Not much left of Lehman Bros.

[Francesca R]

http://uk.reuters.com/article/businessNews/idUKLA17129220080910?sp=true

Lehman Brothers Holdings Inc (LEH.N: Quote (http://uk.reuters.com/stocks/quote?symbol=LEH.N), Profile (http://uk.reuters.com/stocks/companyProfile?symbol=LEH.N), Research (http://uk.reuters.com/stocks/researchReports?symbol=LEH.N)) said it plans to sell a majority stake in its investment management division and spin off commercial real estate assets as the struggling U.S. investment bank fights to raise capital.It is not clear who will buy these divisions or what price the bank will get.

http://h1.ripway.com/FrancescaR/leh.gif

[Almo]

Wow. Big time melt-down.

[Francesca R]

The stuff announced two days ago is already history as it appeared to get voted down by markets (the shares went to almost $4).

As of now it is more likely that Lehman will have to be taken over lock, stock and fixed-income trading desk, and Bank of America is the only available buyer. Probably the CEO (Dick Fuld) joins the ranks of the recently departed.

Lehman's sale (if it goes this way) would not use government funds. Other banks, whilst not at all keen to be part of a takeover/rescue, have been continuing to trade with Lehman because by now they are realising that it's in their interest not to keep panicking. The rating agencies could spoil that, but will not do so until after the weekend at least.

http://uk.reuters.com/article/businessNews/idUKN0927996520080912?sp=true

[Almo]

Other banks, whilst not at all keen to be part of a takeover/rescue, have been continuing to trade with Lehman because by now they are realising that it's in their interest not to keep panicking. The rating agencies could spoil that, but will not do so until after the weekend at least.

That is an interesting thing. The herd learning not to stampede.

From the article:
The DJ Stoxx European bank index was up 1.7 percent.

Hahaha!! DJ Stoxx...

[Francesca R]

Latest:

1) Lehman Brothers will go bankrupt--no buyers. Perhaps there would have been (Bank of America or Barclays) had the US government guaranteed trading obligations of Lehmans until a transaction was final (which they did with Bear Stearns), but they (the government) did not. There is an unwillingness to invoke further moral hazard for obvious reasons. But other mitigating reasons were 1) Lehmans' failure probably has less severe implications for follow-on multiple bank confidence crises ("systemic risk") because it is neither a deposit taking institution (Northern Rock, UK) nor does it have a substantial prime-brokerage business (Bear Stearns), and 2) there has been more time elapsed for counterparties of Lehman to prepare in advance for this event (not just including a Sunday trading session in which yours truly had to work). So Lehmans' shares will be suspended and worthless, it defaults on its debt (expected recovery rates are guesswork but around 30%) and credit-related transactions with Lehmans (the stuff that was being shut down yesterday by other institutions) will be voided due to its insolvency.

2) Various stuff about the US Federal Reserve further expanding the types of things it will accept as collateral (subject to a risk-adjusting haircut) to lend to banks. Not many banks are using this facility though.

3) Merrill Lynch ("the one that would be next") has arranged to sell itself to Bank of America to remove the possibility of a contagious speculative attack.

4) Ten banks have set up a private USD70bn lending facility that that stands outside any central authority arrangements (like the Fed) to help each other out if need be. This is a commercial "lender of second-last resort" decision that is in the same vein as "the herd learning that it is overwhelmingly in their interest not to stampede"

[martu]

Though this is going to hurt short term long term it can only be a good thing, I think of one of the big boys had to fail in this crisis. The whole 'let us create complicated financial instruments to avoid due diligence’ business model needs to be shown for what it is, a stupid thing to do.

Fuld deserves this too, his arrogance until the end is getting a deserved comeuppance, say what you want about UBS (as one example) at least they admitted their exposure early and took the hit.

[a_unique_person]

No crises here, no siree.:boggled:

[Darat]

Look at the up-side lots of new business for the remaining merchant .ankers.

[Gord_in_Toronto]

Look at the up-side lots of new business for the remaining merchant .ankers.

".ankers" = wankers?

