Bernstein: America “practically invites another catastrophe”
With the Lehman meltdown hitting its one-year anniversary soon, a lot of media outlets are looking back at the events that surrounded Lehman’s collapse. Bloomberg has a good article out that is a must-read piece.
For me, the money quote of the article comes via Rich Bernstein.
One year later, policymakers haven’t learned the lesson of the bankruptcy, said Richard Bernstein, CEO of Richard Bernstein Capital Management LLC in New York and former chief investment strategist for Merrill Lynch.
Rather than break up institutions such as Bank of America Corp. and Citigroup Inc., or limit their expansion, the U.S. has given them billions of dollars in tax incentives and loan guarantees that enabled them to grow even bigger. To protect against a bank collapse touching off another freefall, President Barack Obama has proposed regulatory changes that rely on the wisdom of bankers and government overseers — the same people who created the conditions that led to Lehman’s bankruptcy and were unable to foresee its consequences.
“Designating certain institutions as too big to fail, and not having a thorough regulatory process to match, practically invites another catastrophe,” Bernstein said.
The frightening bit is how close we came to the whole thing crashing down.
Within days, Mohamed El-Erian, CEO of Pacific Investment Management Co., the world’s largest bond-fund manager, was fearful of a banking breakdown.
“I remember at the end of the week calling up my wife and saying, ‘Jamie, go to the ATM, go to the cash machine, and take cash out,’” said El-Erian, who spent the prior weekend at the firm’s Newport Beach, California, headquarters trying to anticipate what might happen to Lehman. “She said, ‘Why?’ I said, ‘I don’t know whether the banks are going to open tomorrow.’ The system was freezing in front of our eyes.”
We can only hope Bernstein is not right about the potential for another catastrophe. More here.
1. The Quiet Coup . . .
2. Thus Bernstein and Rosenberg felt it necessary to leave ML/BAC.
3. Breakfast with Dave (Rosenberg) today describes “a toxic brew”:
M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.
So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.