So there it is.... Lehman Brothers is history now. The stock trades at 21cents (closing 15th Sept 2008), down 94% over the previous day. The institution which ran for 158 years was finally brought down by greed of few traders who traded mortgages.
In a way I would say this is a good thing to have happened. Somehow the concept that Leverage mangifies losses was forgotten in the first decade of this 21st century and the financial market did require a sanity check. However, the magnitude of this lesson is certainly glorified by the write off's we have seen over the last one year in the subprime credit markets. Estimates suggests this figure to be somewhere around USD 600 Billion (FED's balance sheet size is USD 800 Billion) and may be there are more losses coming our way. Unfortunately this isn't just a US story any more. It is now going to be a global contagian, Europe has to follow next; no doubut on that. Chineese (Asian) real estate; god save 'em ... Middle East; I dont want to hear about it any more .... It is going to extremely hard to think of new money making opportunities in the next 2 years or so.
The crux of the problem is excessive liquidity. Dick Fuld - CEO of Lehman had mentioned in one of the meetings that ample liquidity is hiding a lot of evils. He was so true. Unfortunately, Investment Banks were the greedy men who gave markets excessive liquidity speaking purely of mortgages. As the velocity of money increases when you package CDO's / CMO's, it free's up capital to be re-invested and if you dont have enough deals to re-invest your money you have two options - one to sit on TIPS or second to make a bad deal look good. Everyone choses the second (after all its a question of pay and perks) :-)
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