Lehman Brothers' Government Bailout?

Over this weekend a group of Wall Street executives and U.S. Federal Reserve leaders are meeting to discuss what to do about troubled Lehman Brothers. Lehman could declare bankruptcy any moment now. Lots of "experts" claim that Lehman is too big to fail and that its collapse could cause widespread financial panic.

Oh really?

For perspective, stockholders currently value Lehman (at the close of trading on Friday) at a paltry $2.53B. Another company with the same market value is Thomas & Betts Corporation (who?), Memphis-based manufacturer of electrical, steel structural, and HVAC equipment. In other words, stockholders have already discounted Lehman, so those losses are already reflected in world markets. Investors are already giving high odds that Lehman will collapse, and that assessment is also already reflected in global financial company stock prices.

Lehman is a brokerage. Would investors holding brokerage accounts lose money? Probably not. Lehman participates in the Securities Investor Protection Corporation (SIPC). It's a bit complicated, but let's suppose you have a 401(k) retirement account with Lehman valued at $3M. (You're doing well!) That account consists of various stock and bond holdings, and SIPC rules require Lehman to keep your account and others separate from their own assets. That rule should protect you automatically, but in the unlikely event it doesn't you still have an extra $500K of protection. That is, if Lehman's assets are liquidated and the money available doesn't quite cover the value of the underlying assets in your account, SIPC protects you against $500K of such "gap" losses. Since 1970, SIPC has protected over 99 percent of investors in brokerage bankruptcies, so very few people have lost anything.

In 2007, Lehman had $282B of assets under management according to their annual report. That's a reasonably big number, but those assets don't disappear in a bankruptcy. They are stocks, bonds, cash, etc. Some of those assets (about $60B) are mortgage-related assets, and some percentage of those are nonperforming. Lehman wanted to spin off these bad assets into a separate publicly traded company, selling those assets at a big discount to new investors to raise cash and write them off for good. Wall Street nixed that idea, probably because it would highlight problems at other firms even while saving Lehman. The biggest problem, but still small compared to the size of global markets, is the number of employees suddenly out of jobs, many of them high income employees with lavish lifestyles. Like the Arthur Andersen collapse in Chicago, their losses will be felt locally in New York to some extent. (Expect further declines in the local housing market as employees downsize and relocate.) Worldwide there are about 28,000 Lehman employees. Many of them (but certainly not all), especially the biggest earning (i.e. most "successful") individuals, will be offered employment to continue running whatever is left of Lehman. Secretaries and other junior employees will bear the brunt of the collapse both because they are more likely to lose their jobs and because they do not have as much financial cushion. No, life is not fair.

This Lehman situation is really a big game of chicken. To their credit, the Federal Reserve leaders do not seem interested in spending taxpayer money on a Lehman bailout. Wall Street executives, on the other hand, are doing their best to pretend that Lehman's collapse would be the End of the World(TM), in large part because Lehman is highlighting their own asset problems. I think what's going on here is that the Fed is happy to provide a conference room and a pot of coffee, but it's up to the private sector (and the bankruptcy code) to figure out Lehman's fate, and to continue the process of unwinding these bad assets throughout the industry.

"Presumptuous and Arrogant"?

According to Dictionary.com, a synonym for presumptuous is arrogant. Another synonym is...uppity. As in, uppity negro. All class, that John McCain, isn't he? Josh Marshall decodes the dog whistle.

Meanwhile, McCain already crowns himself President. How...presumptuous.

Although I've got another couple words to describe McCain: pathetic and desperate.

UPDATE: Obama is exactly correct....

Bye Bye Citibank U.S.

I managed to close my Citibank account. Oddly enough their exclusive procedure for "global executives" to do so involved sending a fax. How very...Reagan Era. But it worked.

I still bank with Citibank Japan, though. And I do hope Citibank, which is undergoing tremendous turmoil right now, recovers.

