3 ms·

Lehman Bros was, relatively speaking, also a "fart in the wind" - it all started with $2.8 billion loss (not even default). Things kinda snowballed massively fr

by m0zg 5y ago

Lehman Bros was, relatively speaking, also a "fart in the wind" - it all started with $2.8 billion loss (not even default). Things kinda snowballed massively from there though, over the course of a few months to the point where it was a threat to the global financial system. The fear is the same could happen in China as well.

rib3ye 5y ago
That's a point worth reenforcing. The initial losses were severely compounded by nominal value locked in credit default swaps... which were insured by unbacked policies. There has to be at least one person here that understands the sizes of these derivative markets in China, right?
rapsey 5y ago
As JP Morgan said what caused the 1929 stock crash, "someone asked for a dollar".
throwaway2037 5y ago
Same for Bear Stearns. First hit on Google search for "bear stearns hedge fund losses" gives: https://www.investopedia.com/articles/07/bear-stearns-collapse.asp#:~:text=July%2017%2C%202007%E2%80%94In%20a,all%20of%20its%20investor%20capital https://www.investopedia.com/articles/07/bear-stearns-collap.... Quote: <<July 17, 2007—In a letter sent to investors, Bear Stearns Asset Management reported that its Bear Stearns High-Grade Structured Credit Fund had lost more than 90% of its value, while the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund had lost virtually all of its investor capital. The larger Structured Credit Fund had around $1 billion, while the Enhanced Leveraged Fund, which was less than a year old, had nearly $600 million in investor capital.>> After the incident, Bear took the bad assets onto their own balance sheet. Shortly thereafter, creditors starting asking hard questions: "What other crap is on your bloated balance sheet?" That said, the PRC gov't might allow Evergrande to default on their offshore/external/USD debt, but provide a bailout onshore. That seems realistic. During the 2008 GFC, Deutsche had an enormous footprint in the United States (via commercial and investment banking). They got almost nothing from US Fed/Treasury during bailouts. Same for UBS. Why not? They were not American corporations.
- m0zg 5y ago
  Wouldn't that severely damage China's ability to attract foreign capital, though? I mean, they've already made their printer go brrrr to the point where Jerome Powell would blush, so it doesn't seem like they have a ton of flexibility in terms of domestic monetary policy, and therefore bailouts. And nobody outside China is stupid enough to jump on the deck of this particular Titanic. Nobody inside China is, either, but the government can make them jump on, much like US government did with US financial firms in 2008.
  - disgruntledphd2 5y ago
    > Wouldn't that severely damage China's ability to attract foreign capital, though? I kinda get the impression that they want capital for manufacturing rather than property speculation. Given how important house prices/construction is for their economy and growth, it's gonna be really interesting to see what they do (will they accept negative GDP growth to increase "common prosperity").
- guiriduro 5y ago
  That says pretty appalling things about Western capitalism in general that it is predicated on government (ie, public) backstops, protected from the market, socialism for the rich/elite, and not available to the little people. Starts to look like the worst of communism, frankly.
kesselvon 5y ago
Lehman was allowed to go bankrupt, which in the UK forced the immediate cessation of operations (in the U.S., the firm can still operate even if its bankrupt). That was the equivalent of shifting to park on a car moving 80 miles an hour, especially as they froze their prime brokerage. The blow up probably could have been less severe if they smoothed the landing.
- torstenvl 5y ago
  That's interesting. What is the expected method to emerge from bankruptcy, or at least protect investors and creditors, if a business must cease operations? My intuition (and the presumption in the U.S.) is that a market position allows a business to dispose of inventory in normal commercial channels more profitably than auctioning it at wholesale in a Chapter 7-style liquidation. Hence first-day motions in U.S. bankruptcy courts. (Disclaimer: I worked on the Lehman Brothers bankruptcy but did not represent any U.S. or U.K. subsidiaries.)

by m0zg 5y ago

rib3ye 5y ago

That's a point worth reenforcing. The initial losses were severely compounded by nominal value locked in credit default swaps... which were insured by unbacked policies. There has to be at least one person here that understands the sizes of these derivative markets in China, right?

rapsey 5y ago

As JP Morgan said what caused the 1929 stock crash, "someone asked for a dollar".

throwaway2037 5y ago

Same for Bear Stearns. First hit on Google search for "bear stearns hedge fund losses" gives: https://www.investopedia.com/articles/07/bear-stearns-collapse.asp#:~:text=July%2017%2C%202007%E2%80%94In%20a,all%20of%20its%20investor%20capital https://www.investopedia.com/articles/07/bear-stearns-collap.... Quote: <<July 17, 2007—In a letter sent to investors, Bear Stearns Asset Management reported that its Bear Stearns High-Grade Structured Credit Fund had lost more than 90% of its value, while the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund had lost virtually all of its investor capital. The larger Structured Credit Fund had around $1 billion, while the Enhanced Leveraged Fund, which was less than a year old, had nearly $600 million in investor capital.>> After the incident, Bear took the bad assets onto their own balance sheet. Shortly thereafter, creditors starting asking hard questions: "What other crap is on your bloated balance sheet?" That said, the PRC gov't might allow Evergrande to default on their offshore/external/USD debt, but provide a bailout onshore. That seems realistic. During the 2008 GFC, Deutsche had an enormous footprint in the United States (via commercial and investment banking). They got almost nothing from US Fed/Treasury during bailouts. Same for UBS. Why not? They were not American corporations.

m0zg 5y ago
Wouldn't that severely damage China's ability to attract foreign capital, though? I mean, they've already made their printer go brrrr to the point where Jerome Powell would blush, so it doesn't seem like they have a ton of flexibility in terms of domestic monetary policy, and therefore bailouts. And nobody outside China is stupid enough to jump on the deck of this particular Titanic. Nobody inside China is, either, but the government can make them jump on, much like US government did with US financial firms in 2008.
- disgruntledphd2 5y ago
  > Wouldn't that severely damage China's ability to attract foreign capital, though? I kinda get the impression that they want capital for manufacturing rather than property speculation. Given how important house prices/construction is for their economy and growth, it's gonna be really interesting to see what they do (will they accept negative GDP growth to increase "common prosperity").
guiriduro 5y ago
That says pretty appalling things about Western capitalism in general that it is predicated on government (ie, public) backstops, protected from the market, socialism for the rich/elite, and not available to the little people. Starts to look like the worst of communism, frankly.

kesselvon 5y ago

Lehman was allowed to go bankrupt, which in the UK forced the immediate cessation of operations (in the U.S., the firm can still operate even if its bankrupt). That was the equivalent of shifting to park on a car moving 80 miles an hour, especially as they froze their prime brokerage. The blow up probably could have been less severe if they smoothed the landing.

torstenvl 5y ago
That's interesting. What is the expected method to emerge from bankruptcy, or at least protect investors and creditors, if a business must cease operations? My intuition (and the presumption in the U.S.) is that a market position allows a business to dispose of inventory in normal commercial channels more profitably than auctioning it at wholesale in a Chapter 7-style liquidation. Hence first-day motions in U.S. bankruptcy courts. (Disclaimer: I worked on the Lehman Brothers bankruptcy but did not represent any U.S. or U.K. subsidiaries.)