Bailout Watch 46: Lehman Brothers Goes Down

Justin Berkowitz
by Justin Berkowitz
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bailout watch 46 lehman brothers goes down

Think GM has it bad? Or that they’re too big to fall? Think again. Lehman Brothers has just announced it’s filing for Chapter 11 bankruptcy protection. The 158 year-old bank decided to exercise the nuclear option after attempts at bailouts and takeovers failed. Lehman Brothers owes $128b in debt, which will probably be paid out at 60 cents on the dollar. (For reference, General Motors has $43b in long term debt). Thousands of Lehman workers were fired immediately after the Chapter 11 filling. The rest were told that they will be paid through Friday, at the most. John McCain – who probably realizes getting New York’s delegates is beyond the limits of reality – told the International Herald Tribune that he was “glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bail out Lehman Brothers.” Floyd Norris from The New York Times reminds us that Lehman claimed it had ample capital and liquidity as late as last week. Sound familiar? It should. General Motors is in a similar predicament– only worse. Along with Bear Stearns and Merril Lynch, incidents like Lehman are using-up the market’s feelings of shock and surprise at major business failure. If General Motors is hoping for a bailout, they had better get on it soon, or no one will throw money in their direction, even post-C11.

Justin Berkowitz
Justin Berkowitz

Immensely bored law student. I've also got 3 dogs.

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  • Potemkin Potemkin on Sep 15, 2008

    Gardiner Westbound: You make a bold statement with your prediction on the Volt. Its going to fall short you say? You know this how? Please share with all of us,what you base your insightful predictions on. - Mikey I agree with Gardiner. How is an expensive, unproven, limited production, late to market, yet to be finalized vehicle going to save GM. GM needs several 250,000 sales a year vehicles to save it, not some yet to be seen niche vehicle.

  • 50merc 50merc on Sep 15, 2008

    pnnyj and compy386, thanks for your well informed and cogent comments Seems like every ten or twenty years folks need to be rudely reminded to follow prudent business practices. Bundling crappy mortgage loans into collaterized securities didn't make those home buyers into good credit risks.

  • Pch101 Pch101 on Sep 16, 2008

    I've been a bit redundant, but that never stopped me before so I may as well say it again -- GM isn't going to get what it's asking for. It can ask all it likes, but it won't be getting direct loans from the feds. The government can't afford it, but they won't be admitting to that prior to November. That being said, GM is more similar to Bear Stearns than to Lehman. Lehman's failure is, in the scheme of things, not that big a deal. The markets have been watching Lehman for quite awhile, and were able to prepare for its failure. It wasn't the first to get hit, so the market also priced the risk into the stock and into its psychology. We had a hard landing, but the parachute was on pretty tight. Bear Stearns was a different story. It was (sorta) bailed out largely because of timing. It was the first to fall, and its complete collapse without a net at that point would have sent an absolute shockwave through the markets, which were not prepared for it at that time. If GM fails, you have to wonder what that would do for investor confidence to the US markets in general (not just in General Motors.) It could send the entire market into a dive, as uncertainty and fear grips investors wondering what else could possibly go wrong, as they see that the problem is no longer limited to the financial institutions. This swan dive could provoke the proverbial stampede that tramples on a lot of innocents. If GM can fail in a vacuum and only hurt GM, I can personally live with that. But the odds are pretty good that GM would take down more than just GM. That's why a GM bailout could make sense, but not with the current leadership in charge. In order for it to make sense, you need a team leading it who could actually fix it.

  • Morea Morea on Sep 16, 2008
    A blurb on Bloomberg has it that the ex-ceos of Fannie and Freddie will NOT be getting their golden parachute payouts. Did the blurb say anything about jail time?