Please Angela Merkel, Let Greece Fail!!

We have bailout redux all over again.  This time it's Greece.  The international community, mostly the IMF and Europe keep trying to get someone else to take their ugly Greek sister to the dance.  There have been many articles saying that we can't let Greece fail because the effects would be much worse than what happened after Lehman. 

Many in the financial world, and even many of my closest colleagues say that the collapse of Lehman Brothers was a big mistake.

For me, it was a rare moment of principle over politics.  OK, I know that it happened so fast that governments didn't even have time to orchestrate a bailout.  But results matter, and Lehman Brothers deserved to fail.

Lehman Brothers as Too Big To Fail

Many believe that some companies are so big and so interconnected that one company could cause huge losses and ultimate failure at their counterparties.  If that were ever a case for too big to fail, Lehman would be it.  They were a big player in the Mortgage Backed Securities space, and wrote derivatives and sold credit protection just like AIG. 

Let's go over the result of the Lehman liquidation, via wikipedia
  • Barclays assumed most of the core trading business of Lehman including the responsibility for 9,000 employees.  
  • Barclays also assumed much of their trading and derivatives liabilities.
  • Bain Capital and Hellman and Friedman took over their private equity interest.
  • A number of different companies assumed the assets and businesses in South America, London, Canada, etc.  
There were layoffs, many of them dramatic, but there were also huge massive layoffs at AIG.  And, if you were absorbed and working for the new parent, you were likely in a much better position than someone working for a zombie firm like GMAC.  But on the whole, the dramatic, end of the Earth and capitalism talk did not materialize.
  • Number of Lehman counterparties that also failed: Zero. 
  • Taxpayer dollars spent to bailout Lehman: Zero
Think of it another way.  The US taxpayer saved $150BB dollars by not bailing out Lehman.  Lehman would have been AIG on crack cocaine.

The market fell in a panic as it should have.   The world woke up and said, we are so f***ed.  Lehman failure gave the world markets a slap in the face that they needed to understand the transformation that was happening as a result.  See the S&P 500 during the financial crisis: 


What would happen? 

But, as much as the people around the world abhor the bailout, there is now talk of bailing out Greece, which will for sure default in the next two weeks without one.  What would happen if Greece fails?
  • Cost of Funds rises prohibitively up to 25% or more
  • Greece forced out of the Eurozone
  • Debt gets rescheduled and much of it paid
  • Public Spending gets cut by the amount that it needs to
  • Mostly public employees get laid off
  • Strikes in Athens and with spots of violence as government changes
  • Greece becomes the cheapest spot in the world to get a tan
More on the Greece Lehman parrallel via Garp:
"We are becoming increasingly concerned that the crisis in Greece could pose as big a risk to the global economy and financial markets as the collapse of Lehman Brothers did in September 2008," the advisory firm Capital Economics wrote in a note to clients. "The fact that a Greek default is even considered possible is a fundamental shock to confidence in the world order."

The prospect of a bigger rescue was enough to mute the market panic Wednesday. But if Greece cannot secure an international rescue, the nation could be two weeks away from a default -- or an admission to the government's creditors that it can't repay borrowed funds. By May 19, the country must refinance more than $11 billion in debt.

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