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President Bill Clinton’s 20/20 Hindsight on Lehman Brothers

October 7th, 2009


10.07.2009 original publish date
02.08.2011 repaired broken link
06.14.2011 moved article. Now filed under “media commentary”

President Bill Clinton’s 20/20 Hindsight on Lehman Brothers

original article written by Net Advisor

Hindsight is Still 20/20 Mr. President
Nearly a year after the fact, former President Bill Clinton stated that the ‘Bush White House should have rescued Lehman Brothers and it would have affected the economy and presidential election’ (Source: Wall Street Journal).

Let’s go over this again shall we?

Nearly a YEAR, not the following week, not a month later, and certainty not in advance nor during the crisis, but rather about a YEAR AFTER Lehman Brothers went under, NOW, former President Bill Clinton says that the ‘Bush White House should have rescued Lehman Brothers.’

Clinton also said, ‘They thought Lehman Brothers was so much smaller than AIG or Bear Stearns, they could afford to let it fail’ (Source: Wall Street Journal).

Now I am not going into go how the Clinton Administration played a huge hand in created this mess at this time and I am not going to try and figure out by what math how President Clinton came up with odds of Obama v. McCain winning the 2008 election. So for now,


Here are just some of the facts:

1. No one wanted Lehman.

“The government opted not to save Lehman, which was overleveraged and sitting in a sea of alphabet-soup derivatives that almost no one wanted to buy…”

— Source: CNN

2. Secretary Paulson didn’t want to keep bailing out the failure of business decisions. Someone had to be the fall guy and Lehman was next in line for failure.

“Treasury Secretary Henry Paulson is “adamant” that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers.”

— Source: Reuters

3. AIG (now owned in large part by the Federal Government) and Merrill Lynch “MER” (now owned by Bank of America, trading under BAC) was bigger than Lehman back then, and the risk of failure of these firms would have been far more disastrous.

And in my 20 years of market experience, the failure of AIG, Merrill Lynch, and or Morgan Stanley (MS), would have taken the others out, plus numerous other banks would have followed with a total banking collapse.

“If the gov did not do this ($700 Billion subsequent bailout), we would have had a total banking collapse within a week. And that would make the Great Depression look like an E-Ticket ride at Disneyland.”

— Source: NetAdvisor’s 2008 post on Yahoo! Answers

So the government had to decide who was going to stand. AIG, Merrill Lynch, Morgan Stanley, or Lehman Brothers. The smallest of the group, Lehman, lost.

The government chose to bail out insurance giant AIG. Merrill Lynch got married to Bank of America like in a drunken weekend in Las Vegas. Morgan Stanley and Goldman Sachs (GS) were then allowed to become bank holding companies which is what saved them from extinction. Goldman was not in immediate danger, but would have likely collapsed from “collateral damage” from any failure of Merrill Lynch and Morgan Stanley.

Of course this is easy to say because that is hindsight too right? We’ll sure, except for the fact that the Friday one day before the following Monday when Lehman filed for bankruptcy, I bought put options on Lehman betting that they would be the one that failed that weekend. I had no puts on AIG, MS, GS, or MER at that time.

The result was a overnight (next business day) one day net gain of 196%, and my #4 best trade of 2008 (source) (additional trade records on file). I posted in 2007 that I was not exactly Bullish on industries tied to real estate. I listed 6 brokerages, 4 banks, 14 mortgage lenders, and 5 mortgage insurers and stated that this problem tied to the real estate market: “It’s not over yet.”

I knew that this crisis could not have come to a potential bottom unless some major institutions failed. Failure is part of how markets find a bottom. How could he largest financial recession since the Great Depression end without the failure of some major institutions?

It is easy to say that the small companies will fail in an economic recession. But this one was so big that some big institutions had to fail too.

In a free market, sometimes businesses fail, and Wall Street is no different. It is about survival of the fittest, and Lehman was nowhere near fit. Most of the firms (banks and brokerages) were not fit at that time either. But some were strong enough to sustain their counterpart’s failure. The government could not have nor should have rescued all of them. At what cost to the tax payer would that be? An unknown and unlimited cost, all on borrowed money? Now that is socialism, not capitalism.

Thus, for former President Clinton to say one year later that President Bush should have saved Lehman, we’ll, it seems just a little late to make that suggestion.

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