Is This Lehman Again? No, But It Sure Feels Like It
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?
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 Thursdaywas no, this is not a repeat of the scenario that ultimately sent the economy into a sharp recession 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 .
"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 , Procter & Gamble, Johnson and Johnson and Kinder Morgan. He also likes real estate investment trusts, which have easily outperformed stocks this year.
That 2008 Feeling Again
Despite the proliferation of warnings not to compare now with 2008, Rosenberg drew parallels between the two scenarios.
In addition to the confidence issues, he said policy response then—as now—was inadequate, with Washington prescribing a temporary tax rebate to solve the economy's woes. Also, he said equity funds saw a $23.5 billion net outflow last week, the most since Oct. 15, 2008, a month after Lehman blew up. And the 25 percent drop in financial stocks almost always presages a recession, he said.
Worse, the Feddoes not now, as it did then, have the option of cutting interest rates to goose the economy.
The central bank has cut its funds rate to near zero and has indicated little inclination to offer other stimulative measure, such as more quantitative easing.
Rising inflation pressures further make additional direct QE unlikely, though the Fed did take the unprecedented step last week to announce that it would keep its zero interest-rate policy intact for at least another two years.
"The Fed now has no such cannon, nor does it even have a pistol—we are down to unconventional firecrackers," Rosenberg said. "And even with these, the Fed has been doing little more than alter the wording in its press statement."
The Fed, then, is not being looked on as a market savior, even with Chairman Ben Bernanke's critical speech Aug. 26 at Jackson Hole, Wyo. looming.
That also differs from 2008, when all eyes were on the central bank, which launched the Troubled Asset Relief Program to address bank liquidity and, later, two rounds of QE in an effort to raise asset prices and boost risk-taking.
"I'd love to see if we could get through this without the Fed having to intervene," said James Paulsen, chief market strategist at Wells Capital Management in Minneapolis. "We created a terrible moral hazard since TARP. When the markets fall, the politicians jump."
It's not just the markets and debt, though: Thursday also brought another round of bad economic news, including a manufacturing reading from the Philadelphia Fedclearly in recession territory.
"If we recess, it will be because we fear-freeze," Paulsen said. "That is like 2008. Confidence can go so bad that we fear-freeze ourselves into recession. It certainly won't be because of an inverted yield curve or too much tightening."
As for stocks and a performance similar to 2008, the sentiment persisted that while there are similarities, there also are some key differences.
"A lot of people are asking, is this 2008 and Lehman all over again? I think it's not," Rob Morgan, chief investment strategist at Fulcrum Securities in McLean, Va., told CNBC. "The big difference is back in 2008 these banks had subprime debt securities that we couldn't even value. Today, American banks and European banks, obviously they've got their problems. But at least we know what they are."