Below are three articles, all dated mid- or post mid-September 2008, worth recalling as the global depression becomes an increasing reality five months after their intial publication. They are of significant historic interest, and I reproduce them here, with all relevant links, under fair use.
The first article, entitled Lehman folds with record $613 billion debt and dated Monday, September 15, 2008, briefly outlines the demise of Lehman Brothers. The second article, entitled Ex-Finance Ministers Offer U.S. Economic Advice, first aired on NPR's Planet Money on Morning Edition, September 15, 2008. (Interestingly, the article did not generate a single comment!) The third article, entitled A systemic crisis demands systemic solutions, was penned by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, and was published by the Financial times a week after the aforementioned, on Monday, September 22, 2008.
Lehman folds with record $613 billion debt
By Sam Mamudi, MarketWatch
Last update: 10:11 a.m. EDT Sept. 15, 2008
NEW YORK (MarketWatch) -- Lehman Brothers Holdings is closing its doors with more than $600 billion of debt -- the biggest bankruptcy in U.S. history.
Lehman (LEH: 0.04, +0.00, +6.1%) has total debts of $613 billion against total assets of $639 billion, according to a filing prepared Sunday.
The previous largest bankruptcy was that of WorldCom Inc. in July 2002, which had $104 billion of assets.
The Chapter 11 Petition filing with the Bankruptcy Court of the Southern District of New York shows that Lehman has more than 100,000 creditors and more than $150 billion in outstanding bond debt.
"In the judgment of the Board, it is desirable and in the best interests of the Company, its creditors, employees, and other interested parties that a petition be filed by the Company seeking relief under the provisions of chapter 11 of [the bankruptcy code]," said the filing, effectively ending Lehman's 158-year existence.
The filing also names Lehman's three largest stockholders: AXA (AXA: 12.70, -1.40, -9.9%) , ClearBridge Advisors and FMR, parent of Fidelity Investments. Axa holds 7.3% of outstanding common stock, while ClearBridge holds 6.3% and FMR holds 5.9%. As of 8.45 a.m., shares of Lehman were down to 33 cents in pre-market trading; the stock closed just below $13 on Monday September 8.
The largest listed claimants of Lehman's debt were Citigroup Inc. (C: 2.64, -0.27, -9.3%) and Bank of New York Mellon Corp. (BK: 24.02, +0.33, +1.4%) , which were the indentured trustees of about $138 billion of Lehman's senior notes.
That exposure is not directly with the banks -- as indentured trustees they were the agents for the Lehman bonds.
Bank of New York was also listed as the second- and third-largest creditor, with separate claims of $12 billion of subordinated debt and $5 billion of junior subordinated debt -- again, in its role as indentured trustee.
The next largest creditors are Japanese banks Aozora and Mizuho Corporate Bank, a unit of Mizuho Financial Group Inc. (MFG: 4.12, -0.07, -1.7%) .
New York corporate law firm Weil Gotshal & Manges is handling the bankruptcy.
Ex-Finance Ministers Offer U.S. Economic Advice
by David Kestenbaum
Morning Edition, September 15, 2008 · When the U.S. Treasury stepped in to save Fannie Mae and Freddie Mac this month, the public got a reminder of just how interconnected the economies of the world have become. What began as a problem in the U.S. mortgage market, with people borrowing too much to buy houses here, ended up threatening to drag down the entire global economy.
With the news of the Fannie and Freddie bailout still unfolding, former finance ministers from around the world met last week to discuss global economic stability. Some of them had a polite suggestion for the U.S., namely that a little international advice might have helped stave off the crisis.
The ministers met at the University of Virginia, beneath the grand dome where Thomas Jefferson once kept his library. They were cordial, but also frank. Maybe the U.S. should get a financial checkup, they suggested, from the International Monetary Fund.
"Now I think the time has come," said Yashwant Sinha, former finance minister of India. "After the crisis here ... the U.S. should accept some monitoring by the IMF." Sinha thinks an IMF review might have sounded an additional warning about America's still-unfolding mortgage crisis.
It's worth noting that the IMF is the world agency that countries turn to when they're in serious trouble, as Argentina has done during its recent flirtation with the brink. The IMF functions as a kind of global loan shark. Nations get money, but with a lot of strings attached. The IMF also doles out advice. A bunch of experts come to your country and conduct interviews. They look at your books and write a report.
In practical terms, it's not a big deal. But symbolically, what Sinha is suggesting would carry a lot of weight. Sinha says the U.S. has a history of giving advice to other countries about how to run their economies. It hasn't always been so good about listening. But he thinks it needs to get better.
"The U.S. economy is the largest in the world," he says. "Anything that happens in the U.S. or to the U.S. economy has worldwide repercussions, so many countries ... suffer for no fault of their own."
The U.S. Treasury says America has now agreed to get a stability assessment from the IMF. The announcement didn't get much attention, but officials at the IMF expect to start examining U.S. finances in the next couple months.
