Wasting The Middle: Obsessing Over Exits

What was the difference between Bear Stearns and Lehman Brothers? Well, for one thing Lehman’s failure wasn’t a singular event. In the heady days of September 2008, authorities working for any number of initialism agencies were busy trying to put out fires seemingly everywhere. Lehman had to compete with an AIG as well as a Wachovia, already preceded by a Fannie and a Freddie.

If Lehman was the personification of everything going wrong, Bear was its precursor where only the one thing seemingly did. In fact, throughout the middle of 2008 policymakers took great solace in what they thought they had achieved; sure, it was bad but only Bear went down, and even then it wasn’t a complete wipeout.

The summer of 2008 for offshore markets took on a very different reality, however. The panic was really two panics, the first finishing up around March 2008 merely the set up for its much more devastating second act (the events in early 2009 could reasonably be considered as the third). Whereas Federal Reserve and government officials took comfort in only the one, Lombard Street took stock.

Bear Stearns wasn’t some subprime peddler, Chairman Bernanke.

But if the opening drama was uncertainty about what was going on, the interlude between March 2008 and that September was deeper thinking about what perhaps waited for everyone in the end if it was to happen again (and to what unappreciated high probability it could). Market participants, it seemed, were willing to cut the official positive narrative some slack, maybe Bear was the worst of it, all the while still concerned that maybe it wasn’t.

It was a very short lease, a feeling public officials never truly understood. If things really did start to meaningfully improve, so be it; if they didn’t, the exits would never be large enough. That’s the point about this space between uncertainty and fear, almost a mini-reflation inside a downturn, everyone in the middle begins to worry about the exits no matter how wonderful that initial sigh of relief might feel.

The emotional appeal of the sell button (or collateral call) becomes paramount in the second part in a way it never would be in the first. Everyone might still be able to function with care and consideration, deliberate even when they are worried; fear throws all that out the window. If someone punches you in the face out of nowhere, you might hold on and wait to figure out what it was and why. If they throw a second punch, there is no doubt there is only “fight or flight.”

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