This Too Will Pass

IBD Editorials ^ | September 15, 2008

[Kaslin]

Wall Street: Old timers will recall F.I. DuPont or Goodbody & Co. Not-so-old timers remember E.F. Hutton and Kidder Peabody. Now we can add Bear Stearns and Lehman Bros. to the storied names that have fallen.

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We drop these names (and we could have mentioned a hundred more) for two reasons: (1) to remind readers that this isn't the first time an investment bank or brokerage has gone under, and (2) to point out that the country has always survived and grown.

In fact, what's happening now is quite normal in a financial system characterized by booms that lead to excesses that then require corrections before any renewal takes place. We'd be hard-pressed to remember a bear market when one or more financial firms didn't go out of business.

In the oil crisis of the 1970s, for example, major financial companies such as Penn Central and Franklin National went bust. The booming '80s saw hundreds of banks go belly up due to bad loans made to the farm sector and the Third World, and, later, S&L loans to U.S. homeowners.

[nickcarraway]

No mention of Drexel Burnham?

[who_would_fardels_bear]

Translation: Please keep your money in equities long enough for us to completely unwind our positions.

[mnehring]

Whenever you have a sector of the market that dumps like this, it creates a vacuum. Most investors have been pulling out which means there is cash that will be invested somewhere. It also means you have Lehman’s services and Customers that are a vacuum in service to be picked off.. The challenge for investors is predicting what will fill that vacuum.

Lots of opportunities in a downturn like this.

[darkwing104]

[Leisler]

Studebaker. Kaiser. Pierce Arrow. Cord.

[RobRoy]

>>Am I going to have to go out and buy a brown shirt? I was trying to get away from earth tones.<<

Covered puts, for example.

[billmor]

or Dean Witter? They had some of the best and nicest people...

[ThePythonicCow]

which means there is cash that will be invested somewhere.

Mostly not ... cash went poof. The total amount invested in everything on planet Earth has declined by gazillions of dollars over the last year.

If we had a fixed, finite amount of hard currency, say 1000 cute little pink seashells per human being, which we could put here or there as we chose, then yes, a bankruptcy here would mean a rising investment somewhere else.

But most of our wealth is just agreed upon value. Over the last year, human civilization has agreed that we have less, in aggregate fair market value.

[Jack Black]

Wonder what happens to the .20 cent Lehman stock?

They are in Chapter 11. Lots of companies go into chapter 11 and come out. United Airlines did. Of course airlines have assets like planes and routes. Their stock only went to $3.00, not .20 cents.

I’m not 100% sure they will totally disapear, but they probably will. Drexel is the nearest example. They went the way of the dodo.

[razorback-bert]

I heard on the radio they were in Chapter 4.

[668 - Neighbor of the Beast]

I’m no old-timer, but it was E. I. Dupont, not F. I.

[ThePythonicCow]

According to an article at Foxbusiness.com, the Wall Street Journal is reporting that British bank Barclays (BCS: 22.46, +0.98, +4.56%) is close to acquiring Lehman's U.S. assets for $2 billion.

[Jack Black]

Their bankruptcy filing lists $639 billion in assetts. So this is a small portion of their total holdings. Even at deep discounts probably less than 1% of the company. It is probably one of their still solvent and not in bankruptcy wholy owned subsidaries.

[Jack Black]

I don’t believe there is a “chapter 4” of the US Bankruptcy code. Wikipedia has a decent page on it. Some people are calling this “chapter 4 of the crisis”. Bear Stearns Chapter 1. Fannie & Freddie Chapter 2. etc..