Now that does make sense. :p

[leon_heller]

The BBC TV news this afternoon showed employees from the London office departing with their personal belongings in cardboard boxes. Apart from losing their jobs many of them will also have lost most of their savings as they were encouraged to invest them in the bank.

Leon

[drkitten]

The BBC TV news this afternoon showed employees from the London office departing with their personal belongings in cardboard boxes. Apart from losing their jobs many of them will also have lost most of their savings as they were encouraged to invest them in the bank.

I got no sympathy for that, I'm afraid.

I deliberately avoid investing in the sector where I draw my paycheck, precisely because if Little Green Men invade tomorrow and the entire university system is replaced by a series of knowledge pills or something, I'd still have Wal-Mart and BP stock to fall back on. If I worked for Google, I wouldn't touch search engines -- or tech in general -- to park my money. If I worked for Third National Bank, I'd be all over Google and Apple like white on rice and wouldn't touch Citicorp.

If the employees don't know about risk diversification, how TF did they get jobs in investment?

[Darat]

".ankers" = wankers?

Now that does make sense. :p

Well if that's the letter you'd like to insert...

[Francesca R]

I got no sympathy for that, I'm afraid.I'm not sure how accurate it is anyway. There will have been attractive share ownership terms made available to all employees of an investment bank (and indeed this is mirrored at many other companies), but that does not usually translate into employees diverting large fractions of their savings into company shares.

For senior executives, an increasing slice of their compensation will have been diverted into notional shares (or options) in a mandatory fashion, and they will bear a bigger hit, although in theory the senior ones were those more able to influence the outcome that has just unfolded unhappily.

If they are talented individuals--even in a credit crisis--they will find new employment.

[Peacock]

Does anyone think there will be a run on retail banks? Should we be afraid? Or is this just chicken-little thinking?

[Francesca R]

Does anyone think there will be a run on retail banks? Should we be afraid? Or is this just chicken-little thinking?Not in the UK, since when Northern Rock started to experience a bank-run (exactly a year ago) the Treasury publicly guaranteed every penny of all deposits that savers had placed with the institution (and later nationalised it). Retail deposits losing value would be very contagious and this is something that (I think) every government sees as being in the public interest to prevent.

[martu]

Does anyone think there will be a run on retail banks? Should we be afraid? Or is this just chicken-little thinking?

Where are people going to put their money if they take it out?

[balrog666]

Does anyone think there will be a run on retail banks?


A run? By whom? We're the only ones paying attention.

Should we be afraid? Or is this just chicken-little thinking?


It's not chicken-little thinking if the sky really is falling. :p

[drkitten]

It's not chicken-little thinking if the sky really is falling. :p

Almost by definition. Chicken-little thinking is believing incorrectly that the sky is falling.

Since the sky isn't falling, and you apparently believe that it is....

... well, I'll leave the conclusion "as an exercise for the student."

[not_so_new]

Almost by definition. Chicken-little thinking is believing incorrectly that the sky is falling.

Since the sky isn't falling, and you apparently believe that it is....

... well, I'll leave the conclusion "as an exercise for the student."

Well, in the case of Washington Mutual the sky could actually be falling....

"The biggest risk for WM is a run on deposits," said Chris Brendler, analyst with Stifel Nicolaus & Co. "With all the negative headlines and recent IndyMac failure, WM's retail deposit franchise is a huge concern to us as a significant outflow of consumer deposits could lead to devastating liquidity problems since the company has apparently already lost access to the capital markets."

http://money.cnn.com/2008/09/15/news/economy/wamu/?postversion=2008091509

[Francesca R]

WaMu is a commercial bank so it had access to Federal Reserve discount lending facilities before the Bear-Stearns and then Lehman-inspired widening of their scope. I don't think it has used this yet.

AIG on the other hand . . . (not a retail bank)

http://uk.reuters.com/article/businessNews/idUKN1440161120080915

[Peacock]

Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen's firm analyzes the safety and soundness of banks for business clients, but began receiving inquiries from individuals in the past two months for the first time, he said.
"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.
http://ap.google.com/article/ALeqM5ioHc80xKMiATnqCpK0cDKJzk_nPQD936SA2O1

Sort of makes me want to run out and buy a safe and a gun. I'm a little freaked out about this situation.

