To see the mental state of financial markets at the moment you need only to sit at a computer with an Internet connection and watch investors respond to journalism.
On Tuesday morning, Bloomberg quoted an unidentified person inside Lehman Brothers Holdings Inc. saying his firm had tried and failed to raise capital from the Korean Development Bank (KDB). This report came on the heels of an earlier one by Dow Jones in which a named person who regulated KDB denied such a thing had happened—but no matter.
A few minutes after Bloomberg posted the piece, it was the most read news of the day, and Lehman’s shares went into a free fall. Fifteen minutes later, they had lost almost half their value.
What’s interesting, among other things, is the total lack of reflection in the markets. Who had heard of KDB? Who knew what it did, or whether the people inside it were shrewd assessors of subprime-mortgage portfolios?
Basically no one, I’d guess. And yet a single report from an unnamed person inside Lehman that some Koreans had considered, and then passed on, investing in the firm was enough to cause the shares to crash.
And all that had really happened was that KDB proved it may have finally grasped what should be for Asians a cardinal investment principle: never buy anything an American investment banker is selling.
What one can see from this event is that Lehman Brothers is doomed. It’s doomed, in part, because it still owns all sorts of bad assets at inflated prices.
It holds tens of billions of dollars in subprime-related assets of the sort Merrill Lynch and Co. Inc. in July just disgorged at 22 cents on the dollar. But that’s probably just the beginning.
There’s no happy reason they haven’t explained in detail their exposure to credit-default swaps.
No one—not its big investors, not the analysts and journalists who cover it, not even, perhaps, KDB—has had a clear view of its assets and liabilities.
This opacity was once a huge advantage: The people outside assumed the best. It’s now an even bigger disadvantage: people outside assume the worst.
But Lehman is doomed for another reason: people are enjoying its failure.
The pleasure and interest the markets now take in seeing it fail now exceeds their pleasure and interest in seeing it survive.
Interest in failure
This is one of the many unintended little side effects of the government bailout of Bear Stearns and Cos Inc.: to greatly reduce the interest of the people who do business with Lehman Brothers in the survival of Lehman Brothers.
All those people whose affairs are intertwined with Lehman might have pressured them to handle their problems more briskly and intelligently—and might also be trying to keep it afloat.
The US government has made it possible for them to instead stand back and watch with some detachment and even pleasure as Lehman collapses.
After all, the Federal Reserve will give them their money back, reinsure their credit defaults, take another pile of these distressed assets out of the market. And when the dust settles they can go in and poach Lehman’s business and its smarter employees.
The Bear Stearns bailout was supposed to prevent the crisis from rippling through Wall Street. Obviously it hasn’t done that. It’s merely thrown the crisis into slow motion and prolonged the agony.
And it’s given KDB whole new powers.