Lehman Brothers

"If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don't have losers in our economic life, then there are no winners either. If we don't resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point." - Chris Whalen

• Eric Dinallo joins the fight: Split the financial supermarkets to make them safe (FT, h/t Miles)
• Report on bailouts says treasury misled public (NYT) and continues doing so every single day
• Lying treasury to announce BlackRock, Wellington and AllianceBernstein have raised $1.9 billion for PPIP (Bloomberg)
• Larry Summers and the White House economic team (New Yorker)
• Government Sachs lets one well run dry (Reuters)
• CIT's Peek about to join Lewis on the unemployment line (Bloomberg)

• All you ever wanted to know about Paolo Pellegrini, and didn't realize you should ask (Bloomberg)
• Nakagawa, Japan's former finance minister, who resigned after drunk incident at G7, found dead (FT)
• Simon Johnson: A short question for senior officials of the New York Fed (Baseline Scenario, h/t Pete)
• Is the mortgage REIT IPO/follow on bubble finally over? (Bloomberg)
• Roubini says stocks have risen "too much, too soon, too fast" (Bloomberg and RGE)
• Stiglitz deflation threat pushes Fed to stay at zero (Bloomberg)
• From Black Scholes to Black Holes (Dharma Joint)

Want to know why the giant, insolvent banks aren't being broken up?

Here's why...

Reporters at the WSJ have uncovered something very intriguing while they were combing through the billing records of Jenner and Block, whose chairman, Anton Valukas is currently moonlighting as the examiner of the Lehman Bankruptcy Case. In J&B's August fee statement, the firm discloses information that as part of its estate recoupment process, it has been contemplating suing none other than the Federal Reserve.

There probably is a lot of back slapping going around at the Fed and Treasury Department these days as the markets have risen on a flood of liquidity.

• Asian stocks decline on Nomura’s share sale, US housing data.
• China’s stocks fell, with Shanghai Composite set for its biggest weekly loss in 6 weeks.
• Dollar, Yen rise on speculation G-20 will act to curb riskier investments.
• Fed regulators say banks, other institutions face $53B in losses on loans.
• Freddie Mac announces $1B reopening of 2.125% three-year Reference Notes security.
• G-20 poised to crack down on bankers' pay, increase policy coordination.

You may recall that the crude spread gap opened just a few weeks after Lehman Brothers failed and AIG required a capital infusion. During the super contago phase of late 2008 and early 2009, the spread was so ridiculously wide that the rate of return was close to 70% at one point of time.
Those few who had a role in taking advantage of the super contango ended up boosting the spot oil price back to a more normal relationship to the outer months.

It's not just rating agencies that are at the crossroads, but pension funds are at the crossroads too. We need a governance overhaul that introduces more transparency and a compensation system that rewards risk-adjusted returns. The status quo at rating agencies and pension funds is totally unacceptable.

A few brave economists believe fiscal and monetary stimulus, as well as improved productivity, will help the United States bounce back stronger than anticipated, helping it to leap hurdles such as high unemployment, a soaring budget deficit and a beleaguered consumer.

Vicis Capital, a $2.9 billion hedge fund started by Lehman trader John Succo has halt client withdrawals after it received $550 million in September redemption request. The firm has already paid down $2.7 billion in comparable redemptions since October. The asset manager's Vicis Capital Fund, a $2.5 billion volatility fund, has been the primary culprit for LP dissatisfaction after losing 12% YTD, having returned 14% in the last year.

Headlines, as always, from the highly entertaining News From 1930 blog. And all, very appropriate for our blow by blow recreation of the Great Depression, courtesy of the historically predisposed Chairman.

• California's financial depression: unemployment and underemployment rate at Great Depression levels. 23 percent unemployment for biggest state in the nation. California will not see housing peak until 2030 (Dr Housing Bubble)
• Jim Grant: Ringing the bell at the top (Financial Armageddon)
• Peter Schiff: Lehman Brothers revisited (TheStreet)
• FHA faces money squeeze after insisting it needs no new money (AP)
• 2 Nobel economists confirm that credit is not credted out of excess reserves (Washington's Blog)

Are Teachers and other pension funds flying off course? Only time will tell but they sure are putting lots of eggs in the infrastructure basket. As with any investment, the benchmark should reflect the beta, credit risk and liquidity risk of the underlying investments. Infrastructure is a long-term asset class but it isn't free of risks and the benchmark must reflect this.

"As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well. The Guarantee Program for Money Market Funds served its purpose of adding stability to the money market mutual fund industry during market disruptions last fall and ultimately delivered a healthy return to taxpayers."