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Government Bailouts Stop with Lehman

by: Rick Newman September 12, 2008 | about stocks: DIA / LEH / QQQQ / SPY / XLF    

Rick Newman

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When there's a bear market, Wall Street investors go hunting for the elusive bottom—the point at which bad times stop and things turn around. Investors sniffing around the flailing Lehman Brothers (LEH) seem to seeking a bottom, too. This time, they're testing whether the government has the stomach for one more big banking bailout.

The likely answer: No way. That's because Lehman's collapse seems much more contained than other bank meltdowns that threatened consumers directly. The Federal Reserve ponied up $29 billion this spring to help salvage a rump Bear Stearns because a run on the bank's arcane mortgage-backed securities could quickly have spread to other banks, paralyzing the housing market. The case for last week's announced rescue of Fannie Mae (FNM) and Freddie Mac (FRE) was even stronger: The two firms directly support nearly 75 percent of all mortgages being written today.

Lehman's potential buyers—apparently including Bank of America (BAC)—would love to see the feds grease a similar exit strategy for the listing bank. One such person leaked his wishes to the Wall Street Journal, saying buyers would "come out of the woodwork" if the government stepped in. Well, wouldn't that be nice: Big investors getting a sweet deal thanks to a wink, or a wad of cash, from Washington.

President Bush and his financier in chief, Treasury Secretary Henry Paulson, must be thinking: Enough, already. The government has already committed well over $400 billion to a consumer stimulus plan and various bailouts. Now seems like a good time to remind the markets that bailouts are for nationwide emergencies, not investor therapy. Factors working against a bailout:

Lack of contagion. The reasons are abstruse, but Lehman's precarious position seems less linked to the overall credit markets than that of Bear Stearns. If the bank were to fail outright, it would probably have little effect on other banks, especially those that deal directly with consumers. One bit of evidence: While Lehman's shares have tanked, financials overall have stayed steady. "Lehman may not be too big to fail," says Charles Payne of research firm Wall Street Strategies.

Political pressure. The Bush administration and the Democratic Congress have generally escaped criticism for the bailouts they've engineered so far, largely because the case for the benefit to taxpayers was pretty clear. That would be much harder with Lehman, one of Wall Street's smaller banks. Besides, Paulson started his Treasury tenure as a hands-off free marketer, not as a bailout magician. He'd welcome a breather.

Merrill (MER) may be next. Wall Street is bracing for another ugly downturn at Merrill Lynch, one of the biggest firms on Wall Street, and the concomitant vulture activity by hedge funds and others who could exploit the firm's downward spiral. Merrill is tied into nearly every part of the financial system, and Washington would have to pay close attention. So may the rest of us.

Disclosure: none

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This article has 4 comments:

  •  
    Sep 12 05:44 AM
    In the business world, banks are just like the fish in the ocean, the wounded ones are eaten and swallowed by the big ones. But the thing is, all these wounded ones are self-inflicted. Who's to blame ?
    Reply
  •  
    Sep 12 09:07 AM
    Good call, this just out:

    Source Close To Tsy: Mkt Has Had Time To Prepare For Current Situation -CNBC

    9/12/2008 9:04:22 AM

    Reply
  •  
    Sep 12 09:08 AM
    Source Close To Tsy: No Govt Money To Be Used In Any Lehman Deal -CNBC
    Reply
  •  
    Sep 12 04:42 PM
    What a mess! It's clear that shareholders and creditors of these failing financial institutions are being punished as the stock/bond prices fall to zero, but what about the executives who are largely responsible for letting this happen? Are they appropriately losing their jobs/equity/financial parachutes? Also isn't this the clearest example of the failure of rubber stamp boards of directors?
    Hopefully some major studies are and will be done of the implications for reform in all of this so that we might not be "doomed to repeat history because we didn't learn from it" ? I think the free enterprise system has been seriously hurt by all of this government intervention.
    Reply
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