Rodrigo de Rato, a former finance minister of Spain and former head of the IMF, says lots of countries have been through the assessment — not just poor ones. De Rato rattles off a quick list, including Spain, Italy, the United Kingdom and India. The idea, he says, is to search for weak spots in the economy. The IMF looks at how investors manage risks in the market. Unhealthy risks helped bring down institutions like Lehman Brothers just this past weekend.
An IMF review now is only fair, de Rato argues. "It will allow a discussion of issues that maybe are politically sensitive and give a sense of evenhandedness in the world," he says.
At least one American at the conference, former U.S. Treasury Secretary John Snow, didn't place much faith in the process. "IMF has no particular expertise," Snow says. "Does anybody think that if we had 15 more Ph.D.s at the IMF, we'd have stopped this process? We'd have caught it? Hah."
Still, participants at the conference pointed to a shift in America's role in the global economy. They seemed frustrated that Wall Street has stumbled into crisis. As one person put it, "I think even my 6-year-old daughter knows that you don't lend money to people who can't pay you back."
A systemic crisis demands systemic solutions
By Dominique Strauss-Kahn
Published: September 22 2008 19:32 | Last updated: September 22 2008 19:32
These are exceptional times. Exceptional for what has happened to financial markets and for what has not happened, at least not yet, to the broader economy – the onset of a severe recession. Perhaps it was the absence of the latter that lulled too many into viewing the bursting of the housing bubble merely as a correction, the defaults in US subprime mortgages just as misfortune and the failure of important financial institutions as collateral damage.
Six months ago, when the International Monetary Fund estimated more than $1,000bn (€691bn, £546bn) in financial sector losses and predicted a sharp slowdown in the global economy, we were criticised for being too pessimistic. But with much of the losses yet to be realised, and with the financial crisis now acute, it has become clear that nothing short of a systemic solution – comprehensive in tackling the immediate fallout and comprehensive in addressing the root causes – will permit the broader economy, in the US and globally, to function with any semblance of normality.
For the near-term, such an approach must include three elements: liquidity provision; purchase of distressed assets; and capital injections into financial institutions.
First, central banks must prevent runs on banks and financial institutions. They can do so by reassuring depositors that bank deposits are safe and by providing liquidity to financial institutions against good collateral. This was the first line of defence and central banks have probably done by now most of what they could do.
Second, treasuries must remove the reason runs come in the first place: the presence of distressed assets on the balance sheets of financial institutions. An effective way is to set up a government agency to buy these assets and hold them until they mature and can be safely resold. A key issue will be the price at which these assets are acquired: high enough to induce financial institutions to sell, but also low enough for the state to have a chance of making a return and keeping its own long-term finances in order. There are also other, potentially less costly, alternatives. Early this year, the IMF proposed a solution based on longer-term swaps of mortgage securities for government bonds – which cleans up bank balance sheets but leaves the long-term risk with banks, not the taxpayer.
Third, the financial system must be recapitalised – at this point, probably with public support. At the core of this crisis is the fact that the financial system has too little capital. Even as the system shrinks and bad assets are removed, many institutions will still lack sufficient capital safely to extend fresh credit to the economy. It is possible for the state to provide capital to banks in ways that do not imply nationalisation. For example, many IMF members in the past have matched private capital injections with preferential shares and forms of capital that left ownership control in private hands.
I welcome the bold steps being taken in the US and look forward to their effective implementation. Other advanced economies should also be preparing comprehensive contingency plans, not least because of the complexity of dealing with the failure of institutions with extensive cross-border linkages. To the extent that comprehensive approaches are put in place, I am confident that financial systems that had grown too large relative to the economy will stabilise at a more appropriate level. But what about the long-term challenges?
An obvious one is the fiscal cost. The upfront cost in terms of public debt is high but the ultimate cost to taxpayers need not be. International experience shows that, done correctly, the government can expect to recover most of its initial investment. But if fiscal costs turn out large, substantial fiscal adjustment may be required to underpin long-term stability of public finances.
There is a deeper structural issue to be resolved. This crisis is the result of regulatory failure to guard against excessive risk-taking in the financial system, especially in the US. We must ensure it does not happen again. Work has started to rebuild the architecture and the leading industrialised countries have already put forward recommendations for better prudential regulation, accounting rules and transparency. The role of credit rating agencies will also need to be rethought, with greater public scrutiny. In a globalised world, these efforts will have to be broad-based if they are to be effective.
Finally, how might the financial shock play out in the rest of the world? European economies are already slowing markedly and, with further hits to bank capital, this process will continue into next year. Emerging-market countries have been resilient, although there are those who argue that the wheels will fly off these fast-growing economies as capital flows dry up and commodity prices recede. Of course, we should be careful not to treat emerging markets as a block. Some will be helped by falling commodity prices and cooling demand, while others have built strong buffers of higher reserves, lower debt and credible monetary policy frameworks that they can draw on.
Vigilance, objectivity and collaboration – on a global scale – will be needed to deal with the challenges ahead. It is my hope that when finance ministers and central bank governors convene in Washington next month for our annual meetings, it will be possible to have global dialogue, so that all countries can draw lessons from the recent turn of events for the architecture of the international financial system..
The writer is managing director of the International Monetary Fund
