Why Should I Care?: Lehman Brothers
Of all the days for your air conditioner to break.
Late, as usual, you weave past slower commuters, driven by the promise of a cool subway car - an icebox in an otherwise sweltering city.
As the train makes its way down the dirty tracks, fellow straphangers sway, bumping into you with alarming frequency. Craning your neck, you can barely make out the lucky few who managed to claim a seat: A construction worker with dusty boots and stained jeans, mouth agape and snoring soundly; a nurse in scrubs and sneakers.
How many bedpans would he change by the time you finished your second cup of coffee?
Then an odd combination: A janitor, nametag and all, chatting casually with a banker, his profession worn proudly on his pinstriped sleeve. What could these guys possibly have in common?
“Have you heard when they’ll make the announcement?”
“No. Nothing. Radio silence from the CEO.”
“You said it.” 
It’s easy to file the collapse of a major investment bank under “good riddance” - fitting comeuppance for some greedy traders who tore the moral fabric of this country in the name of their year-end bonus.
Why should anyone care if a few rich guys at Merrill Lynch (MER) lose their jobs because their firm made so many bad bets it had to sell itself to Bank of America (BAC) in a hastily thrown together weekend deal?
Even if you aren’t interested in doling out empathy for any of the 25,000 Lehman employees -- a precious number of whom were party to the reckless risk-taking that led to the firm’s demise -- viewing the turmoil on Wall Street as confined to the narrow streets of lower Manhattan is to misunderstand the vital role these financial institutions play in our economy.
Is there another Lehman Brothers out there?
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Consider the employees at Blowtorch, a startup movie studio that takes flyers on independent filmmakers. The company raised $50 million dollars late last year, a good chunk of which came from an unnamed hedge fund. It hired editors, graphic designers and countless other artistic types who couldn’t dissect a balance sheet or model a mortgage prepayment if their lives depended on it - and liked it that way.
Then, just this April, the hedge fund decided to pull out, leaving Blowtorch on the ropes. It laid off most of its new employees and scaled back considerably. The credit crunch, 3000 miles away from sunny California, claimed a group of victims who played no role whatsoever in its creation.
Fortress Investments (FIG), one of the first hedge funds to go public, is a major source of capital for Hollywood movie studios, which borrow tens of millions of dollars to churn out the summer blockbusters hoards of regular Americans watch each summer. So far Fortress has weathered the crisis better than most, but, were it to fall on hard times, there’s a good chance we’d have fewer big-ticket event films in the coming years.
Investment banks like Goldman Sachs (GS) and Morgan Stanley (MS) finance projects not just around the country, but around the world - everything from apartment buildings in China to cement factories in India. The company also employs tens of thousands of Americans, many of whom sweep floors, file files and have no idea about the firm’s strategic direction.
Leverage -- cheap leverage especially -- played a significant role in allowing these firms to get as big as they did, make as much money as they did. Imagine what you could accomplish if you were able to borrow $24 for every dollar in your bank account - much the way Lehman did. A correction is underway, and it’s far from over.
Many would argue this is a welcome development -- and it probably is -- but the road to healthy, economic expansion will be traversed in painful steps.
These firms will contract and rein in their massive economic exploits, the effects of which will ripple around the world and contribute to the ongoing economic slowdown. Jobs will be lost, expansion plans will be postponed and retirement accounts will suffer.
The banker and the janitor have more in common than you think.
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That would go against our ideology that the market must be 100% free.
In my opinion a small amount of regulation is necessary to prevent all out greed. And when one has all out greed many, many people get hurt.
Capitalism is all about creating value, and then selling it to the highest bidder. But there are always people looking for the easy way out, by fooling others.
It's human nature.
P.S.
I was talking with a retired friend over the weekend. And when I mentioned that the real value (in real dollars) of the stock market has not risen since 2000, he said "Oh, I hadn't thought of that". And the scary part is he has a PhD (in chemisty).
I have to admit, though, that the examples of why Lehman is such a loss are a little weird. In a more normal credit environment, should company like Blowtorch been able to raise $50 million? Should I really be boo-hooing over loss of funds to the movie industry?
To have an economy built on something real requires that money not be mal-invested. If Blowtorch is a good idea, there's nothing wrong with starting small and growing as business allows. Most of the big companies of today didn't start out with that kind of money.
You're right, the easy money of the credit boom certainly helped companies like Blowtorch raise buckets of money.
The idea isn't necessarily whether we should be have empathy for various people who lose their jobs. The point of the article was just to show that the ripple effects of the failure of a Wall Street firm is far and wide, that people seemingly disconnected can be effected.
Andrew
Matt
