative and intelligent.

how do you do it? you don't sleep do you...just reading these posts keep me up till wee hours of the morning and i realize i better get some balance in my life and take a break.

It is too dam late to fix any thing , i have an idea , bring down the financial system and restart ,i thing it will be the cheapest and fastest way .

exactly the same thing you do when you restart your pc when it freeses.

Also fannie and fredy must give evry american household a house (mortgage free) , and the banks must give loans (intrest free), this way they may return the faivor that we american tax payer are doing to bail them out now .

oh yes i almost forgot , we expect a nice (thank you card) in the mail too

what do you think ??

[Hiram]

From everything we have read and learned...this collapse, albeit seemingly haphazard, was a planned collapse of our system. I sense a group behind all of these events pulling and tugging on strings.

This is perhaps the early link in the chain...

The way runs on banks work...is that everybody gets the idea to get their money out at the same time...the trick is to figure it out before everyone else does. There is the rub.

[Rocky_Shorz]

the small regional banks are doing fine, it is just the Giants that are tumbling...