Will someone please pat me on the head and tell me everything will be OK?

[ServiceSoon]

Can somebody please explain how this is happening? I guess the balance sheet isn't so balanced.

[Darat]

It's similar to pass the parcel - only in this case it aint good if you are the one left holding the parcel when the music stops because you have to cough up the prize.

[Francesca R]

Also, there not being a Santa Claus nor an Easter Bunny nor a Tooth Fairy is a triple whammy.

[Darat]

http://ap.google.com/article/ALeqM5ioHc80xKMiATnqCpK0cDKJzk_nPQD936SA2O1

Sort of makes me want to run out and buy a safe and a gun. I'm a little freaked out about this situation.

Will someone please pat me on the head and tell me everything will be OK?

Everything will be OK. Remember this is just an adjustment in the imaginary world of finance, it's rather like everyone still agreeing that the Emperor is wearing clothes but that the imaginary trousers could do with taking in an inch or two at the waist.

[Darat]

Seriously Francesca - could you provide a concise summary of what has caused this in simple financial speak? I think I do understand it but not well enough to explain it to someone else in a coherent and simple manner!

[Francesca R]

No, because I suspect a lot of people would still take the piss out of it :) My suggestion would be to buy any broadsheet newspaper tomorrow.

ETA--Or watch "News at Ten"; that's generally pretty good.

[Darat]

But they'll only print what the Illuminati tells them to (http://forums.randi.org/showthread.php?t=123769)...

[Francesca R]

Please don't link this forum to that one again.

[not_so_new]

http://ap.google.com/article/ALeqM5ioHc80xKMiATnqCpK0cDKJzk_nPQD936SA2O1

Sort of makes me want to run out and buy a safe and a gun. I'm a little freaked out about this situation.

Will someone please pat me on the head and tell me everything will be OK?

I am NOT qualified to say anything definitive here, there are much better people on this forum to answer your question but I will give you my view.

First I think we have learned a lot about banking in the last 80 years. As hard as we try to shoot ourselves in the foot with get rich quick scams from bad junk bonds in the 80's to todays housing crisis the safeguards we have put into place have held back the waters and the damn has yet to burst (of course the counter argument would be that, just because we have not had a major problem YET this does not mean the damn can't burst over something unexpected).

Second, I don't think people (i.e. the general public) are paying much attention to this story. Most people A) don't know there is a problem B) don't know how deep the problems are and C) think that their money is protected anyway (which it is to a degree, see the paragraph above) so they are not that worried. I think that alone is enough to not worry too much about a run on the banks.

Lastly there is some money out there I believe. I think the fact that Bank of America was willing and had the money to purchase Merrill Lynch shows this to be somewhat true (of course they are now done and can't purchase anyone else that shows up on the auction block). Also this shows some money is still out there....

"Ten major commercial and investment banks announced Sunday they would pool $70 billion of their own money to create a borrowing facility that they could tap into to help them ride out the crisis."

http://money.cnn.com/news/newsfeeds/articles/djf500/200809151141DOWJONESDJONLINE000528_FORTUNE5.htm

$70 billion might not be enough if this goes a lot deeper but the Feds have said they would back this up with more funds as well. In my limited understanding it seems as if a good part of the problem these companies now face is fast access to capital when something big hits.

Again, I am not an expert at all but I am not overly worried. I am cautiously optimistic that this correction was coming, the worst has not hit yet but we will weather the storm and come out with a healthier economy in a few years without imploding back into the stone age.

[Darat]

There does seem to be quite a lot of ...er... money out there still to be had (mainly in state/central bank facilities) but it is no longer cheap so now the banks are being a lot more sensible in using it.

[martu]

A simple account of Lehman's fall is briefly documented here: Lehman can only blame itself for this disaster (http://business.timesonline.co.uk/tol/business/columnists/article4747936.ece)

[martu]

On the money availability front banks got nervous lending it to anyone, now that Lehman has gone that seems like a sensible decision. Who would you lend money to now with any confidence you’d get it back?

