Doomsday clock for global market crash strikes one minute to midnight

[CPP]

I guess my memory is not too shabby after all and the theory of payback may not be too far off the mark:

1998 bailout[edit]

On September 23, 1998, the chiefs of some of the largest investment firms of Wall Street—Bankers Trust,Bear Stearns, Chase Manhattan, Goldman Sachs, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley Dean Witter, and Salomon Smith Barney—met on the 10th floor conference room of the Federal Reserve Bank of New York (pictured) to rescue LTCM.​

Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM's capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system. After LTCM failed to raise more money on its own, it became clear it was running out of options. On September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division. The offer was stunningly low to LTCM's partners because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time lapsed before a deal could be worked out.[SUP][23][/SUP]
Seeing no options left, the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets.[SUP][24][/SUP] The principal negotiator for LTCM was general counsel James G. Rickards.[SUP][25][/SUP] The contributions from the various institutions were as follows:[SUP][26][/SUP][SUP][27][/SUP]

• $300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
• $125 million: Société Générale
• $100 million: Paribas, Credit Agricole[SUP][28][/SUP]
• Bear Stearns and Lehman Brothers[SUP][29][/SUP] declined to participate.

If you need something to read while hanging around an airport or taking that long plane ride pick up the entire LTCM story which has been recounted in Roger Lowenstein's book, 'When Genius Failed'.

 

[wisnon]

Thanks CPP, I have had it for years but have not read it yet. My pal used to work there, so I had some info from there, but most came from online sources who discected this stuff years ago.

LTCM were ganged upon and "greeked", IMHO because of jealousy. Yes, they played fast and loose with risk, but the crisis instant was manufactured as a takedown. Lehman and Bears didnt want to play ball in the "bailout" and got their payback in 2008 as the sacrificial lambs. That is the way I see it.

I think the system is rotten to the core...

 

[FlexibleAudio]

I guess my memory is not too shabby after all and the theory of payback may not be too far off the mark:

1998 bailout[edit]

On September 23, 1998, the chiefs of some of the largest investment firms of Wall Street—Bankers Trust,Bear Stearns, Chase Manhattan, Goldman Sachs, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley Dean Witter, and Salomon Smith Barney—met on the 10th floor conference room of the Federal Reserve Bank of New York (pictured) to rescue LTCM.​

Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM's capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system. After LTCM failed to raise more money on its own, it became clear it was running out of options. On September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division. The offer was stunningly low to LTCM's partners because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time lapsed before a deal could be worked out.[SUP][23][/SUP]
Seeing no options left, the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets.[SUP][24][/SUP] The principal negotiator for LTCM was general counsel James G. Rickards.[SUP][25][/SUP] The contributions from the various institutions were as follows:[SUP][26][/SUP][SUP][27][/SUP]

• $300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
• $125 million: Société Générale
• $100 million: Paribas, Credit Agricole[SUP][28][/SUP]
• Bear Stearns and Lehman Brothers[SUP][29][/SUP] declined to participate.

I recall them being involved in the negotiations but I did not recall them opting out. None-the-less if you think these firms demise was directly orchestrated payback for a small event 10 years prior, I don't buy it. The circumstances that led to there liquidations were much more complicated than what you describe.

First, what you describe would involve Bernanke effecting payback for an act on Greenspan's watch. I just don't see that type of behavior from the Fed. (Even if they wanted to I don't think they are bright enough to put it together.) Paulson, now that is an entirely different matter.

On the margin was Paulson influenced by the Lehman and Bear's decision to decline LTCM? I suppose its possible, but in the grand scheme of things that's like saying after being punched in the face for fifteen rounds a prize fighter got upset because a mosquito bit him in the first round. In other words, Goldman butts heads everyday in deals a heck of a lot more meaningful than putting $300mm into LTCM. In any event, no one will ever really know everything about what went down except Hank. Geithner and Bernanke may think they do, but I doubt it.

 

[audio.bill]

I was feeling a bit uneasy after hearing about the continued market downturn again today. My (unrealized) losses from a peak in April are starting to mount, although still not having reached a full 10% correction. So I sat down in front of my system and had a most enjoyable listening session for a few hours, and was taken into another realm where I could completely forget about any financial concerns. That's what this hobby is all about my friends, when you can enjoy your favorite music being reproduced so realistically that it transports you into a relaxed state of nirvana. Ahhh, I'm seeing everything in much better perspective now. Life is good!

 

[Mike]

Well said Bill. Don't worry, it will be a little rocky until Oct/Nov, but then (hopefully, as I suspect) turn around.

 

[BobM]

Dare I say ... it was an opportunity this afternoon if you have a 6-12 month horizon. Well, we will see what Monday brings.

 

[cmalak]

I recall them being involved in the negotiations but I did not recall them opting out. None-the-less if you think these firms demise was directly orchestrated payback for a small event 10 years prior, I don't buy it. The circumstances that led to there liquidations were much more complicated than what you describe.

