Seven years ago today, Lehman Brothers failed. But it is what took place just over two weeks prior that is of interest for the scope of this article.
On August 27, less than 20 days before the failure of Lehman, Morgan Stanley analyst Patrick Pinschmidt revised his forecast on Lehman's Q3 earnings from an 8 cent profit to a Q3 loss of $2.80 a share.
Patrick cautioned: "For the franchise and shares to turn the corner, we think management needs to announce a significant bulk asset sale or framework for investors to evaluate the structure or pricing of likely asset disposals."
Also he wasn't very far off when he said that "we believe a key question for investors is not the size of the writedown, but how remaining illiquid asset exposure squares with capital cushion."
And yet, despite his clear concerns about the longevity of Lehman, did the then-Morgan Stanley analyst cut his rating on Lehman? As Reuters reminds us, the answer was a resounding no:
"The analyst maintained his "overweight" rating on shares of Lehman and Goldman."
One month later Lehman did not exist, and Goldman would have followed into the abyss had it not been bailed out first by Buffett and then by the FDIC and the Fed.
Why is this episode relevant? After all virtually everyone was saying Lehman is fine and that there is no risk for the longevity of the bank, at least until the very end, when it was revealed that Goldman's alumnus at the US Treasury had decided to sacrifice Lehman (in the process eliminating Goldman's biggest fixed income trading competitor).
The answer can be found in Mr. Pinschmidt's bio:
Patrick Pinschmidt serves as the Deputy Assistant Secretary for the Financial Stability Oversight Council at the U.S. Department of Treasury. Pinschmidt also serves as the Executive Director of the Council. Prior to joining Treasury, he served as a Financial Markets Policy Advisor to the Congressional Oversight Panel on the Troubled Asset Relief Program (TARP). Previously, Pinschmidt was a sell-side equity research analyst for ten years covering financial institutions, most recently as the Senior Broker and Exchange Analyst at Morgan Stanley. Prior to joining Morgan Stanley, Pinschmidt was the Senior Online Broker and Market Structure Analyst at Merrill Lynch. Pinschmidt holds an MBA from Columbia University’s Graduate School of Business and a bachelor's degree in U.S. History and Diplomacy from Georgetown University’s School of Foreign Service.
In other words, Patrick is now one of the top-placed people in charge of the US Treasury's FSOC. Yes, the same person who 2 weeks before Lehman failed, had an "overweight" rating on the Lehman stock, is not in charge of financial stability.
Is there any doubt why nobody has any faith that without the perpetual backing of the central money printer, US capital markets can no longer exist?