1 backward-1 forward
1) The 60 Minutes piece on Lehman highlighted the concept of regulatory capture that has continued to roll through market blunders at MF Global and JP Morgan. Another important reality, missed by Too Big Too Fail also, needs to be recognized. Lehman just didn't fail, it was taken down.
After Bear, as bid list littered the Street with mortgage securities, the 25 cent bid at 75 cent offer was common. The government pushed MS, GS, and LEH to come down from the prevailing 35 to 40x gearing. As MS and GS obliged, Fuld made a bet that he could lag behind and "win" once the monetary flood gates opened. Several scary months later, authorities saw that LEH remained geared at over 30 to 1 while MS and GS had significantly lowered their ratios. Fuld's gambit infuriated both regulators and his competitors. Thus, he was taken down.Contrary to HBO versions of history, the Fed and the Treasury Dept. were not unaware or cowering from this situation. The failure of the Reserve Fund (and others) was a known possibility and the CPFF was rolled out as quickly as possible. Whatever convoluted legislation came about in the fog of panic is more a function of Democratic deployment of The Shock Doctrine (Naomi Klein) than objective analysis of the crisis as it unfolded. As we noted at the time, GS returned to a marginally higher gearing with the taxpayer money quicker than MS. John Mack was said to be apoplectic when 2 quarters later a pairs trade of long GS, short MS emerged because he was more conservative with the citizens investment.
2) The recent decline in the bond market has occurred with the usual sprinkling of "to QE or not QE" groping. Over 4 years into the new Monetary (Quantitative) Regime and an unprecedented move toward Fed transparency, the public understanding of Quantitative Easing remains limited. The Fed regularly has referred to "rhetoric and extended periods" in its discussions of tool box equipment. LSAPs and Twisting are activities related to the also often spouted "stock vs flow" approach to the Fed's balance sheet and the economy. European slogging produced a Summer QE of strong rhetoric from the Fed. Japanese flows in the bond market have been in response to the $/Yen situation more than Fed LSAP disappointment. If QE is a market magic trick, then strong language is more "rabbit out of a hat" than "saw the lady in half". By Sept., the audience will be demanding something more elaborate.