[Francesca R]

On the money availability front banks got nervous lending it to anyone, now that Lehman has gone that seems like a sensible decision. Who would you lend money to now with any confidence you’d get it back?There you have a multi-player Prisoners Dilemma but with the opportunity for conferring. All players are better off co-operating (lending to each other) than defecting (refusing to lend to each other) and they know this. If you did not know how your competitor was going to play you should rationally defect (not lend) because if they co-operate (lend to you) you are quids-in, and if they defect (don't lend to you) you are better off than if you did and they still didn't.

But you're not all in jail, you can talk, and you can develop a mutual-co-operation equilibrium. This "explains" the clubbing together to the tune of $70 billion.

Still, if one of those players "cheats" then the co-operative agreement becomes invaded by defection again.

[martu]

There you have a multi-player Prisoners Dilemma but with the opportunity for conferring. All players are better off co-operating (lending to each other) than defecting (refusing to lend to each other) and they know this. If you did not know how your competitor was going to play you should rationally defect (not lend) because if they co-operate (lend to you) you are quids-in, and if they defect (don't lend to you) you are better off than if you did and they still didn't.

But you're not all in jail, you can talk, and you can develop a mutual-co-operation equilibrium. This "explains" the clubbing together to the tune of $70 billion.

Still, if one of those players "cheats" then the co-operative agreement becomes invaded by defection again.

If your competitor does not know what its liabilities are would you do business with them?

[balrog666]

Almost by definition. Chicken-little thinking is believing incorrectly that the sky is falling.

Since the sky isn't falling, and you apparently believe that it is....

... well, I'll leave the conclusion "as an exercise for the student."



You're still bummed out, huh, Bubby?

Do what I do, :iblamelisa:

[drkitten]

Can somebody please explain how this is happening? I guess the balance sheet isn't so balanced.

It's not that the balance sheet isn't balanced -- it's that people misjudged risk (in many cases, were mis-sold risk). Technically speaking, money that I am owed (because I lent it out) is an asset of mine (so it goes onto the plus side of the balance sheet), while money that I owe is a liability.

The problem is : how does one value money that I am owed? If you owe me $10,000, should I carry that on my books as an asset worth $10,000? Even if there's only a 50/50 chance that I will ever be paid back? (Answer : no, obviously. If there's just a 50/50 chance of my being paid back, then the loan is "worth" at most 5,000.)

But if I think that the loan has an iron-clad guarantee of being paid back, I've misjudged the risk and could get in serious trouble if I treat it as being worth more than $5000.

This all started with high-risk mortgage loans, which were being sold in bulk as investments. People thought that, in bulk, high-risk mortgages would turn into low-risk investments, because although some of the loans would go south, they wouldn't all go south -- and they were supported by rising real estate value in the underlying collateral.

Then they started all going south (in bulk) and caught people unaware.

The first casualties were the people who held these bulk mortgages directly and weren't seeing the money they expected. I think that wave of casualties has mostly happened by now.

The second wave were the people who had loaned money to the first wave, expecting to be paid back by the money from the mortgages. (Or the people who relied on money from the first wave, for example, by providing services to them. Now is not a good time to be selling title insurance.)

The third wave will be the people who had loaned money to the second wave. The Nth wave will be the people who loaned money to the (N-1)st wave. But at each wave, the effect will become less and less (assuming sensible policy decisions).

That's a huge oversimplification but should give you the right idea.

In the case of Lehman, from the cited article:

In the new world Lehman wanted clever new recruits, capable of creating ever more complex financial instruments. The belief was that bigger brains would lead to bigger profits. The equity salesmen who spent their days advising, buying and selling shares for international clients — and had been the firm’s lifeblood — were old hat. Fixed income and proprietary trading became the new holy grail.

On bonus day it was clear who was in and who was out, but in doing so the firm laid the foundations of its destruction.

The bigger profits came and Lehman set up proprietary trading teams, ploughing a lot of their own and clients’ capital into leveraged deals in property and other more opaque areas.

[martu]

It's not that the balance sheet isn't balanced -- it's that people misjudged risk (in many cases, were mis-sold risk). Technically speaking, money that I am owed (because I lent it out) is an asset of mine (so it goes onto the plus side of the balance sheet), while money that I owe is a liability.

