Wednesday, September 17, 2008

Lehman, AIG and missing solution to global crisis

Goodbye Lehman
Lehman Brothers’ is no more. But, instead of cheering the Fed for not using tax-payers money, I think Fed has not fully nullified the threat. Moreover, I am siding with Lehman.

When something as old as Lehman fails, it must be one hell of a crisis. Actually, it is, and I have been harping on it. Yet the fact remains that something that survived the great depression will be no more. Many people have said that Dick Fuld was wrong in not selling to KDB. Yet surprisingly employees of Lehman I know – believe there must be a reason. Some say if you prick Dick Fuld, he bleeds green! They still believe in their top boss –even after the bankruptcy.

I do not believe that incredibly talented people at Lehman did something way different than what GS, MS and ML have done. There is something fundamentally wrong when you see Lehman and ML scurrying for capital – like there is no tomorrow.

Fed solution not complete
The Fed’s reaction to Lehman’s troubles was erratic. On one hand, it did not bail our Lehman but bailed out AIG. So they bust their argument about tax-payers money. I think Fed, with all the experience at the table, has failed to deliver creative solution to the crisis.

So where is the solution?
A single regulator, even as big as the Fed, cannot deliver a solution to current crisis. I think a global consensus needs to evolve. Global central bankers acting in sync can possibly solve this crisis sooner. It is time to take the John Pierpont Morgan solution. Get all central bankers into one room and lock the room until they get to the solution.

The current crisis begs for a need for new globally relevant regulatory framework. This framework needs to buy time for companies under attack – while not using any taxpayer’s money. However, looking at WTO, I think we are long way away from such a situation.

One other important learning from the crisis is that global accounting practices are not as robust as they seem. The root cause of this crisis rest in the accounting principles that allow asset values to move away from ground realities. Asset values moved along with fabricated-market realities leading to self-propagating bubbles.

Another accounting goof-up has been notional value changes creating real cash-flow profits. There is evidence of similar occurrence in a lot of trusts and funds. It seems irrational to me.

Aligned incentives are critical for firm survival. In this matter, I think Lehman was much better off. The employee benefit program tied long-term employees’ fate into the fate of the firm. I believe you cannot get better than this. A real hard look at compensation is definitely warranted.


Lastly
I end with a hope.
I hope in 2 years time, Dick Fuld and his team miraculously claws back with the Lehman Brothers’ name. I hope to see those golden letters on greenback on that building in Wall Street – just where they were for more than a century. I hope Dick Fuld has something up his sleeve. I really hope. And, I hope they do it soon.