True 'Lehman Moments' Must Clear These Hurdles
Ever since the demise of Lehman Brothers in 2008, the failed bank's name is evoked whenever a company, industry or market gets into difficulties. Google the words "Volkswagen Lehman Moment" and you'll generate 357,000 results in 0.55 seconds. Do the same for "Glencore Lehman Moment," and the search engine will deliver 144,000 items in 0.49 seconds. So I propose applying the following criteria to judge whether the label is warranted the next time there's a financial car crash:
It isn't a Lehman Moment if people are calling it one.
The very fact that we can discuss Volkswagen and Glencore as potential Lehman Moments proves that they don't qualify. As well as killing its victim, the disaster has to be swift and unanticipated. It can't be Wile E. Coyote dashing off the cliff and levitating for a while until he looks down; only "here today, gone tomorrow" events count. Volkswagen has slowed production, but its 600,000 workers still have jobs; Glencore's travails were evident to anyone who bothered to look at a chart of commodity prices. Those images of shell-shocked Lehman employees carting boxes of belongings out of the building won't be repeated.
It isn't a Lehman Moment unless somewhere in Germany there is a Landesbank up to its neck in trouble.
The technical financial term is a "stuffee" -- that special customer who will buy anything and everything their investment bank salesperson waves under their nose. Talk to any bank salesperson, and they'll confirm that the name of that special customer almost always ends with the word "Landesbank," with the result that these banks have an incredible track record of being on the wrong side of every bad trade. When Wall Street was peddling dodgy mortgage bonds, the Landesbanks were eager buyers -- requiring a bailout that cost the German government 97 billion euros ($108 billion) in state aid and guarantees. So a true Lehman Moment must inflict pain on one of Germany's state-owned regional banks. On that score, you have to bet that Volkswagen is almost definitely eligible.
It isn't a Lehman Moment if the endangered firm has a friend in its hour of need.
There's a coterie of financial professionals, most of whom used to work at Lehman, who remain convinced that the U.S. authorities allowed the firm to go bust as revenge for Lehman's refusal to participate in Wall Street's 1998 bailout of Long-Term Capital Management. On Sept. 12, 2008, the U.S. Treasury and the Federal Reserve summoned bankers, including the CEOs of Citigroup, JPMorgan Chase and Goldman Sachs, to a meeting, urging them to back Lehman in its hour of need. Three days later, it became the biggest bankruptcy in U.S. history.
So, when the crunch comes, the victim of a true Lehman Moment must find itself friendless. Volkswagen is too important to the city of Wolfsburg for that; if push came to shove, the German government would probably be obliged to take the company into care. It's harder to see who'd be there for Glencore.
It isn't a Lehman Moment if the CEO isn't issuing denials and reassurances, or blaming speculators.
Lehman shares dropped by 46 percent on Sept. 11, 2008, slashing its market capitalization to less than $3 billion; it had been worth more than $45 billion just 19 months earlier. "Our core business and our strategy are sound," Chief Executive Officer Richard Fuld had told investors in June. "With this franchise's strength and power, we can go it alone. I believe in the model." In the weeks prior to the collapse, Fuld had been calling his Wall Street peers, trying to find out who was spreading rumors about his firm's liquidity problems. His time would have been better spent finding a buyer for his bank while a sale was still possible.
Volkswagen moved swiftly to defenestrate its CEO, Martin Winkerkorn, once the world learned it had been cheating on emissions tests. Glencore CEO Ivan Glasenberg has maintained his silence even though his personal net worth has dropped to about $1.9 billion, down from $7.3 billion in July 2014. The company is tapping shareholders for $2.5 billion, shelving dividends and planning asset sales as part of a plan to reduce its debt by $10 billion in an acknowledgment that shareholders weren't happy with its balance sheet.
It isn't a Lehman Moment if it doesn't contaminate an entire industry.
The shock waves from the fall of Lehman are still rippling through investment banking in the shape of stricter regulation and more onerous capital requirements. Government efforts to stop financial firms from being too big to fail stem directly from its collapse. Glencore's woes have yet to prove that vertically integrated commodity companies, running the gamut from mining to speculating on prices in the futures market, are untenable. And while Volkswagen's debacle may sound the death knell for the diesel car engine, the revolution coming to the auto industry (electric power, self-driving vehicles, hire-don't-own) was on track well before the German carmaker got caught cheating.
So far, Lehman is still in a class of its own.
(Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent nonexecutive director at Glencore.)
(Corrects name of Glencore CEO in penultimate section.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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