The problem is : how does one value money that I am owed? If you owe me $10,000, should I carry that on my books as an asset worth $10,000? Even if there's only a 50/50 chance that I will ever be paid back? (Answer : no, obviously. If there's just a 50/50 chance of my being paid back, then the loan is "worth" at most 5,000.)

But if I think that the loan has an iron-clad guarantee of being paid back, I've misjudged the risk and could get in serious trouble if I treat it as being worth more than $5000.

This all started with high-risk mortgage loans, which were being sold in bulk as investments. People thought that, in bulk, high-risk mortgages would turn into low-risk investments, because although some of the loans would go south, they wouldn't all go south -- and they were supported by rising real estate value in the underlying collateral.

Then they started all going south (in bulk) and caught people unaware.

The first casualties were the people who held these bulk mortgages directly and weren't seeing the money they expected. I think that wave of casualties has mostly happened by now.

The second wave were the people who had loaned money to the first wave, expecting to be paid back by the money from the mortgages. (Or the people who relied on money from the first wave, for example, by providing services to them. Now is not a good time to be selling title insurance.)

The third wave will be the people who had loaned money to the second wave. The Nth wave will be the people who loaned money to the (N-1)st wave. But at each wave, the effect will become less and less (assuming sensible policy decisions).

That's a huge oversimplification but should give you the right idea.

In the case of Lehman, from the cited article:

Well put but I have to add something to it to clarify, some people bought these loans not knowing what they were buying. The many levels you mention hid what the underlying asset was so much that some had no idea what they were purchasing. They only knew that everyone else was doing it and they were making money doing it.

Hence why what is happening now is considered a crisis and not merely a market correction or downturn, we do not know where these debts are. We will not know for months, maybe years.

[Francesca R]

If your competitor does not know what its liabilities are would you do business with them?My point again: at some stage the likelihood that I will go bust if everyone defects makes that a worse payoff than the lesser likelihood that I might go bust if everyone co-operates and I uncover a lemon. So at that stage (which is close at hand for the ten banks concerned)--Yes.

[zooterkin]

Not in the UK, since when Northern Rock started to experience a bank-run (exactly a year ago) the Treasury publicly guaranteed every penny of all deposits that savers had placed with the institution (and later nationalised it).

Personally, I blame Mary Poppins for that one, anyway. I think I'm right in saying there hadn't been a run on a UK bank in living memory, but there was the 'folk memory' of the one in the film.

[Francesca R]

Seriously Francesca - could you provide a concise summary of what has caused this in simple financial speak? I think I do understand it but not well enough to explain it to someone else in a coherent and simple manner!Oh, there is this: The Subprime Primer (http://forums.randi.org/showthread.php?t=107053)

[Darat]

It's similar to pass the parcel - only in this case it aint good if you are the one left holding the parcel when the music stops because you have to cough up the prize.

I should be an economics or business professor - the professor they got on PM this evening to explain it to the listeners used this same analogy, sadly he didn't credit me with it.

[martu]

My point again: at some stage the likelihood that I will go bust if everyone defects makes that a worse payoff than the lesser likelihood that I might go bust if everyone co-operates and I uncover a lemon. So at that stage (which is close at hand for the ten banks concerned)--Yes.

How are you calculating these likelihoods?

[Francesca R]

How are you calculating these likelihoods?I am telling you that that is the "calculation" (more like a judgement) that the group of ten banks has made and that is the conclusion they have reached.

Do you have an alternative explanation for the assembling of the USD70billion facility they have created? What is it?

[Darat]

The bosses all like to have a big room full of money so they can go and roll about in it?

[dudalb]

The B Of A is Bullish on Merill.Lynch,and has bought them out.
Damn, I always liked their cattle stampeding through Wall Street commercials.

[martu]

I am telling you that that is the "calculation" (more like a judgement) that the group of ten banks has made and that is the conclusion they have reached.

Do you have an alternative explanation for the assembling of the USD70billion facility they have created? What is it?

