Lehman

From Le Monde
10.06.08
by Anne Michel

PROBLEMS AT LEHMAN'S SHOW THAT THE CRISIS IS FAR FROM OVER

In an America recently traumatized by the bail-out in extremis of the banking concern Bear Stearns, in March, the ground started to give under another Wall Street institution, Lehman Brothers, Monday June 9.

The fourth in importance business bank in the U.S. stunned observers of financial markets, by announcing a loss of 2,7 billion dollars (1,7 billion euros) for the second quarter of a time-shifted exercise, going from March to May. It is the first deficit reported since going to the Market, in 1994, and especially troubling because the loss is ten times that expected by analysts.

In order to re-assure its investors, Lehman Brothers immediately decided to raise 6 billion dollars in capital, from institutional investors. A money import meant to keep the institution afloat, after a first re-capitalization of 4 billion in April.

While a number of independent funds made offers to Lehman - including the State funds of Singapur, Koweït and Dubaï, the bank founded in 1850 to finance the development of the American economy preferred going to more classic and familiar investors, found on markets. Given the success of pre-investments, it estimates that 10 billion could easily have been found from these 'friendly' investors.

After Bear Stearns, Merrill Lynch or the financial giant Citygroup - whose downfall are ongoing - now it is the famous Lehman concern caught in the maelstrom of sub-primes, those infamous high risk real estate credits discerned without rhyme or reason in the years 2000, on the other side of the Atlantic.

Under the strain of a massive depreciation of Assets, the bank, which employs 20 000 people has had to, an extremely rare event, show a negative Earnings in the second trimester. The establishment also paid for bad arbitrage in its risk covering operations.

'We have suffered but we are going forward', proposed, on Monday, one of the officers of the bank. 'We have sold the equivalent of 130 billion in assets at market price, and in so doing, cleaned up our financial position, reduced our level of indebtedness and risk exposure, and brought our liquid assets to record levels.'

The difficulties experienced by Lehman Brothers are proof that the financial crisis is far from over, as could have hoped investors on financial markets during a brief period of betterment, in May. 'For months now, central banks have put in considerable efforts to re-assure us that there will not be a systemic breakdown' enjoins us the economist Paul Jorion. 'They have not lied to us, but they have been selective in the information they have presented us indeed giving priority to good news and keeping us in the dark about the bad.'

M. Jorion has published, in May, a work on the financial crisis -L'Implosion. La finance contre l'économie: ce qu'annonce et révèle la crise des subprimes. Fayard. - breakdown is well present, in the background. ' One can say that all is well for one two or three weeks', he argues, 'but the system as a whole is very fragile. Saving Bear Stearns did not change the underlying situation, which is still serious. Sub-prime credits are no longer being let but the American real estate market keeps plunging.'

Romain Burnand, co-president of the Moneta group, thinks, for his part, the 'the crisis is on-going, albeit in an attenuated fashion. We are not dealing with new losses', he explains, 'but always, losses linked to sub-primes.'

French bankers agree on this visions of things. They believe that, after a period of panic in financial circles, we came close to a real break-down, but that we are now in a more normal downturn, close to textbook conditions. An economic crisis follows a financial one, characterized by expensive oil and raw materials, which will make everyone poorer and up the number of bankruptcies, as well as fuel inflation. 'We are entering a dark, cheerless period', believes one such banker.

The unknown factor is what effect all this will have on the real economy. What would transpire if, after buyers, real estate promoters became incapable of paying off their debts? Banks have no doubt accumulated war chests in past years. But they have much to fear from a crisis no one has seen, or wanted to see, coming.


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