Monday, September 15, 2008

The Truth behind Lehman

(borrowed from Financial Armageddon)

The Truth is that Merrill, Morgan Stanley, and even Goldman are all in the same boat. The Fed and Treasury actions have given them roughly six months to "cut that crap out", but they didn't. They didn't sell off their portfolios of junk, but what they did do was take the liquidity they were given and speculate in the commodity markets, earning a nice profit and allowing them to report better-then-disaster "earnings" while hiding the trash in "Level 3" buckets on their balance sheets.

The entire game was predicated on the idea that the market for housing and commercial real estate would turn within six months to a year from last summer.

We now know, of course, that this is total garbage; housing and commercial real estate are long-cycle businesses that average fifteen to eighteen years from cycle top to cycle top, and there is absolutely nothing you can do to change that.

As a consequence every one of these firms that has tried to "hide the sausage" is ultimately going to die. They have made the critical mistake of trying to play games instead of selling off their portfolio of trash last summer when it was still possible, and now are going to have to eat it - with disastrous results. It is highly probable that three years from now none of these firms will have survived in their present form.