Monday, September 21, 2009

Lehman and Bear Sterns

Why did the government help bail out Bear Sterns while leaving Lehman shareholders with nothing? From what I've been reading, it's because Bear Sterns had a buyer in JPMorgan (thanks for the correction on the typo Chris). No one in their right mind wanted to touch Lehman Brothers.

Lehman was so big and so leveraged that even with government backing (as in the Bear Sterns deal) there wasn't enough interest from Wall Street big shots to buy Lehman. And thus 12 months ago they failed and sent the financial system into panic.

It will happen again. Probably when I'm 60 and about to retire.


Chris said...

I'm going to have to disagree on a few points.

1. JPMorgan, not Morgan Stanley, bought Bear. There's a big difference.

2. As for leverage - without taking the time to do the research - I think Bear was just as (if not more) leveraged than Lehman.

3. Lehman definitely had suitors. I think it really came down to Hank Paulson deciding he had to send a message that the government wasn't going to save everyone. If he had it to do over my guess is that he would have taken a different approach.

4. With some real government assistance there were interested buyers. Barclays was one. But they were patient. They let Lehman file for bankruptcy and then scooped up some of Lehman's biggest strengths (the broker/dealer and their NYC office building) for pennies on the dollar without having to mess with the crappy mortgage assets.

5. Dick Fuld, Lehman's CEO, gets some of the blame too. He turned down offers to sell the company for about $25 a share in the months before the collapse. Plus he was generally regarded as a jerk with few friends on Wall Street so no one was in a hurry to help his firm as it fell apart.

6. I do agree that this will all happen again.

Mac Noland said...

1) Typo. Thanks for the correction. I do know the difference between an bank and investment advisor.

2) maybe, but not at the same scale. I think Lehman had far more debt.

3) You may be right. I'll have to side with you as you're the banker

4) Could be.

5) I guess it doesn't pay to be an ass hole.

6) at least we agree on something.