Sunday, September 15, 2013
Lehman's Failure: Five Year Anniversary
Lehman financed long term assets with short term debt, some of which needed daily refinancing. The company had billions in "off balance sheet" liabilities due to risky derivative wagers. The monied class no longer trusted Lehman to make good on their debts (or bets).
Why didn't the U.S. Treasury save Lehman, when it bailed out nearly everyone else? Lehman had two Bush's on board, cousin George Herbert Walker and brother Jeb (John Ellis Bush). It would've been unseemly for a President to bail out his brother and cousin.
One might ask: To what extent are companies financing long term assets with short term debt today? How prevalent are off balance sheet obligations like derivatives or forward looking contracts? What kind of world event could cause financial institutions to cease short term lending and begin betting heavily on the failure of corporations to pay their debts?
The canary for the Fall 2008 financial crisis cratered in the spring of that year. The Carlyle Group's mortgage back security fund Carlyle Capital Corporation (CCC) declared bankruptcy. Five years later Carlyle is stepping back into that arena. The Carlyle Group is "mapping a strategy that would entail purchasing large volumes of both nonperforming and reperforming home loans with securitization as a source of funding."
CCC valued its mortgage backed security loans as AAA, when they weren't. Carlyle levered CCC over 30 times debt to equity. When core holdings fell in value, massive debt drowned the Guernsey based Carlyle Capital.
Five years later Carlyle plans to buy up broken home loans. Carlyle likes sectors where Uncle Sam provides guarantees, subsidies and ensures little competition. It remains to be seen how Uncle Sam will assist Carlyle with re-entering distressed home mortgage backed securities. Rest assured, it's in the mix somewhere.
How do home loan securitizations, performing and broken, contribute to financing long term assets with shorter term money? When will the next disequilibrium arrive where lenders fail to provide money needed for refinancing? Who will implode and why?
Lehman fell five years ago today. Another crisis will come. The public's questions will once again be when, where, how and why?
Posted by PEU Report/State of the Division at 1:35 PM