My Dad told me that one day, "There's no such thing as a free lunch."
In essence, what he was trying to teach me is that every action in life has its consequences.
No action is performed without a re-action. This theory came home to roost today, as one of Wall Street's oldest and most respected financial firms collapsed under a cloud of bad debt.
In a matter of months, the value of Lehman Brother's stock crashed over 95 percent.
To put that in perspective, in January 2008 a single share was valued at a little over $60. Today, it was valued at 21 cents. Yes, you read that correctly.
Why did this happen? Billions of dollars invested in mortgage debt. As the value of assets owned through debt by Lehman plummeted, all their invested fortunes simply vanished into thin air. Gone. Money on paper simply erased. The years of lending gobs of cheap money to people who could not afford it in the first place had finally caught up. As the whole mortgage industry, stitched up with yards of ARM's and bad debt has tumbled, Lehman Brothers was dragged along into the pit.
Its total outstanding debts are a total of $786 Billion, and the value of its assets are: $639 billion.
That is a gap of $147 Billion.
The math is quite simple. They now owe a lot more money than they are worth. Usually when one finds yourself in this situation, you get a loan to make up the difference until you can put yourself into positive territory. Herein lies the problem. No one is willing to fork out $147 billion dollars in loans. Not any banks, and this time not the government.
So do I feel sorry for them? No.
Wall Street has been treated like a casino the past few years. You can only engage in risky, unsound, business practice for so long until it catches up to you. When may I ask did someone in upper managment raise the red flag? This is a company that has been in existence for over 100 years. Would the founders Emanuel and Mayer Lehman have approved of this? Thankfully, the american taxpayer will not have to pay in to bail them out. Enough is enough. Enough of the greed. Enough of the credit card mentality.
As I read online today from one financial advisor - "goodbye Lehman, it was nice knowing you"
Looks like lunch time is over.
Sean.