Monday, September 15, 2008

Lehman vs. Bear?

Hank Paulson, the Treasury, and the Fed helped Bear Stearns shareholders get $10 per share.

They are letting Lehman hang by itself.

What's the difference between Investment Bank A (Lehman) and investment Bank B (Bear Stearns)?

1. Bear had the good luck to go first. One is an exception, two becomes moral hazard.

2. Bear was more intricately entwined with the rest of the financial system through complicated swaps and other guarantees.

3. The markets had ample time to get ready for Lehman's demise.

I suspect my order of the above is about right.

If I were in Manhattan today, I would have gone to Lehman and stood on the sidewalk and just watched. I was at the Berlin Wall in 1989 -- that was a much, much bigger event, but history is being made today.

My favorite question now is: How does it make sense to have $700 billion of assets supported by about $20-25 billion in equity (i.e., 30x leverage) -- when those assets can change in value by 5% in a matter of days? Is this a question of liquidity or of solvency (recognizing that the line between those two concepts is not clear).

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