Meanwhile, this past weekend the FDIC seized control of IndyMac Bank in one of the U.S.'s largest bank failures ever.

Congratulations Senator Obama

Many people around the world are fascinated with this year's U.S. presidential election. These beautiful ladies, fully aware of Barack Obama's Hawaiian heritage (also a plus in Japan), hail from the city of Obama in Fukui Prefecture, Japan. Understandably the city of Obama is enthusiastic about one of the two presidential candidates, and city leaders welcome any potential financial boost given their slightly ragged local economy. (Photo credit: Toru Yamanaka, AFP/Getty Images.)

But interest in Japan does not compare to feelings in Africa as Obama officially clinched the Democratic Party's nomination this week. (He mathematically clinched some time ago.) These positive feelings are deep and profound.

I must say it's wonderful to see so many people around the world viewing the United States and her people much more favorably.

Worst Banking Service Ever

I completely concur with this report: Citibank's "Global Executive Banking" is absolutely terrible. In my case, it has been at least six months since I opened my account and Citibank still cannot figure out how to unblock the account after my company's personnel department has made countless attempts to verify with them that I do actually work for my company. During one of these attempts I literally sat next to the head of our personnel department who stayed on the phone with them at 10:00 p.m. Tokyo time. He was told they had everything they needed, but I later find out that the block is still in place.

Conveniently Citibank is now holding a fairly substantial sum of money and paying 0-point-trivial interest. (If you're not a "global executive" they'll pay more interest, about 2% more.) I also cannot fathom why "Global Executive Banking" is only open from 9 to 5 Eastern U.S. time Monday through Friday. On top of all that, it seems impossible to link my Citibank Global Executive Banking account with my Citibank Japan account. They might as well be Royal Bank of Scotland and HSBC in terms of their interoperability.

UPDATE: In this blatantly false advertising which aired this year, the Citi Never Sleeps except of course for "global executives":

From Editorial Cartoonist Tom Toles

Tokyo Broadband

At home in Tokyo I have 100 Mbps Internet service, and it's just part of the normal rent for this particular building. Granted, rents are high, but truly high-speed Internet service isn't even if you have to pay for it separately. ASAHI Net, for example, charges anywhere from 3,035 to 3,570 per month for 100 Mbps service to an apartment, depending on where you live. Even DSL service (12 Mbps downstream/1 Mbps) is just 1,990 yen per month.

I was just watching Walter Mossberg complain about broadband service in the U.S. (Mossberg is the Wall Street Journal's technology writer.) He is correct. The Japanese are way ahead.

As another example, in Japan "One Seg" is getting quite popular. With One Seg you can watch digital television on a mobile telephone, free. The picture quality is quite reasonable. One Seg doesn't work while riding subways underground, but for a 90 minute typical commute into work about 60 minutes will probably be above ground. For the other 30 there's always 3G mobile e-mail and Web browsing which does work in the subway tunnels.

If that's not enough, Livedoor has blanketed about 80% of central Tokyo with WiFi service. That's only 525 yen per month. For comparison, it costs twice that rate for T-Mobile WiFi service in the U.S. Per day.

I Wasn't Alive to Hear the Gettysburg Address

But I heard this speech. Did you?



By the way, Senator Obama wrote all the words.

U.S. Dollar Collapsing

The U.S. dollar will now buy only about 97 yen as I write this post. It was around 120 not too long ago. The dollar has performed comparatively well against the Japanese yen, but apparently the normally activist Bank of Japan has no problem allowing the dollar to slide.

The good news is that my employer provides reasonable hedges against currency risk, so I do better than most. And my employer reports earnings in U.S. dollars, so a weak dollar is great news for the company on Wall Street. Most other U.S. expats and tourists will get hurt, however.

I will do a lot of shopping in the U.S. during my next trip there.

Although 97 yen is low, it's not the all-time record low. The record low of about 85 yen was set at the end of the first Bush recession, in the early 1990s.

What He Said