(Lehman as it might have been ... The following is part of a
special feature package marking the fifth anniversary of the
collapse of the Wall Street securities firm. Breakingviews
writers imagine what might have happened if post-crisis
reformers had acted pre-crisis. Herewith a column from that
alternative archive. The authors' opinions are their own.)
By Swaha Pattanaik
LONDON, Sept 15, 2008 (Reuters Breakingviews) - The
unprecedented operation taken by U.S. regulators yesterday to
prevent a bankruptcy of Lehman Brothers is triggering ructions
across global stock, bond, currency, and money markets. The pain
will be universal, but longer term, the slide in equity markets
is likely to eclipse the turmoil in other asset classes.
Bank shares are already being pummelled worldwide. The
innovative use of a “bail-in” mechanism by regulators led by the
Federal Reserve may have averted a messy collapse of the Wall
Street firm, but it is fuelling fear that similar measures may
be taken to save other troubled banks. Further losses look
At the very least, investors need to re-evaluate the risks
of holding shares in the financial sector. Though the funding
costs of banks rose after the June passage of the SOB Act, bank
bonds are sliding and the cost of insuring against defaults has
surged. Against this backdrop, Wall Street’s fear gauge, the
VIX, is likely to test or exceed all-time records.
Lehman’s recapitalisation is reverberating well beyond the
equity markets. Money market tensions are rife and the scramble
for dollar funding is driving frantic trade over the foreign
exchanges. The greenback, now finding favour as a safe haven, is
likely to continue strengthening. The rally in the highest grade
sovereign bonds may persist as falling share prices trigger
flight into U.S. Treasuries, German Bunds and British gilts.
Still, these trends should prove less scary than if Lehman
had gone bankrupt. With a potentially global systemic crisis
averted, financial institutions should gradually become more
willing to lend to each other in the interbank market. Dollar
funding is likely to become less difficult to access as the
money markets heal. A sharp jump in implied volatility in the
currency options market should also prove temporary.
Avoiding a chaotic unwinding of Lehman through a bankruptcy
filing means that money markets, the plumbing of the financial
system, are unlikely to freeze up. Nor will the popularity of
dollars turn into a desperate dash. But the rescue comes at a
cost. Investors in equities and bank bonds look like they will
pay the heaviest price.
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- American regulators for the first time deployed the
so-called resolution authority granted to them under the Save
Our Banks Act at the weekend to recapitalise Lehman Brothers.
They wiped out Lehman shareholders, forced the conversion of all
subordinated debt and preferred stock, and imposed a 20 percent
haircut on senior creditors.
- Bank shares slumped around the world, dragging equity
markets lower. Implied volatility has spiked in currency and
stock markets. Money is flowing into core government bond
markets. The money market tensions which have been growing in
recent weeks are persisting and dollar funding is still hard to
- In Europe, regulators are deploying the as-yet untested
bank resolution mechanism to rescue troubled banks in the
(Editing by Robert Cole and Sarah Bailey)
Keywords: BREAKINGVIEWS LEHMAN/STOCKS/
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