The Upside of a Lehman Crash

Is "Lehman Crashing Again", in the words of Alea's headline? The Lehman stock price reminds me of Zeno's arrow: first it falls by half, and then by half again, and then by half again -- and each time it's "crashing". Quite impressive, really: a company can easily crash two or three times a week, at this rate.

Looking to the CDS rather than the increasingly-meaningless equity, John Jansen reports that "Lehman Brothers are wide but real at 750/800". I think that's a more useful datapoint. The equity is already at zero (plus a little something for option value); if it falls further that makes little difference to the debt. And if you believe Michael Lewis, the moral hazard trade is still going strong:

This is one of the many unintended little side effects of the government bailout of Bear Stearns Cos.: to greatly reduce the interest of the people who do business with Lehman Brothers in the survival of Lehman Brothers...
After all, the Federal Reserve will give them their money back, re-insure their credit defaults, take another pile of these distressed assets out of the market.

We'll see: I have a feeling that the NY Fed won't be able to easily find a buyer for Lehman this time around, and that it won't feel any great need to bail out the bank itself. A Lehman default would send shock waves through the financial system, to be sure -- but if it happens slowly and with a lot of advance warning, those shock waves might not be substantially larger than some of the other events which Wall Street has weathered over the past 14 months.

Indeed, in a case of "that which doesn't kill me makes me stronger", a Lehman default could actually be a good thing for the markets as a whole. If Lehman defaulted and the sun still rose the following morning, the single greatest fear of the markets -- systemic meltdown following the collapse of a major intermediary -- would be shown to be overblown. And that could trigger a major relief rally in credit.