Rebirth of England.

Chapter 604 The end of the road

Just when they thought everything was in place, McCarthy, head of the British Financial Services Authority, called Geithner.

McCarthy informed Geithner that the FSA still needed to assess whether Barclays had the right capital structure to take on the risk of acquiring Lehman Brothers.

After hanging up the phone, Geithner angrily rushed into Treasury Secretary Paulson's office and told Paulson and Cox that the British financial regulatory authorities might reject the deal.

Paulson immediately expressed disbelief.

He asked Cox to call McCarthy again to confirm.

After receiving the same reply, Paulson personally called British Chancellor of the Exchequer Darling, who also expressed his anxiety about the potential risks of the deal. Barclays' acquisition of Lehman Brothers would pose a threat to Britain's financial security - especially after Standard Chartered Bank had acquired Merrill Lynch.

After hanging up the phone, Paulson said harshly:

"We've been fooled by the British, they don't want to import our cancer!"

At this time, he also wanted to call Bush Jr. and have the President communicate with the British Prime Minister to see if there was any room for maneuver.

However, he seemed to have heard from the British Chancellor of the Exchequer that Prime Minister Brown was already aware of this matter, so he gave up his last fight.

"Why didn't we think of this before? This is fucking crazy."

Geithner yelled at the situation that had just occurred.

Paulson, Bernanke, Geithner and other Wall Street giants made a serious mistake. They did not consider at all that the British financial regulator would reject the deal and that there was no second alternative.

The situation at this moment can be said to be that everyone is in danger.

The subprime mortgage crisis intensified. Bear Stearns was acquired by JPMorgan Chase under the protection of the Federal Reserve. Fannie Mae and Freddie Mac were taken over by the Treasury Department.

Financial companies realized that Lehman Brothers' toxic assets were huge in scale and complex in relationships, which could trigger financial shocks and spread to themselves.

Everyone is looking for a way out for themselves.

The US government and Wall Street financial institutions did not want to do anything or take any responsibility for Lehman Brothers, so why would Britain take the initiative to get involved?
British Chancellor of the Exchequer Darling reminded Paulson on the phone:
"We need to determine what will be undertaken and what the American government is willing to do."

Paulson responded:
"Then there's nothing we can do."

Obviously, Wall Street and the British government will respond with the same attitude.

This day was a day of despair for Lehman.

After Sunday, Lehman Brothers will have little time left.

When Barclays' acquisition of Lehman Brothers failed, Paulson immediately realized that Lehman's bankruptcy was inevitable.

As a result, Paulson and Bernanke, who were originally Lehman's rescuers, immediately turned into "pullers".

They urgently urged Lehman Brothers' board of directors to file for bankruptcy as soon as possible to prevent the spread of bad market expectations.

At 7 a.m. on July 14, the board of directors of Lehman Brothers announced:
"Lehman Brothers Investment Company files for Chapter 11 bankruptcy protection from the federal government."

At this point, the 158-year-old Lehman Brothers had created the largest investment bank bankruptcy in American history.

The collapse of the company, which had a debt of $6130 billion, not only left more than 2 employees unemployed, but also triggered a chain reaction in the financial market. As soon as the stock market opened on Monday morning, the US stock market suffered a "Black Monday" - the Dow Jones Index recorded the largest single-day drop since the "9.11" incident, and global stock markets also collapsed.

The next day, the Asia-Pacific stock markets, including Japan, South Korea, Hong Kong, and Taiwan Province of China, all fell by more than 5%.

At this point, the global economy encountered the Lehman moment, and the subprime mortgage crisis eventually turned into a world-class financial tsunami.

……

“We are all witnessing history, aren’t we?”

At this time, Barron had returned to New York. He was in the office of the New York branch of DS Group on Wall Street. He looked at the flow of people downstairs, which seemed to be the same as usual, but always gave people a sense of oppression, and said lightly.

"This is indeed one of the few times in my career that I have witnessed such a tense moment, Your Highness."

Next to him was Davis, the president of Standard Chartered Bank, who said with emotion:

"The collapse of Lehman Brothers is just the beginning. I'm afraid there will be a bigger tsunami next."

"But the good news is that we are now standing on the shore. We just need to wait for the tide to go out and pick up the prey trapped on the beach."

Yes, after Lehman Brothers announced its bankruptcy, another good news came. That is, after taking over the previously bankrupt IndyMac Bank, the Federal Deposit Insurance Corporation (FDIC) is still negotiating with Standard Chartered Bank on its acquisition of part of IndyMac Bank's assets.

As Lehman Brothers declared bankruptcy, the other party may have finally realized that they needed to prepare to take over more bankrupt banks, so they quickly reached an agreement with Standard Chartered Bank.

Standard Chartered Bank will acquire all branches and some assets of IndyMac Bank for US$15 billion, on the condition that they take over the other party's employees.

These IndyMac Bank branches and assets will be merged with the Merrill Lynch Industrial Bank institutions and assets they acquired to become Standard Chartered Bank's commercial banking branch in the United States.

Affected by the bankruptcy of Lehman Brothers, the only two remaining independent investment banks in the United States, Goldman Sachs and Morgan Stanley, also encountered considerable trouble.

However, the most urgent situation is American International Group (AIG), the largest industrial and commercial insurance company in the United States, which is involved in a large number of toxic assets, including residential mortgage-insured securities (CDS).

After Lehman filed for bankruptcy, mortgage defaults increased significantly, and a large number of financial institutions and counterparties that purchased such insurance filed claims with American International Group.

Without financial assistance, the company may not survive for days or even hours.

AIG-FP, a subsidiary of AIG, operates a large number of credit default swap derivatives (CDS). Due to the lack of supervision and AIG's indirect reputation guarantee, customers did not ask the company to increase its trading margin, so the company has been operating with light assets and high risks for a long time.

The reason why it was so deeply involved in CDS was that during the previous real estate boom, from 2001 to the end of 2006, housing prices in the United States continued to rise.

In AIG's view, insuring those subprime loans under such circumstances was a risk-free money-making opportunity. In order to earn $200 to $300 million in premiums a year, the company guaranteed a large number of CDS bonds, making it the company with the largest amount of CDS bonds guaranteed in the United States. Now, the payment of CDS bond premiums alone is enough to drag the company into the abyss.

As mentioned before, in order to sell more related financial derivatives, those financial companies often insure one CDO bond...which means it can correspond to several CDS!

According to statistics, the total value of the global CDS market in 2007 was as high as 62 trillion US dollars, far exceeding the total US GDP of 14.48 trillion US dollars that year, while the total value of US subprime mortgage bonds (CDO) was only 7 trillion US dollars!

According to statistics in the third quarter of 2007, the CDS products held by the top 25 banks in the United States were worth as much as 14 trillion US dollars.

Therefore, the default risk brought about by the collapse of Lehman Brothers could have crushed the seemingly huge financial system through the financial derivative product of credit default swaps alone.

Because of the greedy Wall Street capital, the default insurance CDS that was originally intended to reduce asset risks turned into a nuclear bomb that destroyed the financial bubble.

(End of this chapter)