Posts Tagged 'New York Life'

Roubini: Insolvent banks should feel market discipline

By Matthew Richardson and Nouriel Roubini | May 6, 2009
From the Financial Times:

Joseph Schumpeter famously argued that the essence of capitalism was creative destruction, by which new economic structures are born from the rubble of older ones. The government stress tests on the 19 largest US banks, the results of which are due be announced on Thursday, could have facilitated this process. The opportunity looks likely to be missed.The tests, which measure how viable banks are under adverse economic conditions, have no “failed” category, even if as many as 10 are reported to need additional capital. But, given that the economic environment already reflects the tests’ worst-case scenario and that recent estimates by the International Monetary Fund of financial sector losses have doubled in six months, the stress test results will not be credibly interpreted as a sign of bank health.

Instead, market participants will conclude that banks requiring extra capital have, in fact, failed. As a result, these institutions will not be able to raise outside capital and will immediately require government help.

Once again, the question will be how the near-insolvent banks can be kept afloat, to avoid systemic risk. But the question we really should be asking is: why keep insolvent banks afloat? We believe there is no convincing answer; we should instead find ways to manage the systemic risk of bank failures.

Schumpeter’s biggest fear was that creative destruction would lead capitalism to collapse from within, because society would not be able to handle the chaos. He was right to be afraid. The response of governments worldwide to the financial crisis has been to give the structure of private profit-taking an ever-growing scaffolding of socialised risk. Trillions of dollars have been thrown at the system, just so that we can avoid the natural process of creative destruction that would take down these institutions’ creditors. Why shouldn’t the creditors bear the losses?

One possible reason is the “Lehman factor” – the bank runs that would occur as a result of a big failure. But we have learnt from the Lehman collapse and know not to leave the sector high and dry when a systemic institution fails. Just being transparent about which banks clearly passed the stress tests would alleviate many of the fears.

Another reason is counterparty risk, the fear of being on the other side of a transaction with a failed bank. But unlike with Lehman, the government can stand behind any counterparty transaction. This will become easier if a new insolvency regime for systemically important financial institutions is passed on a fast-track basis by Congress. Problem nearly solved.

That leaves the creditors – depositors, short- and long-term debt-holders and preferred shareholders. For the large complex banks, about half are depositors. To avoid runs on these deposits, the government has to provide a backstop. But it is not clear it needs to cover other creditors of a bank, as the failures of IndyMac and Washington Mutual attest.

Even if systemic risk were still present, the government should protect the debt (up to some level) only of the solvent banks, not the insolvent ones. That way, the risk of the insolvent institutions would be transferred back from the public to the private sector, from the taxpayer to the creditors.

The government may be able to avoid the mess by persuading long-term creditors to swap their debt for equity, at a loss. The recent failed effort with Chrysler suggests this will not be easy. But a credible threat of bankruptcy could scare creditors into negotiation, to avoid bigger losses.

Suppose the systemic risk problem is solved. The other argument against allowing banks to fail is that after a big loss by creditors, no one would be willing to lend to banks – which would devastate credit markets. However, the creative-destructive, Schumpeterian, nature of capitalism would solve this problem. Once unsecured debtholders of insolvent banks lose, market discipline would return to the whole sector.

This discipline would force the remaining banks to change their behaviour, probably leading to their breaking themselves up. The reform of systemic risk in the financial system would be mostly organic, not requiring the heavy hand of government.

Why did creditors not prevent the banks taking excessive risks before the crisis hit? For the very same reason creditors are getting a free pass now: they expected to be bailed out. For capitalism to move forward, it is time for a little orderly creative destruction.

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Ex-Lehman Vice President Larry McDonald & Patrick Robinson write Wall Street expose

THE eagerly awaited Wall Street exposé . Written by a perfect combination of authors. By Lawrence G McDonald, the hard-driving Lehman Brothers trading Vice President, and the #1 New York Times bestselling author Patrick Robinson, the man who wrote Lone Survivor for the Navy SEAL Marcus Luttrell.

Direct from the heart of Lehman Brothers, the bank that smashed the world’s economy. An incredible blow-the-lid-off account of the greed, the misjudgements, the dreadful stupidity of men who should have known better. Revealed by a man who was there, the eyewitness, Larry McDonald. Anyone, laymen or expert, can understand the crucible of a Wall Street trading floor. This is a black box of secrets. And now Larry McDonald rips the lid off.

PRE-ORDER YOUR COPY ON AMAZON.COM TODAY!colossalbullapproved

A Colossal Failure Of Common Sense

THE eagerly awaited Wall Street blockbuster. Written by a perfect combination of authors. By Lawrence G McDonald, the hard-driving Lehman Brothers trading Vice President, and the #1 New York Times bestselling author Patrick Robinson, the man who wrote Lone Survivor for the Navy SEAL Marcus Luttrell.

Direct from the heart of Lehman Brothers, the bank that smashed the world’s economy. An incredible blow-the-lid-off account of the greed, the misjudgements, the dreadful stupidity of men who should have known better. Revealed by a man who was there, the eyewitness, Larry McDonald. Anyone, laymen or expert, can understand the crucible of a Wall Street trading floor. This is a black box of secrets. And now Larry McDonald rips the lid off.

PRE-ORDER YOUR COPY ON AMAZON.COM TODAY!colossalbullapproved

The EYEWITNESS Account of Lehman Brothers Published in June!!

It’s called “A Colossal Failure Of Common Sense.” This is THE book on the financial crisis, written by ex-Vice President of Lehman Brothers, Lawrence G. McDonald, and the #1 NYTimes bestselling author, Patrick Robinson. Click on some links below to read all about it. This is the first book written by a senior Wall Street trader in the history of publishing.

