Oct 27

Lehmann, le retour


Waiting For Lehman

In Samuel Beckett’s play Waiting for Godot, the four main characters wait in vain—Godot never arrives.

In the financial markets, the same thing is happening now—we are all waiting for Lehman: That sudden bankruptcy-crisis-calamity which sets off a whole series of credit events, which in turn causes massive sell-offs, plunging markets, collapsing confidence, and ultimately—just like the bankruptcy of Lehman Brothers did back in 2008—shoves the entire global financial edifice right up to the very edge of the cliff.

To the edge—and perhaps this time over it.

We have good reason to be waiting for Lehman—our current situation is simple and stark: Sovereign nations and individual citizens are over-indebted—to the point where they cannot pay back what they owe. We all know that this overindebtedness at the sovereign and individual level is going to end, and end badly: Worse than 2008.

When will Lehman arrive!?

But lately, my thinking has changed: Like the characters in Godot, I think that we’re waiting in vain. The Lehman-like event will never arrive because it won’t be allowed to arrive. So this miserable slog we are going through will continue—indefinitely. (Yeah, I know: Sucks to be us.)

My thinking is based on two assumptions: One, that the central banks and government financial authorities and regulators around the globe are absolutely terrified of a repeat of a Lehman-type bankruptcy or trigger event. And two, that those self-same central banksters and government drones will do absolutely anything to prevent another Lehman-like credit event from setting off another cascade of consequences.

And when I say “absolutely anything”, I’m not using hyperbole: Fuck principles, fuck the law, fuck legal constraints, fuck even basic long-term economic and fiscal health—or sanity. The clowns running the circus were so freaked out by the effects of the 2008 Lehman bankruptcy and the domino-effect that it triggered, that they will not let it happen again—ever. Come what may.

Hence, this endless Waiting for Lehman: This endless slog of ad hoc solutions and fiscal half-measures that brings us only tension and misery—and erodes our economy even further.

But this certainty that the bureaucrats in Washington and the eurocrats in Brussels and Frankfurt will do absolutely anything to avoid a Lehman-like event adds something key to the equation:


Since we know how the central banks and economic leadership will react—that is, if we start from the assumption that the political/economic leadership will do absolutely anything to prevent a major credit event from taking place—then we can predict what they will do in the three main areas of weakness:

  • Sovereign debt and the possibility of default.
  • Financial sector weakness and the possibility of insolvency.
  • Geopolitical crisis and the possibility of another Oil Shock.

What follows is a discussion of those three areas of weakness—and what the central banks and economic leadership will do about each of them.

A Sovereign Debt Default

We all know the score, insofar as sovereign debt is concerned:

National governments—as well as local ones—went on a spending spree during the good times before 2008. They over-promised entitlements and services, while at the same time cutting taxes—thus placating the electorate with the promise of something for nothing. They financed the inevitable shortfall with cheap sovereign debt. Hence the massive fiscal deficits during boom years.

Now, of course, we’re dealing with the hangover.

Because of the recession and the concomitant high unemployment, tax receipts have dropped—drastically. Hence the hole of the governments’ balance sheets—which was big to begin with—becomes massive during these bad times, requiring even more money——thus pushing sovereign nations closer to default and bankruptcy.

The nations most in debt, and therefore most likely to default, are well-known—Greece, Portugal, Spain, Italy. But there is also the issue of local government over-indebtedness and default in the United States, China, the various “strong” European nations, etc. No nation is exempt from this problem—which will come due.

Or will it?

If we assume that the central banks and government regulators will do absolutely anything to prevent a Lehman-like event—in this case a sovereign debt default—then their course of action becomes abundantly clear: They will do for the big economies what the Europeans have been doing for Greece. They will hand out more loans, backed by assets that are less and less trustworthy, in exchange for more promises of austerity and fiscal responsibility that everyone knows will not be kept.

A Major Bank Bankruptcy

The major European and American banks are all exposed to the bad European sovereign debts—the European banks directly by way of actually owning this crap, the American banks indirectly via their sale of credit default swaps on the bad European sovereign debts.

Why doesn’t anybody know for certain how weak these guys actually are? Because following the 2008 Global Financial Crisis, the financial authorities made the banks’ balance sheets more opaque—that is, less transparent.

In the United States, the suspension of FASB 157—which essentially allowed American banks to mark to make-believe—was just one of the policies implemented to, quote, “shore up the financial sector”. A similar process took place in Europe.