Doing what they are told (or face stricter regulation perhaps) it is way too early to make a judgement call like that, citi's liabilities alone could use up a lot of that facility. It reminds me of LCTM bailout, sure it was necessary but the banks looked out for number one first and foremost.

[Francesca R]

They were not "told" (compelled) by any central authority to do it though were they? Where is your evidence of that please?

Of course they look out for number 1 first and foremost. So do all co-operators in the prisoners dilemma game. And if you look above you see I mention a scenario whereby it could unravel if somebody cheats. I doubt that is likely. Precisely because the banks are *not* being compelled to do this, it is likely to a self-reinforcing co-operation.

[martu]

They were not "told" (compelled) by any central authority to do it though were they? Where is your evidence of that please?

Of course they look out for number 1 first and foremost. So do all co-operators in the prisoners dilemma game. And if you look above you see I mention a scenario whereby it could unravel if somebody cheats. I doubt that is likely. Precisely because the banks are *not* being compelled to do this, it is likely to a self-reinforcing co-operation.

I have no evidence for this you asked for an alternative explanation so I gave you one.

Do I think it is likely? Probably not but one thing I do know is at this time I would not assume the banks are making good judgement calls after the mess they have created. We are in this position because of their judgement.

[Francesca R]

I am sure there has been official encouragement, yes. But that is because it is in the public interest as well, and that increases the co-operation payoff in the game-theoretical strategy.

[martu]

I am sure there has been official encouragement, yes. But that is because it is in the public interest as well, and that increases the co-operation payoff in the game-theoretical strategy.

Wasn't it treating the real world as a theoretical model that started this mess?

I hope you are right though.

[Francesca R]

Game theory is a mathematical extension of the fundamental "people respond to incentives" axiom. It can be mis-used of course but I think that axiom usually holds ;)

[Puppycow]

Wasn't it treating the real world as a theoretical model that started this mess?

I hope you are right though.

I don't think you can completely avoid theories, whatever you do. The thing is not to put too much trust in theories, and be prepared for contingencies.

I recently read a book called The Black Swan, which provides an interesting perspective. The author of that book is not a fan of game theory and other financial/economic theories.

His stategy is to put most investment money (90%) in something really safe like government bonds, and make a few bets on things that could pay off big if they pan out, like new epoch-making technologies.

He hates invesments in banks or insurance companies, because the downside risk is much higher than the upside. Today's market seems to vindicate that view.

[Gurdur]

This is going to depreciate the USA dollar again, you know.

[martu]

Game theory is a mathematical extension of the fundamental "people respond to incentives" axiom. It can be mis-used of course but I think that axiom usually holds ;)

Yes I know but as an Excel jockey at at a Hedge Fund I promise you the marketing department consider the laths the real world if it makes the fund look good.

[martu]

I don't think you can completely avoid theories, whatever you do. The thing is not to put too much trust in theories, and be prepared for contingencies.

I recently read a book called The Black Swan, which provides an interesting perspective. The author of that book is not a fan of game theory and other financial/economic theories.

His stategy is to put most investment money (90%) in something really safe like government bonds, and make a few bets on things that could pay off big if they pan out, like new epoch-making technologies.

He hates invesments in banks or insurance companies, because the downside risk is much higher than the upside. Today's market seems to vindicate that view.

I like Taleb's books a lot, Fooled by Randomness is a fantastic read also by the way. However he has been involved in at least two hedge fund blow ups in his career which he doesn't mention that often, his models fail too. I am not sure if the credit crisis is a black swan, did he call it I wonder?, but I do know a few funds did and they made a killing.

The maths is often so elegant it is almost a shame sometimes when the real world disagrees with it.

[Francesca R]

Yes I know but as an Excel jockey at at a Hedge Fund I promise you the marketing department consider the laths the real world if it makes the fund look good.How is your fund doing? 2008 is not pretty (https://www.hedgefundresearch.com/hfrx_reg/index.php?fuse=login&1221556366) for many (http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD) hedge funds. (I know of some outstanding exceptions)

[Francesca R]

I recently read a book called The Black Swan, which provides an interesting perspective. The author of that book is not a fan of game theory and other financial/economic theories.Are you sure? Nassim Taleb eschews modern portfolio theory as a way to make money, which is reasonable since it was never conceived as such. But IMO his treatise on "black swans" is significantly dependent on game theory.

