What
Really Happened When Lehman Failed… And Why Spain Will Be Much Worse
http://albertpeia.com/reallehmanspainworse.htm
‘Countless pages have been written about
why Lehman caused the system to almost implode. However, the reality is that
Lehman nearly took down the entire financial system for two reasons:
1) Lehman’s $155 billion
worth of bonds were used as collateral in hundreds of billions of Dollars’
worth of trades.
2) Lehman’s 8,000 clients who
were all using Lehman to make trades saw the collateral that they had placed
with the firm (to backstop their portfolios) frozen.
Lehman’s client list included some of the
biggest names in the financial world. Remember that before the 2008 collapse,
the big broker-dealers (Lehman, Merrill, etc) were all standalone entities (the
Merrill/ BofA merger and the others had yet to happen). So all of the big
banks, with few exceptions, had their collateral parked with broker
dealers like Lehman.
The below story reveals that both Bank of
America and Dubai’s sovereign wealth fund both saw collateral frozen when
Lehman went bust. I can assure you many other big names were caught in a similar
situation.
Lehman: One Big Derivatives Mess
It turns out that Lehman, like other big
dealers, was running a perfectly legal but highly risky game moving money from
firm to firm. It used the collateral from one trading partner to fund
more deals with other firms. The same $100 million collected in one
deal can be used for many other transactions. “Firms basically can use [the
money] as their own collateral for anything they want,” says Kenneth Kettering,
a former derivatives lawyer and currently a professor at New York Law School. But
when the contracts terminate as the result of bankruptcy, the extra
collateral is supposed to be returned.
As part of those transactions, buyers had
put up collateral in the event of losses. But weeks after Lehman’s
demise, large sums of leftover collateral have yet to be returned to the
trading partners. Bank of America (BAC) executives tried several times to
persuade Lehman officials via e-mail and phone calls to fork over funds,
according to a suit. But BofA was rebuffed. In one e-mail exchange, a Lehman
employee wrote to BofA: “All activity has been suspended until further notice.”
Nasreen Bulos, a lawyer for one of
Dubai’s sovereign wealth funds, got the same chilly response. The Global Strategic
Equities Fund of Dubai, part of the gulf state’s $12 billion investment
portfolio, gave Lehman $40 million in June as part of a deal pegged to
energy giant BP’s (BP) stock. According to an affidavit, Bulos started
contacting Lehman on Sept. 15 to get back $27 million in collateral. Four days
later, Lehman told Bulos it would not honor the request or say anything further
on the matter.
http://www.businessweek.com/stories/2008-10-07/lehman-one-big-derivatives-mess
Normally, a client’s collateral would be
unfrozen soon after the bankruptcy of a broker dealer. In Lehman’s case it
wasn’t. And that, combined with Lehman’s $155 billion worth of bonds becoming
worthless, created a severe collateral shortfall in the system.
This is why the market held together for
a little over a week after Lehman went bust: the players who had collateral
with Lehman thought they’d get the money freed. When they didn’t, the system imploded
as collateral calls were issued. What followed was widespread liquidation as
banks did everything they could to free up capital to meet funding needs or to
buy new higher grade collateral (hence the skyrocketing rally in Treasuries at
the time).
This is the reality of what happened in
2008, though few know it. And this is why a default in Spain or Italy (whose
€1.78 and €1.87 trillion in sovereign bonds are collateral for likely more than
€100 trillion in trades) would bring about a collapse that would make Lehman
appear minor in comparison.
Remember, if Spain goes bust, they over
€1 trillion in collateral would vanish triggering a chain reaction in at
least €50 trillion if not €100+ trillion in trades at the large banks/
financial institutions.
Again, and I cannot stress this enough:
when Spain defaults (and it will) the system will experience a collateral
crunch that will be exponentially higher than that which occurred following the
Lehman bankruptcy.
This is why I’ve been warning that the
2008 was just a warm-up. It’s why the Powers That Be in Europe are absolutely terrified
of what’s happening there. And it’s why those investors who do not prepare in
advance for what’s coming will lose everything.
If you do not want to be one of them, you
need to get moving.
We have produced a FREE Special Report
available to all investors titled What Europe’s Collapse Means For You and
Your Savings.
This report features ten pages of
material outlining our independent analysis real debt situation in
Europe (numbers far worse than is publicly admitted), the true nature of the EU
banking system, and the systemic risks Europe poses to investors around the
world.
It also outlines a number of investments
to profit from this; investments that anyone can use to take advantage of the
European Debt Crisis.
Best of all, this report is 100% FREE.
You can pick up a copy today at:
http://gainspainscapital.com/eu-report
Best Regards,
Graham Summers
PS. We also offer a FREE Special Report
detailing the threat of inflation as well as two investments that will explode
higher as it seeps throughout the financial system. You can pick up a copy of
this report at:
http://gainspainscapital.com/gpc-inflation