Originally posted by gunnut
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They had to let Lehman fail after they nationalized Fannie Mae and Freddie Mac (which dwarf Lehman). I've been following the American financial channel CNBC on this and the general opinion of what the banks that were thinking of buying Lehman wanted "was the deal J.P. Morgan got to buy Bear Stearns, but they were not going to get it." The two major companies that considered buying, Barclays of Britain and Bank of America, called the Fed's and the Treasury's bluff, but it turned out to not be a bluff.
The general consensus today on CNBC was insurer "AIG is too large to fail" with a trillion-dollar balance sheet all over the world. The New York state government is arranging for them to borrow $20 billion from themselves, and they have to get $20 billion from somewhere else to avoid a downgrade which will force other companies to do some hand-wringing.
A lot of people don't know what's going to happen. You have to realize that the Wall Street investment banks we're pretty much the top rung of the economy for a significant period of time. We started this year with 5. Bear Stearns ceased to exist in March, and Lehman Brothers went bankrupt and Merrill Lynch got bought for $50 billion all in the same weekend. So what was 5 has become 2 and it's looking likely it could become 0 as the remaining two, Goldman Sachs (the elite of the elite) and Morgan Stanley, may have to find buyers like Merrill Lynch did.
The gravity of the situation should not be understated: What's going on now is the largest transfer of wealth you will see for at least a generation. That of course means insecurity, uncertainness, but also chances to buy for those with the balls to try. The practical effects so far is higher unemployment (up to 6.1% last month, and that's with hedonics designed to lower it) and it's going to be a lot harder for the typical citizen to get a large loan.
For those that shrug this off, this is exactly how Britain lost their sole position of power in the 1920s and 1930s, which eventually allowed the U.S. to take it, when the British lost their financial authority over the world, and in capitalist democracies the fate of a military follows the fate of its finances. So we would be wise to tread carefully.
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