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Is This Lehman Again? No, But It Sure Feels Like It
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CNBC.com Senior Writer
More than whether the European debt crisis is exploding, or if the US is re-entering a recession, or what the Federal Reserve's next move is, the markets want to know one thing: Is this another Lehman?
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Caroline Purser | Getty Images |
No word makes investors' blood run colder than "Lehman"—a reference, of course, to the Wall Street titan whose fall in September 2008 triggered the worst financial crisis since the Great Depression.
The short answer during the stock selloff Thursday was no, this is not a repeat of the scenario that ultimately sent the economy into a sharp recession
![[cnbc explains]](http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/_News/_CNBC_EXPLAINS/_IMAGES/CNBC_explains_icon1.gif)
and nearly capsized the entire global economy.
That, at least, was the view of market veterans of all stripes. On trading floors, though, the Lehman denials carried less weight, sending the major averages down as much as 4 percent just as a relief rally inspired hopes that perhaps the worst of the two-month slide was over.
"It isn't just today—this is going to happen many times over the next year," said Vern Hayden, president of Hayden Wealth Management in Westport, Conn. "A lot of it is emanating from Europe. It's the uncertainty, the slow growth, perhaps no growth...Money is being pulled out of equities quite rapidly because of that fear."
At its core the Lehman collapse stemmed from a crisis of confidence that in turn stemmed from an overload of toxic mortgage-related debt across the financial system.
A whisper campaign began that Lehman—and six months earlier, the equally venerable Bear Stearns—had so much subprime junk on its balance sheet that the firm could fail. Overnight lending partners, which were so critical to the company's success, ultimately refused to lend to Lehman.
The company failed, with systemic risk cascading through the economy.
Most market pros dismiss direct comparisons between now and then. U.S. banks are far better capitalized now than the massively overleveraged conditions in 2008, they argue.
Yet traders unloaded shares of European banks—and US financials—following news that a European bank borrowed $500 million from the European Central Bank, a disturbing signal that some institution somewhere was struggling to maintain adequate capital and fueling fears of contagion from the Euro zone's debt crisis
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"Central banks are not equipped to deal with solvency issues," David Rosenberg, economist and strategist at Gluskin Sheff, pointed out in his morning note. "Liquidity yes, but not solvency; and in the end, it was not so much liquidity but a complete loss of confidence over balance sheets that did Bear Stearns and Lehman in."
With that lesson still fresh in Wall Street's minds, risk became poison in the day's trading, with a selloff into weakness countering what many advisors consider wise strategy.
"You've got a risk-off trade and it's on steroids right now," Art Hogan, managing director at Lazard Capital Markets, told CNBC. "What we're having right now is panic, indiscriminate selling. History has proven these are not the days that you want to be selling on."
Hogan flatly declared "this is not 2008" and cautioned against joining the selling fray.
"These are the days you want to sit back and...make your wish list and look for those opportunities where stocks got washed out in this baby-out-with-the-bathwater environment," he said.
Hayden as well said investors should be buying, but only into safe names such as Colgate Palmolive [CL
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], Procter & Gamble [PG
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], Johnson and Johnson [JNJ
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] and Kinder Morgan [KMP
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]. He also likes real estate investment trusts, which have easily outperformed stocks this year.
Data is a real-time snapshot *Data is delayed at least 15 minutes
