Biggest Bankruptcy in Wall Street History

We are spoiled for choice this morning, dear reader; we scarcely know where to begin…

…with yesterday’s 504 point sell-off on Wall Street?

…with the biggest bankruptcy in Wall Street history – Lehman filed chapter 11 with $613 billion in debt?

…with our old dictum: the force of a correction is equal and opposite to the deception that preceded it?

…with another look at the Big Picture…at what it means for capitalism when its biggest firms go bust?

…with the past or the future? With a look back, at how a company that survived the Civil War, the railroad bankruptcies, the Panics, WWI, the Great Depression, WWII, and the Cold War couldn’t survive the biggest financial boom in Wall Street history? Or a look ahead, at what will happen after one of the biggest dealers in the $400 trillion derivative market bites the dust?

Do we take the high road – with a lofty discourse on the perils of excess leverage?

Nah…let’s take the low road:

We told you so!

Yes, dear reader, we watch the masters of the universe go down…with a fair amount of amusement and even schadenfreude. They claimed to be the smartest people on the planet – and demanded to be paid as if they were. They said they were doing the world a big favor – “allocating capital” so efficiently we would all get rich. And, of course, no one would get richer than they. But who could complain about their billions in bonuses when we were all getting rich?

Now, it turns out, they weren’t so smart, after all. Like all hustlers, they weren’t smart enough to ignore their own lies. They were the ones who packaged up all that subprime debt – mortgage loans on over-priced property to people who couldn’t pay the money back; they knew what was in that “mystery meat.” Then, they got the useful stooges at the rating companies to call it Grade A. And then, they bought it themselves! What were they thinking? Not only that, they bought it on leverage – so that if it went bad, their whole company would go belly up!

And now, mothers no longer want their babies to grow up to be stockbrokers and investment bankers. Now they want them to grow up to be bankruptcy lawyers! That’s where the money is!

But let’s stop gloating and try to figure out what is going on…

We are in a deflationary correction. The financial industry made a fortune by flogging debt; now it is taking huge losses because its collateral is going bad, its assets are declining in value and its business is soft.

Merrill Lynch was worth $86 billion in January of 2007. Now, it is selling itself to the Bank of America for $50 billion. Why the sale? Because Merrill is afraid that it could go the way of Lehman Bros. That latter firm was worth $45 billion in February 2007. Now it is worth nothing…or close to nothing. Shares traded hands yesterday at 29 cents.

Goldman Sachs, meanwhile, is said to be the best firm on the Street. But even it is suffering. It is supposed to announce revenues down 73% for the 3rd quarter.

The handwriting has been on the wall for a long time. Once its collateral began to go down in ’07, the bubble in the financial industry couldn’t last long. We saw what was coming down the pike and have been sending our dear readers to the Strategic Financial Survival Library for resources on how to continue to make money in the coming bust.

Still, unlike our readers, investors are shocked; they hadn’t bothered to read the headlines. Yesterday, they sold stocks and the dollar. Oil held stead – still over $100. The euro rose…and gold jumped $26.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Very nice.

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