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FBN’s Charlie Gasparino and former Lehman Bros. VP Larry McDonald reflect on the 3rd anniversary of the Lehman Brothers collapse and how the U.S. ec...
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Three years ago this week in Lehman Brothers collapsed leaving thousands of people out of work and setting off the country's financial meltdown but could it.
Have been presented joining me now former Lehman Brothers vice president current senior director at new wedge USA.
LLC and author of a colossal failure of common sense the inside story the collapse of Lehman Brothers.
Though -- introduction to Larry McDonnell then.
Shorter production for my friend -- Charlie Gasparino of Fox Business of course gentlemen.
Larry I mean this.
This change your life you were you were minding your business -- to trader -- In people are forget.
As the firm teetered and then finally crashed.
I thought about writing my book and to went to my wife that -- -- -- that I think.
If we sell a million books will break even on our Lehman stock with.
-- but you and that you both wrote books I.
-- -- was in the words funny I pitched my book earlier in the year it was kind of bizarre because what I did was I basically said.
All these big firms were looking for sovereign wealth capital the sovereign wealth funds to kuwaitis and all -- the Chinese they own huge pieces of US firms I thought that was a great story.
I sold before that book before that the collapse of Bear Stearns.
And then all of a sudden you know the world content -- -- and started -- would -- very interesting question I think it.
A -- one could Lehman's collapse in prevented.
And I think equation is should it have been for yes and I say no I agree with you I I think this was a firm that took way outsiders.
You know -- I talk to people at Bear Stearns I I think Haitian immigrant that He went and you know and it kind of was -- remember they sold Bear Stearns through some sort of a deal with with JPMorgan with a Federal Reserve in the US government US patent and picked up a lot backs up -- all the losses.
They did do that the Lehman but Lehman was given months to prepare.
The run -- best as we say -- -- these investors pulling out -- not leave it live lending money which all the big Wall Street firms needed constant loans because they were leveraged 31.
Over at Bear Stearns at all that was compressed in about a week they had no real time to react to it but then but -- Lehman Brothers had months and months and months and months and they ended and the management there which I think your book points out.
Was so feckless and ineffective it just it screwed it up.
Well Dick Fuld has had to stand for a long time I mean that that this that denial thing.
So steps forward three years.
It has what change are are are the financial markets in a better shape today we've got more capital that they all had to raise.
Are they better.
Let the testing -- this is a little complicated development think it's slow.
Essentially Lehman's balance -- had forty billion of commercial and residential real estate that took it down.
But believe it or not most of Lehman's balance sheet was the government bonds so if you look at banks.
They do have speculative assets but most banks have the line in part of the -- government -- -- A fast towards its 2011.
You have the European banks did the -- -- better shape globally.
They've -- less leverage get better quality assets nowhere near as much sub prime toxic assets but the problem is the highest quality part.
All of the balance sheet which is supposed to be the government bonds if you mark goes down by ten point three and five points.
To put the it the the effect on the -- the capital debate so power.
In this is to cut this is the concern is because if you own government -- -- what we've put the odds are often that.
Yeah but but that's nice that's nice now but what if we get this inflation to keep moving up and interest rates start going up and then the value of those bonds goes.
Yeah like I what do you have I think what I -- I got -- by any measure the banks are much much much better capitalized now.
Does that what does that mean is that capital.
Yes -- yeah yeah that it would that we're not going to 2008 now here's the problem that that we have right now I would bank system.
We have assets financial assets.
Bomb basically concentrated instead of light you know eight banks.
You know we have among 443.
It's a lot less we have three mega banks.
JPMorgan Chase Citigroup.
And Bank of America almost for a bank market the most distressed had all the and now and we too big to fail now if you have.
That much wealth that much finance -- it will deposits and everything comes from on three players.
That is a recipe down the road from massive disaster because they are we to be was -- Bank of America in of itself.
And now controls stuff from Merrill which means of putting the customer deposit it controls the brokerage accounts -- equal these people -- -- -- you let a bank like this implode.
Now now we find out from from Brian won hands CU over Bank of America.
That He got Warren Buffett's five billion dollars at 6% just like going to uncle Lou we that's a that's an uncle -- -- paying way above the only reason you -- way above his tissue.
Are hurting and you can't get the money someplace -- So if you look at the last three weeks the reason for this incredible.
Almost unprecedented market volatility we've had five moves in the last six weeks -- a 5% to 8% and the SP 500.
-- from 2003 to 2007 we didn't have one move greater than 8% so we've had this incredible place because what's happening in Europe.
Italy for example has one point nine trillion.
Of covered bonds outstanding.
Spain say 6700 billion so those those countries have so many government bonds and so many bank balance sheets over there but and -- not the US.
Greece is not but even it's the funding of these other big and it should be -- should -- -- flight to quality to US -- -- see if Greece defaults are we going to you on.
-- received an account gonna have we're gonna have some hit we had well we we've been putting another out to customers that they knew it the last couple weeks.
What we think it's nothing in the throes right now is that.
The Federal Reserve potentially in the ECB are joining up.
In their does I think the beginning already bailout Europe this the beginning stages with well I think TARP to you have Larry -- the of the BlackRock -- What one of these -- sort of major players in the drama that unfolded three years ago with the financial collapse of -- in Brothers.
He's gone on record saying it is going to be a TARP like they'll start out that does that mean we pay I don't think so but I think the Fed.
Is -- we know it involved in any sort of global.
The total will never finger and that applies from -- maybe we should.
Maybe we should Charlie Gasparino in builder McDonnell think a -- very much -- -- anniversary to thank you yeah.
Irregular heart yeah.
