- • The financial crisis has reached yet another high watermark with Lehman Brothers filing for chapter 11. In this paper we point to the key takeaways of the recent events and look at where the risks lie going forward. We also sum up our views on key financial markets.
- • Event risk is now high on the agenda again. With Lehman Brothers filing for chapter 11, it is clear to the market that the US authorities have drawn a line in the sand - no more bail-outs! The implication is that more large banks can go bust if they are not able to provide the necessary capital to compensate for losses. It is now in the hands of other banks to help their ailing peers to raise the necessary capital.
- • It was not all bad news over the weekend. The fact that Merrill Lynch was able to find a buyer proves that it is still possible to raise capital - as long as there is positive net worth in the company. The problem for Lehman was that it became insolvent and no one saw value in buying the company.
- • In the short term, all focus will be on whether AIG will survive or have to file for bankruptcy. Other drivers will be earnings reports from Goldman Sachs (due September 16) and Morgan Stanley (due September 17), the ability of other troubled companies to raise capital, and developments in the CDS market where contracts on Lehman Brothers now need to be settled.
- • We expect the crisis to continue to evolve with high volatility in all markets. Central banks could again come into play. Potential cuts from the Fed and Bank of England are back on the agenda and pressure will mount on the ECB to join in supporting the ailing world economy. Especially as lower oil prices should reduce inflation concerns.
