September 15th, 2008
10:38 AM GMT
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LONDON, England - Those of us who work in financial journalism have a slightly frazzled look about us today. It's been the most extraordinary weekend as Hank Paulson and Wall Street's top executives desperately attempted, and ultimately failed, to breathe life into ailing Lehman Brothers. I've experienced nothing like it in my 25-year career.

The demise of Lehman Brothers, the fire sale of Merrill Lynch – the next potential domino in the chain – and news of serious problems at insurer AIG have sent shock waves around the world. Three of the top five U.S. investment banks have now fallen victim to the credit crunch. These really are seismic events. As one commentator put it: "Tectonic plates are shifting under the foundations of the U.S. financial system," and we're all likely to feel the ground shake.

In London, the FTSE 100 index of leading shares fell nearly 3 percent in the first few minutes of trade. With the dollar tumbling both the Bank of England and the ECB said they would intervene if necessary to bring stability to the currency markets.

Our old friend David Buick of BGC partners, says the mood today on the trading floors in London is grim.

It's not so much the demise of Lehman Brothers that has sent shock waves through the City, but Hank Paulson's refusal to use public funds to sweeten any rescue deal and the realisation that we're still some way from finding out just when the cycle of huge write downs and failures will end.

Confidence, he says, is shot to ribbons. And after this unprecedented roller coaster of a weekend, so am I.



soundoff (22 Responses)
  1. Robert L. Holt

    Mr. Buick recently said the crisis will end when there is blood on the streets. Is there now enough blood on the streets?

    Brgds, Robert

    September 15, 2008 at 11:25 am |
  2. Alfredo bremont

    what do you expect when Jeff koons works are worth 20 millions us what do you expect from this crazy billionaires. they underestimate reality believe propaganda is reality and facts do not exist. a total lack of perception on what this 21 century is.
    we are not in the 19 century unfortunately most folks and the UN and wall street are still on the 19 century, believing that the rule of the media materializes. however we now know that reality and what is publish on the main media are quite irrelevant to reality. no wonder politics has become a sitcom and exploitation is now a rule of the mighty. however the end of that philosophy is closer than you can expect. therefore only chance to save the ill human race and its inadequate capitalistic system is to properly and intelligently share the wealth i propose a limit of 50 million us to personal capital the surplus should go to those that need it the most. and in this law all citizens of the planet must be include starting with the Russia parvenus.

    September 15, 2008 at 1:25 pm |
  3. Milan

    -Wall Street is now facing the consequences of bad practise and greed. If you totalled the bonuses paid to executives over the past 7 years you would see that they do not need taxpayers money they have enough of their own!

    September 15, 2008 at 3:11 pm |
  4. Umer Fahim Khan

    It happened in late 20's, then in 70's again in 80's, more recently in 2000 and now its happenening again. Causes may be different in each case, but the damage is similarly gigentic.
    Important question is how to prevent such a business bloodshed from happening again when we get to the lower end of next business cycle, after the era of next growth (if it ever comes) is over?
    Is their something fundamentally wrong with the world's economic system that needs to be changed?

    September 15, 2008 at 3:32 pm |
  5. Gary Hamby

    Have We Created a New Economic Model?

    The absence of government oversight for the past 7 years plus the dangers of reckless deregulation of the financial companies struck hard at the American financial system this date, threatening it in the most grave manner since the Great Depression.

    In a desperate move to stave-off international credit rating reductions the Federal Reserve initiated unparallel measures to inject massive liquidity into the markets this date. Banks will be able to turn in high risk CDS’s (Credit Default Swaps) and speculative stocks for cash. What will the Federal Reserve do what such ‘assets’? Presently, no one knows with certainty what will happen, but it is likely that the American taxpayer will be stuck with the bill.

    Lehman Brothers (LEH), a one-hundred and fifty-eight year old venerable Wall Street firm has filed bankruptcy this morning. This action reflects the total absence of risk management and prudent judgment by its executives. Yet, these executives, if ousted, will receive millions in compensation due to the ‘Golden Parachutes’ common in corporate America. In essence they will have received these millions for having destroyed a long-term, reputable firm with world-wide relationships. Approximately six months ago, Lehman Brothers had discussions with multiple other financial entities and sources revealed that numerous offers were extended. However, the greed and hubris of these executives prevailed and all offers were rejected because the value was not enough for them and because they would have had to surrender executive controls. Instead, bankruptcy was forced on the firm this morning. This after a weekend filled with desperate attempts to find short-term financing and/or a government bail-out that would have allowed the company to continue its operations and be compliant with government regulations for securities firms. Sadly, it will be the millions of shareholders and the twenty-thousand plus employee who will suffer.