First, what you describe would involve Bernanke effecting payback for an act on Greenspan's watch. I just don't see that type of behavior from the Fed. (Even if they wanted to I don't think they are bright enough to put it together.) Paulson, now that is an entirely different matter.

On the margin was Paulson influenced by the Lehman and Bear's decision to decline LTCM? I suppose its possible, but in the grand scheme of things that's like saying after being punched in the face for fifteen rounds a prize fighter got upset because a mosquito bit him in the first round. In other words, Goldman butts heads everyday in deals a heck of a lot more meaningful than putting $300mm into LTCM. In any event, no one will ever really know everything about what went down except Hank. Geithner and Bernanke may think they do, but I doubt it.

I'm with you in this Paul. Lehman's collapse and Bear Stearns take-under by JPMorgan was in no way payback for them opting out of LTCM's bailout. Also, Nirman don't forget that BoA was also asked/strongly prodded to buy Merrill before it collapsed in 2008 and Merrill Lynch had participated in the LTCM bail out, so I don't think that conspiracy theory holds here. I had just finished a Summer Associate position in Chase's High Yield group (summer bet 1st and 2nd year B-school) and remember reading about the LTCM rescue when I had just started back up at B-school. As it happened, I ended up going back to Chase and joined the M&A group for the next 4 years before switching to the Buy side and coming up to Boston. Interesting how one remembers things about headline events like that.

 

[FlexibleAudio]

I'm with you in this Paul. Lehman's collapse and Bear Stearns take-under by JPMorgan was in no way payback for them opting out of LTCM's bailout. Also, Nirman don't forget that BoA was also asked/strongly prodded to buy Merrill before it collapsed in 2008 and Merrill Lynch had participated in the LTCM bail out, so I don't think that conspiracy theory holds here. I had just finished a Summer Associate position in Chase's High Yield group (summer bet 1st and 2nd year B-school) and remember reading about the LTCM rescue when I had just started back up at B-school. As it happened, I ended up going back to Chase and joined the M&A group for the next 4 years before switching to the Buy side and coming up to Boston. Interesting how one remembers things about headline events like that.

No kidding. Jimmy was a good friend. Sad to lose him.

 

[cmalak]

Oh wow! He sat in a few client meetings as the Grand Poobah/white hair guy in the room when I was a junior banker on deals I was working on I was shocked when he passed away earlier this year. How did you know him? Were you in the business Paul?

 

[wisnon]

I'm with you in this Paul. Lehman's collapse and Bear Stearns take-under by JPMorgan was in no way payback for them opting out of LTCM's bailout. Also, Nirman don't forget that BoA was also asked/strongly prodded to buy Merrill before it collapsed in 2008 and Merrill Lynch had participated in the LTCM bail out, so I don't think that conspiracy theory holds here. I had just finished a Summer Associate position in Chase's High Yield group (summer bet 1st and 2nd year B-school) and remember reading about the LTCM rescue when I had just started back up at B-school. As it happened, I ended up going back to Chase and joined the M&A group for the next 4 years before switching to the Buy side and coming up to Boston. Interesting how one remembers things about headline events like that.

Huh, the fact that BoA was prodded to rescue ML supports my theory.., maybe I am not following you?

BTW, this is not a new retrofitted theory but was touted even back then and payback is a strong word. Its more like not motivated to help outfits that were not "team players". As Paul said, we will never know for sure, even if we think its likely or not.

What we should agree on is that the system is rotten...

BTW, I was out of B-School already for a few years when the LTCM crisis happened.

 

[cmalak]

Norman...did you go to b-school in US or Europe?

 

[FlexibleAudio]

Oh wow! He sat in a few client meetings as the Grand Poobah/white hair guy in the room when I was a junior banker on deals I was working on I was shocked when he passed away earlier this year. How did you know him? Were you in the business Paul?

Yep. We hadn't communicated since last fall. I knew him when that hair wasn't white; but it was always slicked back. :lol:

We had a lot of fun in the 80's and 90's before I pulled the rip cord and bought my own business. I did about $25 bn with him in the original go-go LBO days.

As Jamie Diamond said when he passed: “Jimmy was a master of his craft, but he was so much more — he was an incomparable force of nature.” Pretty much says it all from my perspective. Dude was one of a kind.

 

[wisnon]

Norman...did you go to b-school in US or Europe?

IESE

 

[wisnon]

Yep. We hadn't communicated since last fall. I knew him when that hair wasn't white; but it was always slicked back. :lol:

We had a lot of fun in the 80's and 90's before I pulled the rip cord and bought my own business. I did about $25 bn with him in the original go-go LBO days.

As Jamie Diamond said when he passed: “Jimmy was a master of his craft, but he was so much more — he was an incomparable force of nature.” Pretty much says it all from my perspective. Dude was one of a kind.

What was CoD?

 

[cmalak]

IESE

I'm assuming you were in main Barcelona campus as back then they probably did not have the satellite campuses/programs they do today. One of my very good buddies from undergrad days went to INSEAD which is supposed to have a very similar type program to IESE. Cool beans.

