Wry & Dry

September: Lehman collapse and Europe creation.

September presages warmer weather in Melbourne (fat chance) and, to W&D's delight, the soothing sound of leather against willow.

But it is also a month of significant fiscal anniversaries.

It was just eight years ago last week that financial services firm Lehman Brothers filed for bankruptcy, in what was, and remains, the largest bankruptcy filing in U.S. history.  

Lehman held over $600 billion of assets.  Its bankruptcy confirmed the rotten state of the U.S. housing market and the greed of its lenders.  This was the GFC.  


Lehman's core equity was geared 33 times.  That is, to put it simply, $100 of assets on the left-hand side of its balance sheet was matched (funded) on the right-hand side by about $97 of debt and $3 of equity.  

So, if the value of the assets (the left-hand side of the balance sheet) fell by 3% to $97 then the right-hand side, by definition, must also fall by 3%.  As the debt remains at $97, the shareholders' equity must fall by 3%, to $0.  Hence the shareholders and the company were wiped out.

Readers are urged to see the excellent movie 'The Big Short', which explains, entertainingly, the greed that led to the GFC. 

In spite of all of the fraud in Wall Street leading up to the GFC only one person has been jailed, Kareem Serageldin.  Serageldin had approved the concealment of hundreds of millions in losses in Credit Suisse’s mortgage-backed securities' portfolio.  

He got 30 months in the slammer.

And no-one at Lehman was charged with fraud. 

But consider this: on 10th September 2008, the chief financial officer of Lehman Brothers, Ian Lowitt, told shareholders and the public that the bank had $42 billion of available cash, or liquidity.  The bank’s position, Lowitt reassured, “remains very strong.”

Lehman filed for bankruptcy five days later. 

And with all the chatter about Brexit, there is merit in readers being reminded that it was 70 years ago last Monday, that the idea of a 'United States of Europe' was first envisaged.  Well, in a public sense, at least.

It was in September 1946 that Winston Churchill, Britain's war-time and arguably greatest Prime Minister*, in a speech in Zurich, called for the 'creation of a United States of Europe'.  

His call for reconciliation between France and Germany, and 'the re-creation of the European family' inspired a European movement that led to the creation of the Common Market, and, ultimately, to today’s European Union.

But Churchill did not envisage that the UK would be part of this Europe.  His vision was that the UK, the British Commonwealth, the US and USSR should be 'friends and sponsors' of the project.

“We are with Europe, but not of it,” he wrote in 1930 (in America's Saturday Evening Post). “We are linked but not combined.”

That ambiguity has haunted Britain’s relationship with its continental neighbours ever since, culminating in the UK referendum vote on June 23 for Brexit.

Perhaps that ambiguity is now gone.  As the newest successor to Churchill (Teresa May) succinctly put it, "Brexit means Brexit".

*The accolade was best given by one of Churchill's biographers, Roy Jenkins, the former Labour Chancellor of the Exchequer.  Jenkins' 1,002 page biography is an amazing insight into the complexity of the times and of the man.  

Jenkins, reared in the cradle of British parliamentary democracy and with the innate nurture of Palmerston, Disraeli, Lloyd-George, Asquith and Gladstone (and biographer also of the latter two) in his bones, assessed that only Gladstone came close to Churchill in receiving that opaque appellation of 'the greatest'.

W&D hastens to add that 'greatness' meant that Churchill could manage the Blitz, but not his bills.  Readers may wish to peruse the fascinating 'No More Champagne: Churchill and His Money'.  

The below is added to remind of Churchill's persuasive oratory, even to an audience of one.

Churchill alcohol