Michelle Malkin » The fit hits the shan on Wall Street

The fit hits the shan on Wall Street

By Michelle Malkin • September 15, 2008 06:31 AM

Welcome to another Black Monday.

Or rather, Red Monday — red for all the hemorrhaging taking place on Wall Street.

Lehman Brothers is filing for bankruptcy; Bank of America Corp. is buying Merrill Lynch & Co. For once, they didn’t get straight-out bailouts from Washington. But the Fed took several actions “to provide additional support to financial markets, including enhancements to its existing liquidity facilities.”

And there may be more on the way. U.S. automakers are pushing for $25 billion in government-backed low-interest loans. Naturally, the auto industry denies it is asking for a bailout, but taxpayers will be on the hook if the automakers fail to repay the loan. Insurance giant AIG also wants a government hand-up, if not a direct handout.

And now is the time where I get to say, “See, I told you so.” From March 17, 2008, as the Bear Stearns bailout was underway:

I warned from the start of stimulus-palooza that we were headed in this direction. Both political parties support these massive government interventions–from empowering judges to meddle with private contracts to backing billions in mortgage securities. This isn’t the last step. It’s the first. And you know who will end up getting screwed: The responsible and the frugal.

***

More from Business Week:

“Mondays better not get any more manic than this. Wall Street expected to spend today trying to contain the damage from a bankruptcy filing by Lehman Brothers (LEH) after the fourth-largest investment bank failed to find a buyer for its broken balance sheet over the weekend.
And that’s not all. There’s the distressed sale of Merrill Lynch (MER) to Bank of America (BAC) for approximately $44 billion, and a radical restructuring plan for American International Group (AIG), the insurance giant which became a major player in mortgage-related securities and derivatives.

…The plunging prices of Merrill and AIG raised the possibility that the market had figured out that the two are harboring big new losses from mortgage-linked securities. Worse, if Merrill and AIG lost a lot of capital, Wall Street sees fewer ways to replace that capital since the Fannie and Freddie deals. Terms of the government’s takeovers of Fannie and Freddie trashed the value of their preferred stock.

Until now, preferred stock has been a prime tool for daring investors to inject new capital into a company needing rehabilitation. The Fannie and Freddie deals indicated that preferred investors could lose big, along with common stock investors, in distressed takeovers. Both Merrill and AIG raised new capital early this year by issuing securities similar to preferred. Lehman also raised money from preferred investors, who are now likely to be wiped out in a bankruptcy. So now big issues of preferred securities may not be available to fill holes in balance sheets from new losses.

After a bad week, a working weekend, and a manic Monday, Wall Street can only hope the credit storm is at its worst.

***

Update: Lehman Bros. associates gave far more to Democrats than to Republicans. Just something to remember when Democrats blame this mess on the Bush Administration. (And now that The One is weighing in, let’s not forget this either.)

Posted in: Subprime crisis

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#455861

On September 15th, 2008 at 2:07 pm, txvet2 said:

On September 15th, 2008 at 1:40 pm, lgm said:

They were responsible for knowing the terms of the contract, and for questioning those terms they didn’t understand.
#455925

On September 15th, 2008 at 2:56 pm, CO of Fort Housewife said:

On September 15th, 2008 at 1:40 pm, lgm said:
True, but there is lots of evidence of borrowers not understanding or being told all the conditions of a loan. Many were not aware that the low “teaser rates” were only for the first few years. You can argue that this information was in the fine print, but who reads fine print?

When I’m making a purchase that is going to cost me upwards of $400K (including interest), I sure as heck read all the fine print. To fail to do so is, in my opinion, what’s the word…IRRESPONSIBLE.
#455957

On September 15th, 2008 at 3:14 pm, emjem24 said:

lgm said:
Real issue: Where did all this bad debt come from? Consumer protection laws are supposed to protect people from taking loans they have little chance of paying back. Bush era deregulation and relaxation of regulation allowed lenders to flout these rules and generate a mountain of bad debt. Clinton would not have let it happen.

The problem is that Clinton DID allow it to happen and you deliberately avoid the point because you believe that no Dem can fail. That the government can never fail.

The fact of the matter is that Clinton was part of this mess when he loosened restrictions on who could borrow and who could get loans for homes. That an industry became built around that is missing the point. Are there economically naive people out there who think that with 75k you too can afford a 500k house? Yes. Were there lenders who exploited the situation? Yes.

A lot of the deregulation and lessening of borrowing standards started with Clinton. Perhaps, if Americans like you stopped lying to themselves about why you don’t live within your means, the economy, and the financial industry, wouldn’t be in a muddled state right now.
#456014

On September 15th, 2008 at 3:37 pm, kudafa said:

In post #95, LGM said “who reads the fine print.” In my view, the very existence of fine print is reason enough to scrutinize those passages with a microscope. If the people didn’t understand what they were getting into, take a little time & get an opinion from someone who knows about this stuff, such as a real estate lawyer. Spending a few hundred dollars could save people tens of thousands later on. I’ve had it up to my ears with people moaning about not knowing what they did, & how they were screwed & want rescued without any responsibility. Unless there is outright fraud, deception or coercion, how about people just man up & accept they made a bad decision & take care of it.
#456019

On September 15th, 2008 at 3:38 pm, emjem24 said:

self-edit: first sentence of third paragraph should read… A lot of the deregulation and lessening of borrowing standards was not ended by Clinton. Sorry about that.