The Orwellian/Absurdist rationale was, “If nobody can see how weak a big bank really is, then it is no longer weak—therefore, it is strong”. (Beckett would have been so proud.)

Thus these are the twin models of how other teetering banks will be managed: In Europe, their profitable units will be stripped off the cancerous skeleton of the bank, and then grafted onto existing (and State-controlled) local banks, leaving behind the “bad bank” with the name of the failed institution—like Dexia.

In America, the bank will be recapitalised, even as it is shrunk. Insofar as Bank of America is concerned, apart from all the cash they’ve raised through these deals, there is a lot of talk that the Merrill Lynch investment banking unit—which BofA bought at the height of the 2008 crisis—will be spun off and/or sold. My bet is Merrill will indeed be spun off—and right soon.

A Geopolitical Crisis

At this time, the most obvious potential crisis is the Middle East—specifically, a possible war with Iran.

At SPG, we already discussed in detail the financial effects of such a war. So I won’t bother going over it again here.

Needless to say, the conclusions were not pretty.

Is there the real possibility of such a war? Well, considering all the noise and trial balloons coming out of Israel, war with Iran seemed at one point inevitable——but lately, the tide has most definitely turned. Any notion of “all options on the table” insofar as Iran is concerned is starting to go over like a lead zeppelin.

Take this latest “Iranian plot”—the supposed attempt to assassinate the Saudi ambassador to the U.S. (huh? I mean really, why bother): Some people behind the curve are still growling about attacking Iran, and using this “plot” as an excuse to beat the War-with-Iran drum.

But this latest “Iranian plot” has been met by the American government and Capitol Hill with calls for sanctions and more diplomatic isolation—but not with calls to bomb Tehran. The more plugged in of the American nomenklatura aren’t taking seriously any talk about war with Iran.

Why? Because an American (or Israeli) war with Iran would break Europe. The U.S. doesn’t import Iranian oil, much less depend on it—but Europe does, especially Italy. Recall the oil consumption figures of the SPG Scenario. And anyway, a cut in Iranian oil supply would hit global oil prices equally—disastrously.

An Oil Shock brought about by a war with Iran would hit Europe—which would hit American banks, due to their exposure to Europe. An Oil Shock—as the name implies—would drive up oil prices, further eroding the global economy. An Oil Shock that hits Europe would likely kill the euro, as inflation would skyrocket.

In fact, any hiccough in the Middle East which hits oil prices would be disastrous for the global financial sector, as well as the global economy.

And the Western central banksters and assorted bureaucrats and eurocrats know this.

Therefore (and of course, barring any unforeseen calamity), there will be no war with Iran any time soon. The financial leadership will make sure to quell any such notion of war with Iran.


The situation we find ourselves in reminds me of the First World War: The European diplomatic situation back then was tied up among all the nations of the continent by way of a series of pacts, alliances and coalitions of mutual assistance. They were wrapped up so tightly that, when a relatively minor event happened—the assassination of Archduke Franz Ferdinand—it set off a chain reaction of obligations and consequences that eventually led to the whole continent going up in flames.

The same thing is going on today, with regards the global financial markets: Everyone is obligated to everyone else, by way of credit instruments. Therefore, if one of these obligations is broken—that is, a default by one of the European countries, or a cash hole in one of the banks, or a spike in oil prices that creates a hole in someone’s balance sheet—the entire rickety structure is going to go up in flames.

The central banks and the government authorities and regulators have made it clear that they will do absolutely anything to prevent this outcome: They will prevent a Lehman-like event from taking place, no matter what.

In other words, they have made things predictable for us all.

Insofar as these three areas I have outlined above—sovereign debt, weak banks, geopolitical crisis—there are tremendous opportunities, bought and paid for by way of this predictability.

The fact that the markets will be waiting for Lehman allows people like us—who realize that Lehman will in all likelihood never arrive—to make some bets which could pay off big. The investment strategies I outlined above for each of those cases make it clear how lucrative it could potentially be.

So long, of course, as Lehman never arrives. But caveat emptor: If Lehman does arrive, all bets are off.


Un excellent papier qui décrit bien la situation actuelle d’interdépendance de tous avec tous, ses conséquences et donne donc un éclairage des différentes actions en cours et à venir.


Reste le problème du cygne noir (systèmes complexes) et de l’élément imprévisible qui ne manquera pas de se produire (ne serait ce que par les peuples).


Alors « all bets would be off » !



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