Lehman demise could end speculative raid on taxpayers
Letting Lehman Brothers fail is the lesser of two evils facing U.S. financial regulators trying to stop a textbook trading ploy dead in its tracks - a private sector raid on the public purse.
Close Brothers profit drop in "challenging" marketU.S. authorities have already been forced to pledge some $230 billion (127 billion pounds) this year to restore calm in the wake of speculative attacks on investment bank Bear Stearns BSC. and Federal mortgage agencies Fannie Mae and Freddie Mac.
Market veterans say the classic trade was set to be repeated in the weeks ahead if any form of official assistance had been involved in a deal to save or restructure Lehman, the 158-year old finance house which fell victim to traders aggressively selling its stock in a bid to book a slice of profit supplied, or ultimately guaranteed, by the government.
"It's the taxpayer versus the speculator," Paul Markowski, president of New York investment advisory firm Global Research Partners, told Reuters.
"The speculator doesn't always win, but clearly in this case the speculator has increased the bill of the U.S. taxpayer."
Speculators have a track record in correctly scenting the willingness of official institutions to commit public funds to try to sustain an ultimately unsustainable situation.
Friday's 31 percent plunge in the share price of U.S. insurer American International Group, which has been hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, suggests traders were already on the hunt for their next victim after Lehman.
So too does a rapidly stitched together weekend deal that will see Bank of America Corp buy Merrill Lynch & Co Inc, the world's largest financial brokerage that has written down the value of its assets by more than $40 billion over the last year.
Hedge fund manager George Soros cemented his reputation by famously "breaking the Bank of England" in 1992, forcing the central bank to spend billions to defend the pound's place in the European Union's exchange rate mechanism before the British government withdrew sterling from the scheme.
Currency traders employed similar tactics in Asia in 1997, scenting blood when they realised huge foreign currency borrowings were incompatible with the region's fixed and quasi-fixed exchange rates.
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