Hold Onto Your Oxygen Masks and Seats!

Wednesday, September 10, 2008
Today, Lehman Brothers, which is America's fourth largest investment bank (meaning, broker hive), fell 7% in NYSE trading after announcing a 3Q loss of $3.3 bn. Yesterday it fell 45%. To stem the profuse bleeding, Lehman is offering a 51% stake in its most prized investment sub-unit to any willing sugar daddy (meaning, sovereign wealth fund). There's a growing consensus that Lehman will not survive the month (even though it survived the Great Depression).

A little word on Lehman. I noted many, many posts ago that one of the underlying causes of the Great Depression (leverage and subsequent, catastrophic de-leveraging) is repeating and once again threatening to undo the seams of Wall Street. In case you don't what leverage is, it's the amount a bank or broker or hedge fund borrows to keep its capital trough topped up and overflowing. According to several reports, most banks, brokers and hedge funds are leveraged 30 - 1: meaning they have 30 borrowed dollars for every dollar they own. Lehman is especially guilty of this, but the whole system is complicit and vulnerable.

Leverage is great for speculation: nobody worries about bottom lines and everyone borrows from everyone else. It's one big orgy until the speculative scheme implodes - as it always does.

Also today, Washington Mutual shares fell almost a dollar, or 30%, to $2.32. WaMu is America's largest savings and loans bank, with nearly $200 bn in deposits. Earlier this week, it got a more-than-routine visit from the Office of Thrift Supervision, which is responsible for shutting down banks when they're broke.

Americans are used to thinking that bank failures will always be taken care of by the government - specifically, the FDIC, whose little signs and stickers at bank counters promise to insure deposits up to $100,000. The funny thing is, the FDIC is itself almost bankrupt. It has somewhere between 30 and 40 billion dollars. If WaMu fails, it won't be able to cover even a third of the bank's deposits.

Now, the FDIC will have to borrow approximately $100 bn dollars from the Treasury if WaMu fails. That's on top of the $200 bn + that the Treasury just committed to the Frannie triage scheme. How long can the U.S. Treasury throw hundreds of billions of dollars into sinkholes before IT goes bankrupt?

I starting saying a half a year ago, or more (check the archives if you please), that America is trending toward another Great Depression. I take that back. The dominos are in a row and what's coming might be -worse- than the Great Depression, in terms of capital contraction, social unrest, and unemployment.

What's worse, the Great Depression of the Zeroes will probably be presided over by the tortured cancer, McCain, and his creationshit, Palin.

Please place your tray table in its upright and locked position. Place the oxygen mask over your face and remove a life vest from under your seat. After crash landing, follow the lighted signs to the nearest exit. Remain calm. Brace, brace.