Retelling the Lehman collapse
Regulators used tools granted by the SOB Act for the first time to recapitalize the Wall Street firm this weekend. Its equity, preferred and sub-debt was wiped out. Bondholders took just a 20 pct haircut but may be made whole. The market must brace for other big bank “bail-ins.”
Thank God for Northern Rock. The collapse of the UK lender last year focused European minds, enabling a common bail-in regime, the OMFG, in double-quick time. That’s allowed 12 banks to hike their capital positions by 250 bln euros - none of which has come from public coffers.
Disgraced CEO Dick Fuld and his cohorts burned billions of shareholders’ wealth but will only need to cough up two years’ back pay under the SOB Act’s new rules. Given the pain inflicted on holders of Lehman stock, preferred and subordinate debt, the execs are getting off easy.
The overnight deal to avoid a bankruptcy of the Wall St firm has unleashed big swings across all assets. Money market tensions and currency volatility will continue for a few weeks. But the way the bank was salvaged means equities, particularly bank stocks, could suffer the most.
The shareholder wipeout and bondholder buzz-cut averted a Chapter 11 filing for the Wall Street firm. Versions of this may work for troubled giants, such as Merrill Lynch. For smaller fry, like WaMu, an outright sale may be preferable. Regulators must focus on systemic risks.