Only one year ago, the five big investment banks, worth hundreds of billions of dollars, commanded and gave orders to governments all over the world on how to conduct economic policies. Now with the collapse of Lehman’s, three of them have collapsed.
By Per-Ã…ke Westerlund, CWI

Last week’s ‘Black Sunday’ will have huge and long-lasting repercussions globally. “This is an earth-shattering event, this is like a tectonic plate shifting event” said Thomas Priore, chief executive of Institutional Credit Partners, a hedge fund active in credit markets. “This is welcome back to Black Monday” (International Herald Tribune, 15 September, in a reference to the 1987 crash on Wall Street).

This is the worst financial crisis since 1929 and the following years. As in the early 1930s, every time politicians and pundits claim it can’t get worse, we see another twist of the vicious circle. Five months ago, after the US central bank, the Federal Reserve, staged a rescue operation for Bear Stearns – the first of the big five to go under – Lehman Brothers boss Richard Fuld declared, “the worst is behind us” regarding the credit crunch.

Lehman Brothers is major institution with almost 26,000 employees in 61 offices globally. Its yearly balance sheet had reached three quarters of a trillion US dollars, $748 billion. Like other investment banks, its role was as a dealer of financial services. Lehman was originally mainly working with big institutions. Later, according to Bloomberg News, Lehman took a “central role in the over-the-counter derivatives markets”, a 450 trillion-dollar-market that has “never before seen a major financial counterparty fail to honor its obligations”. The repercussions within this market are yet to be seen.

Stay calm

Over the weekend, the White House and Federal Reserve attempted a new tactic. After the Bear Stearns deal, and the nationalisation of Fannie Mae and Freddie Mac, they would prefer not to be seen as rescuing all financial institutions. In “frantic around-the-clock negotiations” (Financial Times), “the Federal Reserve of New York called together the leaders of most major financial firms in an effort to get them to act collectively to stem any possible panic” (International Herald Tribune).

However, “The firms, worried about their own capital, balked at doing so, though in the end they may take on some of the risk as Lehman’s investments are unwound”. In other words, they were extremely afraid for their own future and had lost all their previous overconfidence. This is also reminiscent of talks during the 1929 crash and afterwards. Capitalism is a system built on the principle: everyone for himself. In every financial crash, ordinary people are told to stay calm, while the capitalists are running to get out of collapsing and overextended markets!

Without any guarantees from Washington, the potential buyers of Lehman – Barclays Bank and Bank of America – both left the negotiations. In Barclays’ case, the British Financial Services Authority, seems to have argued against a deal. Instead, Bank of America bought Merrill Lynch. The latter was severely damaged after losses of $52 billion over the last year. When Lehman Brothers lost 50 percent of its remaining stock market value on Thursday and Friday, Merrill Lynch was also affected. The present deal, worth $44 billion, is less than a third of Merrill’s value at its peak.

Will the dramatic “Black Sunday” signal a new course from the US state, from rescue operations to letting go? That is highly unlikely. A wave of company failures could now follow. New big institutions are already queuing up for rescue. They include the giant insurer, American International Group, and the largest savings and loans company, Washington Mutual.

The salvage operations for Bear Stearns, Fannie and Freddie were not staged to save these companies in the first place. These actions were to stop the entire financial system from collapsing. Facing a major meltdown, the Fed and the Treasury will have no choice but to intervene again. For example, AIG is already in talks with the Fed over new cash.

Already this weekend, credit rules have been changed again to loosen credit conditions for banks and make it a lot easier for financial companies to borrow. Even Bank of America’s purchase of Merrill Lynch involves bending the rules over capital reserves, without the state in this case objecting.

At the same time, ten big global banks have agreed to pool a huge $70 billion fund as a safety net. Any of them could borrow a third of the amount when in crisis. This shows their fear, but at the same time it’s no real solution, more of a PR manoeuvre to reassure investors and stave off more panic. With further turbulence, the banks will not be able to act collectively, as was shown in New York this weekend.

Engines in reverse

At present, there is no institution with an overview or insight into the real state of the credit business in the US or globally. This fact alone, increases the pessimism and panic among the speculators, pointing towards a deeper and longer crisis. Kenneth Rogoff, former chief economist at the International Monetary Fund, believed in August that the current crisis had gone half-way towards bottom.

Bloomberg news summarised the collapse of the heroes of capitalist globalisation: “The engines that powered record growth in the financial industry over the last decade – cheap credit and surging property values – have been thrust into reverse. Companies that once thrived on making real estate loans and holding assets bought with borrowed money are now under siege, giving the upper hand to those less reliant on leverage and holding the fewest assets tied to property.”

The facts point towards a deepening crisis in the US. Construction permits continue to fall, down 17.7 percent in July. Building of family homes was down 32.4 per cent. At the same time, producer prices increased twice as much as expected. In September, employment fell by 84,000 people and unemployment rose to 6.1 per cent. The short-term effect of the state packages to stimulate consumption in the spring now seems to be over.

Repercussions from “Black Sunday” are only at the very beginning. Most stock markets in Asia are closed for holidays, but in Europe shares were down by more than 3 per cent in the first hour of Monday’s trade.

The financial crisis is a humiliating defeat for neo-liberalism and capitalism. The capitalist speculators were given free hands and they completely failed. Even Martin Wolf in the Financial Times says that the Freddie-Fannie deal can “spare us homilies on the sacred role of free financial markets for a long while”.

States have been forced to intervene in order to save the capitalists. It’s up to a fighting worker’s movement and genuine socialist parties to put forward a programme that not just ends the capitalist propaganda, but puts an end to the system itself.