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Finally…. a Lehman Brothers Eyewitness writes a book!

This will be the first and ONLY book that describes exactly what really happened inside the walls of 745 7th Avenue – the Lehman Brothers headquarters, written by a former Vice President, with the #1 New York Times bestselling author, Patrick Robinson.

PRE-ORDER YOUR COPY ON AMAZON.COM TODAY!

THE JACKET COPY

They stand alone – the zillion-dollar questions of the financial crisis : What the hell happened at Lehman Brothers? And why was it allowed to fail, with aftershocks that rocked the global economy? In this news-making, often astonishing book, a former Vice-President of Lehman gives us the straight answers – right from-the-belly-of-the-beast. Larry McDonald is the first senior Wall Street trader ever to write such an expose – revealing at last the culture and unspoken rules of the game like no book has ever achieved before.

PRE-ORDER YOUR COPY ON AMAZON.COM TODAY!

A Colossal Failure of Common Sense is couched in the very human story of McDonald’s Horatio Alger-like rise from a Massachusetts “gateway to nowhere” housing project, to the New York headquarters of Lehman Brothers, home to one of the world’s toughest trading floors. He posed as a pizza delivery man to get past receptionists, to score interviews at brokerage firms. He peddled frozen pork chops, door to door, to hone his sales skills, desperate to realize his dream of working on Wall Street.

We get a close-up view of the other participants in the Lehman collapse, those who saw it coming with a helpless, angry certainty. We meet the Brahmins at the top, whose reckless, pedal-to-the-floor addiction to growth finally demolished the nation’s oldest investment bank. The Wall Street we encounter is a ruthless place, where brilliance, arrogance, ambition, greed, and all the human traits, combine in a potent mix that sometimes fuels prosperity, but sometimes destroys it.

McDonald’s gripping story of the firm’s death spiral is a modern-day thriller, studded with incredible revelations.

The collapse of Lehman Brothers was no surprise and didn’t have to happen. In fact, CEO Richard Fuld and President Joe Gregory were confronted with warnings on three occasions — starting as far back as 2005 —that the property market, on which they were betting the ranch, was teetering toward collapse. Fuld and Gregory turned their backs each time.

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McDonald paints a vivid picture of life inside Lehman, where the isolated and reclusive chief executive ‘reigned’ in his sumptuous 31st floor office, accessible only by private elevator. From this Ivory Tower so much of the firm’s brightest talent was driven out of the door. The full significance of the Lehman bankruptcy remains to be measured. But this much is certain: it was a devastating blow to both America and the world beyond. And it need not have happened. This is the story of why it did.

The Authors

LAWRENCE G. McDONALD was, until 2008, vice president of distressed debt and convertible securities trading at Lehman Brothers. He ran an extremely successful joint venture between the firm’s fixed income and equity divisions and was one of Lehman’s most consistently profitable traders, responsible for bringing in over $83 million in trading profits. He was heralded by many colleagues at Lehman for both his early 2006 call on the subprime crisis and the $46 million in trading profits realized from it. Mr. McDonald is also co-founder of Convertbond.com, named by Forbes magazine as “Best of the Web” from 2000-2003, specifically citing it as the web’s premier source for convertible securities information, valuation and news. In October 1999, before the dot-com crash, the site was successfully sold to Morgan Stanley and remains a property of that firm.

PATRICK ROBINSON wrote Lone Survivor for the US Navy SEAL Marcus Luttrell, It was one of the biggest selling military books ever published, 1 on the New York Times bestseller list for months in 2007. Mr. Robinson is also known for his bestselling US Navy-based ‘techno-thrillers’. The autobiography, which he wrote for Admiral Sir Sandy Woodward, One Hunded Days, was an international bestseller. He lives in Ireland, and spends his summers on Cape Cod, Massachusetts, where he and Larry McDonald sail together.

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PRESS RELEASE:– Financial crisis lights fire under publishers

By Michelle Nichols

NEW YORK (Reuters) – The financial crisis is happening so fast that business books about it can be outdated before they hit the shelves. Some U.S. publishers and finance authors are responding by bringing books to market faster.

While it normally takes 9 to 12 months from the time an author turns in a manuscript to when a book is released, that is down to just a few months for some publishers trying to keep up with the 24-hour information age.

One example is “A Colossal Failure of Common Sense,” a financial thriller about the collapse of Lehman Brothers by former vice president Lawrence G. McDonald. Crown will publish it in July, after acquiring the manuscript only last month.

“With something as current as this, unless your timing is right, you can lose your audience for it,” said John Mahaney, executive editor of Crown Business. Crown is a division of Random House, part of Bertelsmann AG BERT.UL.

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Changing events are an added burden for authors. Shari Olefson’s “Foreclosure Nation — Mortgaging the American Dream” was due to be published in October last year, but when the economic meltdown erupted she realized it would be “wrong and outdated.”

“Really the whole book had to be rewritten,” she said. After resubmitting her manuscript at the end of December the book was published late last month by Prometheus Books.

“Writing a book about an ongoing financial crisis is like herding cats, it’s just really challenging,” Olefson said.

Simon & Schuster, part of CBS Corp (CBS.N), is publishing several books related to the financial crisis that it says have been turned around at a faster rate of four to six months.

“Books that are related to any ongoing, shifting crisis are best published as close to when they’re written as possible,” said David Rosenthal, Simon & Schuster executive vice president and publisher.

Among them is “Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now” by Felix Rohatyn, released in February, just as the U.S. government was considering stimulus plans.

“The financial crisis has led to several instant books,” Popoff said. “The publishers want to be timely and the sooner they can get it out, the closer they can get it to the event happening, the more relevant the book.”

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