Thursday, January 29, 2009

The Lehman Collapse: Good or Bad?

Way back on September 15th I wrote on this blog "The Lehman bankruptcy is a good thing. Yes, I said a good thing. Did you notice that Lehman went Bankrupt and didn't get bailed out? Finally a financial institution that the government didn't bail out.."

That seemed like an eternity ago and since I wrote those words I changed my mind and stated that had I known now what the regulators should have known then, I would have supported a Lehman bailout, or at least a more orderly bankruptcy.

The more I think about the Lehman bankruptcy, which is now credited with the start of the huge panic, stock market crash and credit market freeze up - the more I think that perhaps it was a good thing after all. Here is why:

Had Lehman been bailed out it would have only delayed the inevitable, which was the realization by everyone that the housing market was essentially a bust and this bust would make insolvent our entire global financial system. That delay, while it would have been nice, would have been just that, a delay (mind you, John McCain may feel different, had the financial crisis not occurred he might be sitting in the oval office right now). Perhaps we would just now being starting to deal with it or perhaps it would take a few more months, or years and who knows how many trillions more in mortgages would have been issued (in reality, not many, most of the sausage makers had gone belly up or been sold by the end of October).

My point, Lehman probably should have been rescued, it would have shown consistency and would not have led to the Reserve Funds breaking the buck and to a disastrous 4th quarter. But it would have happened eventually and like a band-aid, the quicker we deal with the pain of pulling it off, the quicker we can recover and get back on steadier footing.

I can pretty much guarantee that this is not what Timothy Geithner was thinking when he decided not to bailout Lehman, despite bailing out Bear Stearns and eventually AIG.

There you have it, letting Lehman go bankrupt was a miserable failure by our political leaders.....finally a failure that could ultimately benefit us in the long run.

I am finally starting to see signs of what needs to happen to move forward. Yesterday the Federal Reserve (article here) announced a foreclosure rescue that might actually help as it includes principal reductions in the modifications. It doesn't go far enough as it still requires the homeowner to be 60 days late (down from 90 days with Paulson's plan) and it appears that they will do everything possible NOT to write down the principal. As I said a few posts earlier, they will get it wrong a few more times before they finally get it right.

In addition, the "bad bank" entity idea that I introduced on this blog on December 3rd is gaining steam and appears to be the way we are going to deal with the crisis. If implemented correctly, it could go a long way to solving this crisis, but it will still take a minimum of three to five years to work this out and housing will never be the same again........until we all forget what happened and this happens again.

Scott Dauenhauer CFP, MSFP, AIF