    American International Group (AIG), the nation’s largest insurance company with a trillion dollar balance sheet, is aggressively seeking a $40 billion bridge financing loan to stave off a credit rating downgrade that would trigger the need for larger amounts of capital to keep it compliant with varied regulations. This company epitomizes the problems with our financial system, as it has declined from over $90 per share to under $8 per share in the past year. Why such precipitous decline? In its simple form it is due to the high volume of mortgage loan write-offs. However, this severe decline reflects a more systemic failure intrinsic in the American financial system, i.e. unregulated companies without government oversight will take too much risk that always catches up with them.

    The failure of Lehman Brothers and what appears to be the imminent failure of American International Group come on the back of government bail-out programs for Bear Sterns, Freddie Mac and Fannie Mae. Merrill-Lynch, the largest retail brokerage company in America has thwarted the same fate by a Bank of American buy-out over the weekend. Analysts are perplexed why Bank of America paid such a whopping premium (they purchased at $29 per share even though Merrill-Lynch closed Friday at $17.05 per share), especially in light of the continuous decline in recent weeks; and, what many believed had yet more downside. There are also many who believe that Bank of America will rue this day when the billions of bad loans on Merrill’s balance sheet force large write-offs.

    All of these failures reflect the inherent problems of allowing private companies to undertake any business activity it wishes without adequate controls in place to protect shareholders and employees. Controls that have been conspicuously absent since the Bush Administration took office in 2001. Who will ultimately bear the brunt of such greed and incompetence? Tragically, it will be the American taxpayer because this administration has engineered a new economic model – Capitalism with Socialized Risk!

    September 15, 2008 at 4:26 pm |
  6. Mike Chase

    I am sure the mood on the trading floors is grim. How does one trade intelligently when the financial world may be at the edge of the precipice? This is not a question of bull or bear market, it is a question of the survival of the financial system as we know it. The value of the world's reserve currency is in question and the political and financial leadership of the United States is allowing the system to spin further and further out of control. Forcing interest rates down and reserves into the system while the amount of US Government debt is increased by a third with the moves for Fanny and Freddy by Secretary Paulson is hardly likely to build confidence. An estimated $407 billion Federal budget shortfall is not a big confidence builder either.

    What everyone seems to forget is that the trigger was the refusal of the financial markets to listen to the few analysts that said lending money to institutions that are collateralizing the loans with other loans being made to people that have no chance of repay them is past stupid approaching criminal. What the world is faced with is a system of fiat currency that has no real value except the word of politicians and others that fail to understand that money is a commodity and as the supply of a commodity increases its value falls. They then deliberately undermine that value by crushing the confidence of those that are expected to accept it in exchange for things of value.

    Mike

    September 15, 2008 at 4:35 pm |
  7. E. Hungerford

    Amen, Alfredo Bremont! Unregulated GREED is the ultimate cause of this crisis. Unmitigated profiteering and capitalism must stop, or at least be substantially controlled by governmental forces– the market is *clearly* NOT regulating itself! These billionaires will NEVER be satisfied by the amount of money they have; I second a $50 million US cap on personal wealth. No human needs that much to prosper, let alone any more. Our entire culture, what we value, and how we treat each other, needs to change! Let's start with that personal wealth cap and *much* more stringent lending laws.

    September 15, 2008 at 5:10 pm |
  8. Jason Feinberg-The Boulevard Magazine

    Two questions:
    First, I think some of these institutions are missing a media opportunity to lend some calm over what is going on. A number of people probably weren't aware of the SIPC and what their function is. While agree that the government must draw a line and not reward bad behavior but the mass layoffs about to happen could create an even more drastic catastrophe. November will certainly decide the course this country will take. I just hope the damage that has been done is not on an unstoppable downward spiral that our new president and administration can't fix.

    Second, while reporting outside of Lehman Brothers this morning, a person interfered with the CNN report shouting that they needed to bring back "Lucus" someone?? I may have misheard that, but I was wondering who he was referring to and if that person had anything to do with what happened or preventing what happened at Lehman Brothers.

    September 15, 2008 at 5:33 pm |
  9. Donald

    Everyday while watching CNN I find John McCain gets 15-20 mins of uninterupted TV time. The last couple times Barack Obama has been interupted for 'breaking news'. Your biases are starting to show. Are you trying to become FIX news in your apparent partisanship for John McCain. It should be obvious to all that network/cable news is lacking in it's responsibilities as the so-called fourth branch of the government. Hence, Lehman, Merrill Lynch, Fannie Mae, Freddie Mac, Bear-Sterns, and all of the other lacks in government oversight. While America burns to the ground all the network/cable news organizations worry about their bottom line rather than actual 'hard' reporting of the news that benefits the people whom your advertiser depend on.

    September 15, 2008 at 6:37 pm |
  10. Dorrell Perry

    What did we expect would happen? Under Bill Clinton, the Lehman Brothers type went to regulators and said remove regulations. Let us run our businesses as we see fit. BINGO! Fannie Mae and Freddie Mac were goverment run/controlled, They were privatized, BINGO! After the great depression of 1929/30 economist and government officials got together and came up with a solution to minimize this type of meltdown. Those rules were taken off. BINGO! Sometimes it is good to have government oversight.

