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business newsPrepare for Lehman Brothers Part 2
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MoneyShow.com Sep 15, 2011 11:30 am
Three years ago, Lehman collapsed. Now, a new Lehman-like financial crisis is coming -- this time involving the debt of governments and European banks.
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That’s the view of a sober-minded Canadian strategist and money manager, John Stephenson, senior vice president of First Asset Management in Toronto. He predicts a new, Lehman-like financial crisis in the next six to 12 months, only this time involving the debt of governments and European banks.
He thinks it could drive stocks much lower, to levels at which they traded, well, just after the collapse of Lehman and AIG (AIG) in fall 2008.
“When it happens, it’s going to happen fast, and it’s going to be ugly and very deep,” he told me in a telephone interview, adding that he expects it to be “worse than the last crisis. Last time around, the governments had some room to bail people out. They don’t have that capacity [now].”
Stephenson isn’t well-known in the States, but I find him smart and credible. He’s been named one of the 50 best money managers in Canada and is steeped in Toronto’s conservative Bay Street culture.
Other famous investors agree with him. Investing giant George Soros, for one, said: “This crisis has the potential to be a lot worse than Lehman Brothers.” (And MoneyShow’s Jim Jubak also discussed it earlier this week.)
Taking a page from the work of Carmen Reinhart and Kenneth Rogoff, Stephenson says the financial crisis first hit the private sector and then moved to the public arena, as governments bailed out the banks to “save” the economy.
"A buildup in government debt has been a defining characteristic of the aftermath of banking crises for over a century," wrote Reinhart and Rogoff in their 2011 paper A Decade of Debt. “For the countries with systemic financial crises and/or sovereign debt problems, average debt levels are up by about 134%.”
That puts a huge burden on taxpayers, and makes the creditworthiness of sovereign debt shakier. “You’ve had a transfer of risk to governments,” Stephenson said. “The average citizen wonders why they’re going to have to suffer for someone else’s mistake.”
Indeed they do…especially Germans and other solid northern Europeans who balk at helping countries like Greece, which they see as freeloaders.
“Politically, the Germans have no interest in bailing people out,” Stephenson said. That puts elected officials like Chancellor Angela Merkel on the spot.
Chancellor Merkel is committed to keeping the eurozone together, but she’s very unpopular and her ruling coalition is strained to the breaking point. So, she and other European leaders have consistently been behind the curve, favoring one short-term fix after another rather than telling their electorates what they really think needs to be done.
(She and French President Nicolas Sarkozy just announced yet another deal they say will keep Greece from defaulting, causing markets to rally.)
In retrospect, the much-reviled TARP here in the US, and the subsequent stress tests, did put our banks in, well, less-bad shape than their European counterparts.
“The US has been more proactive,” Stephenson told me. "In 2008-2009, US banks started issuing equity like it was going out of style. European banks never took the opportunity to recapitalize.”
In fact, the euro made things worse for Europe, because it allowed countries like Greece and Portugal to issue debt at extremely low rates, which European banks then bought to squeeze out some extra yield while taking on the low risks of a sovereign credit.
Or so they thought. To this day, said Stephenson, the banks haven’t written down a penny of it.
No positions in stocks mentioned.
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