Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21
Scan Computers - How to Test New Systems CPU, GPU and Hard Drive Stability With Free Software - 4th Jun 21
Hedge Funds Getting Bullish on Gold - 4th Jun 21
THERE ARE NO SOLUTIONS When the Media is the VIRUS - 4th Jun 21
Investors Who Blindly Trust the ‘Experts’ Will Get Left Behind - 4th Jun 21
US Stock Market Indexes Consolidate Into Flagging Pattern – Watch For Aggressive Trending Soon - 4th Jun 21
Microsoft (MSFT) Stock Trend Analysis - 3rd Jun 21
No More Market Bloodbath – Beyond Cryptos - 3rd Jun 21
Bank run, or run from the banks? - 3rd Jun 21
This Chart Shows When Gold Stocks Will Explode - 3rd Jun 21
The Meaning Behind Gold’s Triple Top - 2nd Jun 21
Stock Market Breakout Or Breakdown – What Does The Next Big Trend Look Like? - 2nd Jun 21
Biden’s Alternate Inflation Universe - 2nd Jun 21
What You Should Know Before Buying Car Insurance - 2nd Jun 21
Amazon (AMZN) Stock Summer Prime Day Discount Sale - 1st Jun 21
Gold Investor's Survival Guide - 1st Jun 21
Silver and Copper to Benefit from Global Electrification Push - 1st Jun 21
Will Gold Shine Under Bidenomics? - 1st Jun 21
Stock Market Buy the Dip, Again?! - 1st Jun 21
Stock Market Consolidation Ahead - 1st Jun 21
Stock Market Summer Correction Review, Crypto CRASH, Bitcoin Bear Market Initial Targets - 31st May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Lessons from Lehman's Collapse 10 Years After Failing

Stock-Markets / Credit Crisis 2008 Sep 25, 2018 - 11:09 AM GMT

By: Michael_Pento

Stock-Markets

Global financial services firm Lehman Brother’s stock was in free-fall during the first week of September 2008. After making huge bets in the mortgage securities space, Lehman’s President Dick Fuld feared bankruptcy and frantically sought out a buyer. The company was hopeful to strike a weekend deal with either Barclays PLC or Bank of America.

Nevertheless, Lehman’s outsized investments in the mortgage market ultimately proved them too risky a partner for anyone; and the giant investment bank went belly-up on September 15th.  Prior to this event, Lehman had reported record earnings every year from 2005 to 2007. The Street believed the company to be infallible. Analysts held on to hope until the bitter end. Their mantra went something like this, “nothing to see here, this is a small correction in a small section of the housing market that has little effect on the overall economy.”


But it wasn’t the first time that year that analysts got it wrong. The Wall Street perma-bulls also missed the eleventh-hour fire sale of Bear Sterns to JP Morgan for $2 a share. Five days before the sale, a CNBC host who loves to play with buttons fervently advised a viewer to leave his money in the firm, insisting it would be silly to make a sale at current values. However, less than a week later it lost $60 per share!

The Lehman case became the largest bankruptcy filing in history, surpassing other bankrupt giants such as WorldCom and Enron. Markets were panicked. The following day, September 16th, AIG called then-Fed Chairman Ben Bernanke asking for an $85 billion dollar bailout. For years AIG had collected premiums on Credit Default Swaps (CDS), which are basically insurance policies on debt. All three credit rating agencies, which had rubber stamped all new debt issuances as AAA for years, finally downgraded AIG to AA-, immediately triggering a collateral call of $32 billion dollars. In just one day AIG was basically insolvent. AIG had written CDS contracts on $500 billion in assets, $78 billion of these were on residential and commercial mortgages and home equity loans. Remember, the same types of loans Wall Street and the Fed assured investors were rock solid.

And this was Tuesday; the week had just begun…

September of 2008 was perhaps the most eventful month in Wall Street’s history. On September 21st Goldman Sachs and Morgan Stanley, the last two independent investment banks, become bank holding companies, so they could compete for deposits with commercial banks and better ensure their solvency.

On September 25th a group of Washington Mutual Bank executives boarded a plane to Seattle. Upon de-boarded, they discovered that the Fed had seized their bank assets and sold them to JPMorgan Chase; marking it the biggest U.S. bank failure in history.

And then, of course, Congress got in on the fun rejecting a $700 billion Wall Street financial rescue package known as the Troubled Asset Relief Program, or TARP, on September 29th ; before accepting it on October 3rd.

Also occurring in that infamous month of September 2008 was the placing into conservatorship of both Fannie Mae and Freddie Mac; those two giant government sponsored enterprises that would have gone bankrupt without a taxpayer bailout.

The problems didn’t end with September. October saw Wells Fargo, the biggest U.S. bank on the West Coast, squeeze out Citi Group to buy floundering Wachovia for about $14.8 billion dollars. And it was a good thing Citi wasn’t successful in their acquisition because in November the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp., all had to come up with a plan to rescue Citigroup. Citi issued preferred shares to the Treasury and FDIC in exchange for protection against losses on $306 billion of securities it held.

When the dust settled, the government exited the mergers and acquisitions business and did what it does best--namely, create a scheme to monetize debt and re-inflate asset prices. The first round of Quantitative Easing--a form of government-sponsored counterfeiting--was announced on November 25, 2008.

It’s important to remember that while this major crisis was brewing the Fed saw nothing on the horizon. Then Fed Chair Ben Bernanke saw no bubbles or risk for the broader economy, even as subprime mortgages started to collapse. Janet Yellen, Bernanke’s successor as Fed Chair, made this infamous quote regarding the real estate sector in September 2006, “Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting.”

Fast forward to today, Wall Street and the Fed are busy assuring us there are no bubbles out there at all. And, even if one does exists, it poses no threat to the overall economy whatsoever. They want you to ignore the doubing of the National Debt since Lehman failed. Don’t worry about an annual deficit of $1 trillion either; which is projected to only surge “big league” from its current level of over 5% of GDP. Never mind stock prices that are 1.5x the underlying economy—a valuation so high that it has never been witnessed before. A doubling of corporate debt to a record 45% of GDP isn’t a concern either—even when considering the quality of that debt is at a record low. And, having trillions of dollars worth of sovereing debt with a negative yield is just par for the course…or so they insist.

At least that is their public spin. However, the Fed recently found it necessary to telegraph to certain insiders within the Main Stream Financial Media what it would do during the next financial crisis. Here is the plan: It has pledged to act early and forcefully once the next crisis becomes manifest. The Fed will also publicly promise to do whatever it takes to fight deflation and tumbling asset prices and rising unemployment rates immediately—there will be no scaling into the next fight. Finally, our government will not delay or tinker around the edges when it comes to passing the next fiscal stimulus. It seems both parties have agreed that a massive tax cutting and infrastructure package would need to be enacted very quickly once the next recession arrives.

Of course, our government will have to recognize a crisis exists in the first place, which given the historical record, won’t be until the markets are in absolute free fall. But assuming they do eventually arrive on the scene, those are the things it would try to do “better”. This is crucial to understand if you want to make the most prudent investment decisions going forward. This is because the changes to economic growth and with the inflation/deflation dynamic are going to be unprecedented in scope and in magnitude. If investors are not modeling those changes they will be blindsided. Prepare now while you still have a chance!

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com

mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2018 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in