    September 15, 2008 at 7:30 pm |
  11. CEB

    I find Barack Obama's comments appalling and inaccurate that the failed policies of the Bush presidency are the reason for the tumultuous Wall Street happenings. If Barack Obama was an informed citizen, he would accurately blame oversight committees, board of directors and executives of these Wall Street companies for striving for selfish gains, as opposed to putting the interest of the companies and their employees, first. I would suggest Mr. Obama and the rest of his colleagues set partisan politics aside and go after all of these corrupt executives to inhibit this from happening to other companies, and quit creating false comments about the Republicans.

    September 15, 2008 at 9:15 pm |
  12. Ulla PEttersson

    This financial crisis has been build up for a while, but it's more or less explodes (or collapse?) almost on the day 7 years after 9/11 which was the starting point for last downturn in the world economy with the collaps of Enron and more.
    Accoring to the schoolbooks it's in average 7 years of each economic cycle...

    How much of psycology and how much or poor trading computer programs and other analysis tools is there hidden in this? Is it just a coincident?

    September 15, 2008 at 9:22 pm |
  13. Lawrence Giessinger

    Although it is difficult to be without a job, who can really feel sorry for people at Lehman Brothers. They were laughing all the way to the bank with their exorbitant fees and million dollar bonuses. They will beomoan the fact that all of this happened and rationallize why it should not happen to them, but "greed" probably puts it in its proper perspective. Sometimes you eat the bear, sometimes the bear eats you!

    September 15, 2008 at 10:13 pm |
  14. Christie

    Alfredo, as good as that sounds...its called communism....not so good huh?

    September 15, 2008 at 10:38 pm |
  15. Jack

    If the US is to come out of this economic hole it will have to look inside it's own people and finances and stop sending troops out side to fight battles that just cost lives.The US needs changes and needs it now,because this shock wave is felt all over the world and if it gets any warse,just think about the food prices already gone crazy.....change now..

    September 16, 2008 at 1:39 am |
  16. Guijuan Go

    This whole thing has its roots to 9/11. When the airplanes crashed into the WTC Towers, Greenspan was so worried that the economy will fall into a deep recession. So he took out an insurance for the US economy by lowering the Fed fund rate to 1% and maintaining it for a considerable time. By the time he started raising rates again, a lot of people were into the mortgage bandwagon already which became fodder for the mortage backed securities. It's sad to think that the terrorists who set out on the morning of 9/11 might have gotten what they wanted – to ruin America's financial system.

    September 16, 2008 at 9:26 am |
  17. Umer Fahim Khan

    Christie and Alfredo, communism has failed, but capitalism has not succeeded either.
    I think an ideal economic system would be the one that would encourage real (not speculative) trade based upon 'real' demand for goods and services, and not 'leveraged' moves. Don't you think that this way the world economy will keep on heading north (without such huge dips) because the 'real' demands for goods and services keeps on increasing over time since the world's population is ever increasing and resourses are continuously decreasing.

    September 16, 2008 at 9:37 am |
  18. Ram

    It is obvious that Governmental pressure tactics forced BoA to take Merril Lynch . Imagine the market state , if this deal was not done!!!!!

    September 16, 2008 at 11:21 am |
  19. Sonja

    Blaming CEO's of publicly held companies for the problems we're seeing is not entirely fair or correct. Corporate culture has evolved to the point where top managers can not be straight with their boards of directors when the news is less than glowing. They must report that projections for next year are fabulous, even when they're not. They have to sing a happy song and exude optimism when the reality is that the business is struggling. Boards only want to know how its managers are going to grow the business and make the stockholders happy. Anything less is unacceptable. Highly compensated managers know this and learn to play the game to hold on to their big paychecks. Until straight talk and a willingness to accept the realities of the business climate are allowed back into the board room we're going to continue to see more companies riding thier businesses straight into the ground.

    September 16, 2008 at 1:05 pm |
  20. Robin

    Just in case people haven't noticed ... the government is taking over our lives.... from public schools to what we can display in our front yards or pledge – now they're in control of our money – what is the definition of a democracy?

    September 17, 2008 at 12:02 pm |
  21. Victor

    Robin, a democracy is rule by special interests. The founders of this country gave clear warnings about it, recognizing that a representative government was more reliable. But they also warned that a representative have possess the same morals and ehtics as the people he is chosen to represent... or the republican form of government will fail. Either Ben Franklin or William Penn said, "We will be ruled by God or by tyrants".

    September 19, 2008 at 4:42 pm |
  22. DK Shin

    No need to be too much pessimistic, since my 89 year old mom has been telling me in the past few decades, "crisis can always be an opportunity". it has been proven true in my 30 year IB experiences at U.S. (Bankers Trsut), European (Deutsche), Australian (NAB), Global (Goldman Sachs) and now Japanese (Nomura). Cheers !!! DK Shin

    September 20, 2008 at 1:16 am |

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