 

[CPP]

The Dow Jones industrial average tumbled 531 points,

The Standard & Poor's 500 index fell 3.2% to 1971 as it sunk below 2000 and further into the red for the year.

The Nasdaq composite index tumbled 3.5% to 4706.

FTSEurofirst 300 has worst 1-day fall since Nov 2011

Germany's DAX dropped 3 percent

Having fun yet :whoa:

 

[cmalak]

Yep. We hadn't communicated since last fall. I knew him when that hair wasn't white; but it was always slicked back. :lol:

We had a lot of fun in the 80's and 90's before I pulled the rip cord and bought my own business. I did about $25 bn with him in the original go-go LBO days.

As Jamie Diamond said when he passed: “Jimmy was a master of his craft, but he was so much more — he was an incomparable force of nature.” Pretty much says it all from my perspective. Dude was one of a kind.

Paul...sounds like you got out while the going was good. I obviously didn't know Jimmy very well except for these cursory experiences where he sat in on meetings I was a part of or when he gave internal rah rah speeches to the troops but he was a "force of nature" as Jamie Dimon said. He was a legend throughout his Chemical/Chase/JPMorgan Chase career and I have to say big things came out of such a "small" package passed away way too young for sure and that's too bad.

 

[FlexibleAudio]

Paul...sounds like you got out while the going was good. I obviously didn't know Jimmy very well except for these cursory experiences where he sat in on meetings I was a part of or when he gave internal rah rah speeches to the troops but he was a "force of nature" as Jamie Dimon said. He was a legend throughout his Chemical/Chase/JPMorgan Chase career and I have to say big things came out of such a "small" package passed away way too young for sure and that's too bad.

Lots of good memories. One time we booked the nose of a 747 from Dulles to Tokyo. I drank clear stuff with the clients til we passed out and then woke up and did it all again. We got off the plain, raised $975 million, got back on and slept the whole way back. Jimmy on the other hand worked the entire way..... both legs. He was an animal. You didn't want to be on the other side of the table from him. The best I came across in my years on the street.

 

[Vapor1]

The Dow Jones industrial average tumbled 531 points,

The Standard & Poor's 500 index fell 3.2% to 1971 as it sunk below 2000 and further into the red for the year.

The Nasdaq composite index tumbled 3.5% to 4706.

FTSEurofirst 300 has worst 1-day fall since Nov 2011

Germany's DAX dropped 3 percent

Having fun yet :whoa:

Just like '08, counterparty exposure is the name of the game again, and deflation is in the minds of Central Bankers the worst possible thing that can happen. Glencore, which I mentioned yesterday, was floated in a BofA memo today that they must be bailed out or the carnage will spread into others like Noble and potentially Rio Tinto and BHP. A couple of those dominoes falling would easily match Lehman, but the much higher leverage ratios of today would spell bigger problems. Looking at numbers for Glencore specifically, they're less than 90 days from bankruptcy unless we see commodities rebound something like 30% across the board.

The meme in the US is blame China, I believe because that points the finger away from our own culpability. But this has been the slowest motion train-wreck in history, anybody with any historical context knows it was completely unsustainable. Anybody with analytical skills can see that we've been lied to for years about the 'recovery'. And now that the Fed is out of bullets, the machines aren't enough to save things yet again. Algos do a great job of artificially pumping things up with quote stuffing and buyerless bids when there's no volume, but once real people say sell in mass, they can't even slow it down.

So now that real deflation is happening and quickly pushing over levered companies to the brink, the only question on traders minds is what will the Fed do. It wasn't until Bullard said early this week "The Fed doesn't react to equities" that things really accelerated to the downside. Really, the Fed doesn't react to equities? I think what he meant and everybody knows it is "The Fed is unable to do anything this time". Commodities aren't going to rebound any time soon, there's no demand. So the only hope of this not accelerating further to the downside quickly is QE4, which of course will further inflate bubbles and make the pop even more destructive.

So back to my earlier point, the stress test worst case is of course ridiculous, when much worse than their worst case just got done happening 8 years ago, and bubbles have been dramatically inflated since then. That, and since we're already stuck at 0% interest and maxed out balance sheets around the World, there won't be anything that can be done to stop it this time.

 

[wisnon]

I'm assuming you were in main Barcelona campus as back then they probably did not have the satellite campuses/programs they do today. One of my very good buddies from undergrad days went to INSEAD which is supposed to have a very similar type program to IESE. Cool beans.

Yes Barcelona. The satellite stuff would be executive and other programs.

Insead is VERY different. Like IMD, its a 1 year program. Iese is 2 years and modelled off the original Harvard Program. Harvard is a strategic partner and hence the Prof exchanges. Its why Pankaj Gemmawatt (sp?) was there visiting in my time and is now full time transferee to IESE. Also why IESE like London Business school has the most student exchanges...the timing coincides with the typical US B-School calendar.