Lehman Sisters

Soooooo... what a week. As a bankruptcy lawyer I should have been really excited about what was happening. After all I make my living off of distress. Peoples distress, businesses distress, economic distress. Turmoil, diving markets, skittish people and a more skittish press leading the charge. I should be full of energy and verve but... I found it hard to work on Monday.
Now to be fair my Niece had gotten married over the weekend and my brothers office flooded badly on Sunday but I was in no way prepared for Lehman Brothers, AIG and Merrill Lynch all being threatened with extinction. It was mind numbing. On so many different levels.

Lehman Brother is in Chapter 11 and is selling off it’s good assets so that the rest can be picked over. No one knows what that means for people who had accounts with them and or investments or bonds in the company itself. Everyone knows it is not good but for all practical purposes Lehman Brothers is gone. Likely someone will buy the name and attempt to put it to work somewhere down the line as people keep trying to do with the ghost of the Napster franchise. But gone, over a weekend! Why... because they were so highly leveraged. But we will get to that later.

Merrill Lynch is gone. Swallowed up by Bank of America (which ate Countrywide earlier in the crisis) leaving what would appear to be a monolith but I am thinking it might be the case of a monster swallowing all it can, only to find it was sick to start with (see the rising credit card default rates to get a feeling for how sick). It is almost like BOA is trying to get to the “too big to let fail” status. Which brings us to AIG.

Before I got involved with and insurance defense firm, i had no idea who AIG was. i knew that they were run by one of the notorious Greenbergs (Hank I think). I say notorious because the family has had an eye for a buck and such great instincts throughout the years so as to be legendary. Hank Greenberg probably is thanking his lucky stars (and Elliot Spitzer) that he was forced out but anyway, I knew about AIG. They insure everyone. And when you say, “well they do not insure me, All State insures me”, I need to tell you, that AIG insures ALl State. They insured EVERYTHING. No risk was too big or too nuanced for them to earn a fee on. It would be like if I took out an insurance policy to cover my loses at the craps table. And they were brilliant at it, until they got to insuring the bad bets of people like Lehman and Merrill. They had been backing the shooter at the table for a number of years and the shooter was hot.

The shooter was in course everyone from the investment banks to small timers in town flipping houses and the bet was not a craps bet (which at least has ascertainable odds) but instead was real estate. Because one of the truisms of life thus far has been that real estate always goes up. Right? Well for fans of dollar cost averaging and history, real estate does always go up, they are not making any more of it. The stock market has also historically always gone up but the key is that you have to be in for the long run. My financial advisor is one of my best friends and he trained my wife and I a long time that you do not try and time the market and you have to have an excellent understanding of your own appetite for risk. This has been very good and valuable advise.

So, if these people all bet on real estate, then what is the problem? All they need to do is hunker down and the price of real estate will rise again and all those bad bets they made on the pass line will become good. Right? Well wrong. Very wrong. VERY, VERY WRONG! I see two reasons that the logic is wrong even though it is very logical. They are:

1. Leverage (which is brought on by)

2. The pressure for profits NOW.

I have represented a lot of real estate developers over the past few years. they were bright, intelligent and entrepreneurial and somehow, several years ago we got to a point where if you were not fully invested, meaning if all your assets were not at work then you were a dummy. That is not by itself a bad premise. I have a good German Lutheran disposition which favors this type of industry. No, where it got screwed up was because in order to maximize those working assets, everyone borrowed every cent that they good. That is leverage. Going back to the craps analogy, what these developers did, and what a lot of Americans did on their homes, and Lehman certainly did, well, these craps players visited the loan sharks and gambled on the bet that real estate prices would continue to go up. And up. And up.

Now a good shooter keeps some chips below the table so he can ride out a few sevens, but what our economy was doing was winning bets and then rolling everything forward on the next roll of the dice. None of these developers or investors had any spare powder dry, and when the seven s started coming, they found a way to borrow more and double down. THAT is leverage. But why take this leveraged risk?? It had to be scary. I know it was scary for the real estate developers and many (most) have paid a price with business and personal bankruptcies. But if your the head of Lehman, or Merrill or AIG... not so scary.

1. The money is not yours

2. Your bonus is tied to your stock price, your short term stock price.

3. There is an excellent chance you will be gone before the chickens come home to roost; and (this is everyone’s favorite part of the story)

4. If the 7’s keep coming up, you get fired and get a huge severance package (See Fanny and Freddy CEO’s).
What a Country!

I do love my country and I have a healthy respect (if not a love) for free market capitalism. I know that Obama and Mc Cain are going to fix the system, regulate it better, get back the bonus money, blah blah blah. The problem is not the system and the answer unfortunately is not going to be more regulation. The answer needs to come from a lot deeper in our country. We need to redefine what being a success is. It is not a new Mercedes, although I would love one. if our leaders are going to help us they are going to rally us to redefine our American Values, our Christian values.
But that is a lot to expect. Too much to expect in fact. And in the mean time there is going to be financial turmoil and pain and loses of savings and changes in life style and... all manner of other painful shit. I do not have any answers but this is... more then a little frightening.