Going Back Inside Lehman One More Time: An Important And Relevant Follow-up

Lehman Brothers was a cultural marker, the kind of thing that sticks for generations because of all the wrong reasons. Hardly anyone had heard of the investment bank throughout its unbelievably long history stretching back to the middle of the 1840s (yes, eighteen forties). But being near the center of a multi-generational breakdown causing as yet-untold damage and misery extending far into the future (it’s still going as of 2020 near 2021) will erase even sixteen decades of otherwise silently effective effort.

But what really happened at Lehman, to this day hardly anyone knows. Subprime mortgages? Derivatives? Something bank reserves?

Like Bear Stearns and AIG, the reason we keep coming back to Lehman is what it can tell us about how conventional wisdom hasn’t been all that wise for a very long time. Worse, despite the massive pain its errors unleashed this hasn’t changed over the subsequent twelve years since its epic demise.

To begin with, money is supposed to be very simple. Incredibly easy. The Federal Reserve (or any central bank) does some things, voila, the world works like it’s supposed to, economic utopia at the flip of a single switch (open market operations).

Nope. Not even close. This is merely what the Fed wants you to believe (expectations policy), and it is what gets repeated from the moment you might begin Economics 101 all the way through to your daily adult life consuming commentary about what the media says takes place. Never ask questions, don’t you dare think about fighting the Fed.

On the contrary, as the Lehman story aptly demonstrates, the real monetary world is at the entire opposite end of the spectrum from simple. From the lack of role for bank reserves to the erasure of so many traditional boundaries, money from credit, national system from national system, this global regime can simply knock your socks off – and that’s on a good day.

Because of this, monetary officials who are very, very skilled at keeping up the pretense of knowledge and competence actually have little to no idea what’s really going on. Once you discard the notion that subprime mortgages played any substantial role beyond the initial phase of crisis, this is actually incredibly easy to see. After all, there was that whole GFC thing.

From these two factors, it would make sense, then, to appreciate this intricacy for what it means – even in 2020. Stop listening to central bankers and/or their mouthpieces in most of the financial media (this is starting to change, slowly), start listening exclusively to what the system itself is telling you.

This is no easy task, I assure you. After all, because of what used to be called “benign neglect” where officials let this eurodollar system run its own sort of monetary ecosphere for decades there’s very little direct knowledge of what’s going on. Really going on.

Curves, yields, the “bond market” is really our only window from which to peer inside and get a true sense. For the system itself to show itself in deed – not words from the occasional dealer bank CEO or Economist – as to its condition.

In retrospect, this is what the Lehman story does even if well after the fact. It corroborates the market signals while making a mockery of the “best and brightest” technocrats who don’t have the foggiest idea what they’re looking at most of the time – even when handed access to data and inside commentary in real-time that us mere mortals could only ever dream of obtaining.

To give people what I hope is a really good a sense of this, I wrote about the Lehman story at length last Friday from the inside perspective. Using emails and confidential data gathered by the Financial Crisis Inquiry Commission, when you parse through even a sample of them, you’re left with only this conclusion.

There were a couple of emails, however, I didn’t have the room to feature or include (despite using up ~2600 words, as usual) that are worth the extra effort (it does help to go back, if you haven’t, and read the other one since we’re picking up here in the middle of the story). It really drives home, I think, both of these main points.

In July 2008, Lehman Brothers was already experiencing a modest repo run around the edges of its massive repo funding book. How massive? About $200 billion of securities that required daily rolling over, almost all of it triparty and therefore run through JP Morgan as custodian (with money funds and other cash-rich dealers on the other side pledging cash).

As I recalled in that other article, things at that point were only beginning to sour:

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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