(I don't actually like Taleb's books much, but his "hero"; mathematician Benoit Mandelbrot, has a much better developed theory of financial market risk in his own work)

[martu]

How is your fund doing? 2008 is not pretty (https://www.hedgefundresearch.com/hfrx_reg/index.php?fuse=login&1221556366) for many (http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD) hedge funds. (I know of some outstanding exceptions)

Amazingly* it looks like we're correlated with the market which is causing the marketing department all sorts of problems. Now all the talk is not of alpha but that we're doing better than our biggest competitors (which we are if not by much), still under water for the year though.

* or not so amazing if you don't believe the HF hype. Of course we're blaming investment banks for the lack of credit, without leverage our gains are mediocre in many areas.

[martu]

Are you sure? Nassim Taleb eschews modern portfolio theory as a way to make money, which is reasonable since it was never conceived as such. But IMO his treatise on "black swans" is significantly dependent on game theory.

(I don't actually like Taleb's books much, but his "hero"; mathematician Benoit Mandelbrot, has a much better developed theory of financial market risk in his own work)

Is it his arrogance or his ego that puts you off him?? :)

[a_unique_person]

Not in the UK, since when Northern Rock started to experience a bank-run (exactly a year ago) the Treasury publicly guaranteed every penny of all deposits that savers had placed with the institution (and later nationalised it). Retail deposits losing value would be very contagious and this is something that (I think) every government sees as being in the public interest to prevent.

That only works the first few times. Lehman was allowed to fall.

[martu]

That only works the first few times. Lehman was allowed to fall.

The interesting question is why? Probably because fewer people will be immediately affected compared to, say Merril, who had a high street presence.

[martu]

Nervous mood sees interbank lending dry up (http://www.ft.com/cms/s/0/359f937c-8363-11dd-907e-000077b07658.html) perhaps Game Theory isn't at play here? This is what I'd expect at the moment due to lack of data.

[Francesca R]

That only works the first few times. Lehman was allowed to fall.
I agree there is "not enough money in the kitty" to forestall a nationwide bank run on all deposit-taking institutions.

Lehman was not a deposit-taker. If it was the main-street effects would be an order of magnitude more severe.

[drkitten]

The interesting question is why? Probably because fewer people will be immediately affected compared to, say Merril, who had a high street presence.

Is this supposed to be a bad thing?

[martu]

Is this supposed to be a bad thing?

I don't think so no.

[Francesca R]

Nervous mood sees interbank lending dry up (http://www.ft.com/cms/s/0/359f937c-8363-11dd-907e-000077b07658.html) perhaps Game Theory isn't at play here? This is what I'd expect at the moment due to lack of data.Well to be fair to the theory, your suggested outcome is still a result of it--unless you're talking about blind panic (irrational), and I didn't think you were.

[martu]

Well to be fair to the theory, your suggested outcome is still a result of it--unless you're talking about blind panic (irrational), and I didn't think you were.

No I do not think it is irrational but I do think the banks do not know each other's positions well enough to make a call. Caution prevails, about time some would say.

[a_unique_person]

The interesting question is why? Probably because fewer people will be immediately affected compared to, say Merril, who had a high street presence.

AIG needs $75billion.

http://business.theage.com.au/business/crisishit-insurance-giant-aig-near-collapse-20080917-4i3i.html

This is even bigger. Insurance is also intrinsic to the sense of stability that people need to invest.

[Raptor Witness]

Here's what actually burst the bubble and broke all the trend lines to begin with.

http://farm3.static.flickr.com/2227/2072040606_517363e89b_o.jpg

http://farm3.static.flickr.com/2014/2116101521_037f716741_o.jpg

http://farm3.static.flickr.com/2219/2116085231_5ac0fa21ff_o.jpg

[KoihimeNakamura]

Say it with me..

Coorelation is not causation.

[Francesca R]

Happy birthday, Lehman-free world. I don't have to work this weekend :) (but probably will)