Dead Man Blogging …

I just wanted to offer my immediate, quick, bullet-point take on the flurry of GIGANTIC market-related news today, which i briefly referenced last night.

• Lehman Brothers’ brankruptcy obviously sucks for the company’s employees and shareholders, but this HAD TO HAPPEN. Over the past year, starting with Bear Stearns, the U.S. government has spent hundreds of billions of dollars, and will likely spend hundreds of billions more, bailing out numerous large financial institutions. The process had to stop as there will likely continue to be a stream of companies, in the financial sector (hello AIG) and then elsewhere (hello GM), that ask for bailouts or other financial assistance from a federal government which just doesn’t have the balance sheet to support any more albatrosses. The obligations it has already taken on will bring the U.S. economy to the brink of disaster, and the government had to make a stand that most companies from here on out would be on their own.
• Merrill Lynch CEO John Thain is no dummy. He saw the government playing tough in the Lehman negotiations, and decided now was the time to pursue an exit strategy – while he still had the time. Without a doubt, Merrill would have been in the bears’ crosshairs next. The deal he signed with Bank of America was an extremely savvy one.
• Can’t say the same for Bank of America and its CEO Ken Lewis. He is already dealing with the repercussions of unwisely taking on Countrywide Financial, a large home lending organization that was among the worst of the worst in terms of bad apples. Now, he’s paying a healthy premium for Merrill when there is little doubt the stock would have fallen much, much lower in the coming weeks. Fifty billion dollars is nothing to sneeze at. Perhaps the only explanation for the timing of the transaction was that the U.S. government placed some pressure on Lewis and Thain to make a deal – though that was denied in a press conference.  Or perhaps Lewis is just a patriot who feels a company named Bank of America should do its part to bolster the confidence of the economy (and knows deep-down his own institution will be threatened if things don’t turn around soon).
• All this news is obviously causing turmoil on Wall Street. The markets are down big as I write this, yet I think there is a possibility that a short-term rally occurs in the near future. I’m encouraged that the financial stock index as well as the other major market indices are still holding above their all-time lows. The market is already hugely bearish, which is a good contrarian indicator (when everyone’s already bearish, that can mean that there aren’t many people left who want to sell)
• This is not the end of the story. There will be more fallout. The long orgy of easy credit days are over, the U.S. consumer is on life support and will remain there for years, and the world economy will continue to feel the pain of our exuberance for some time.  I still worry about a significant, deep, prolonged recession or even mild depression. I worry that the global markets are now so complex, so intertwined, that even one failure like Lehman could cause a systemic collapse. I worry that a geopolitical event pushes us over the edge. I worry that the aging demographics of the U.S. and the country’s enormous and growing budget deficit will make it tough for us to pull out of our current malaise. But I now also have at least a glimmer of hope that I haven’t had for a long time. The government and the Fed can’t bailout, or rate cut its way out of this mess. We have to feel some pain, maybe a lot of it.  But it’s true that things look darkest before the dawn.  We’re not there yet, I don’t think, but we’re certainly closer.