What’s in a Slur

The buzz phrase we keep hearing from the media elite is a "Lehman moment for Europe." The implication is a financial institution failure that takes the system down with it. This is a dangerous simplification and a disservice to understanding our crisis, the EZ debacle and most importantly, the way forward. If by "Lehman Moment" one means hubris gambit writ large, then I'm on board. Fuld bet the farm that a bailout was coming so holding onto toxic stuff that was 26 cent bid in the market and betting on the "pass" line was logical. The government had already told him (and his competitors) to reduce their gearing months before. The others reluctantly  complied and paper trading around 43 cents after Bear took the hit with all the coincident carnage. Lehman remained in the neighborhood of 35x geared while Goldman and Morgan Stanley had moved down markedly. (In the ultimate burn, Goldman bumped back up ahead of returning the government money, while MS played tight with the taxpayer and paid the price in stock valuation when earnings posted several quarters later.)
A Lehman Moment is thus the moment when entities are taken to the curb. The EZ is not geared at the ratios that brought Fuld's firm to the woodshed. In fact, the only financial constructs operating at extreme gearing are the central banks. The Fed is at 70x by some metrics. The structural problems with the ECB are evident when viewed through this prism. This is not to say that the Euro financial system is not fracturing, clearly it is. But if we are going to point to the risk as a Lehman Moment, we should at least  agree on what that risk is.

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