For some time now people have wondered which big bank would find itself in trouble after the collapse earlier this spring of Bear Stearns. Everyone’s best guess is that it might be Lehman Brothers
. The news today is not good: a $2.8 billion loss that the bank’s tough CEO Dick Fuld called “totally unacceptable.” Do you think?
One of my co-workers, economist Jennifer Kuan at the Stanford Institute for Economic Policy Research
, suggested to me the other day that one explanation for an attack on a bank might be whether or not it is up front with investors that it is in trouble. Possibly, for example, Bear Stearns was not as forthcoming as it should have been about its mounting losses and so others on Wall Street were not willing to back them up when things got really difficult.
Could the same be happening to Lehman now?
Lehman Posts $2.8 Billion Loss – WSJ.com
A perfect kick-off post for this new blog. Today’s New York Times posts the “staggering numbers” – RED numbers – that are hitting Wall Street now in the wake of the credit sector meltdown over the last year. At a minimum the numbers show why timing is everything if you are an investor.
(The picture at the left may be a bit of an overreaction. It shows the aftermath of the infamous bombing of Wall Street in 1920. Thirty were killed.)
In the words of the Times:
“The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.”
But now? Well since last July more than 100 billion of those profits have vanished. That’s just here in the US! Globally, the total is $380 billion.
What is critical in the story, however, is the conclusion that the models used by big banks are still problematic. These models rely heavily on historical data. But as they say, Garbage In, Garbage Out – if you don’t have historical data that can track potential future events, the models are pretty worthless. Hence, the continued use in the words of the Times of “giant erasers” to write down the value of banks’ loans and investments.
Restructuring and regulation of the industry is underway.
Nearly Half of Wall St. Bank Profits Are Gone – NYTimes.com