Another day, another U.S. financial giant is wheeled on a stretcher into the already over-crowded I.C.U. -- Imploding Credit Unit.
On Tuesday, September 9, Lehman Brothers (the fourth largest investment bank) suffered a 45% hemorrhage in its share price, in the steepest one-day drop ever. Now at a 10-year low, Lehman stock has lost nearly 90% from its 2007 high.
The prognosis isn’t pretty: Lehman is losing precious liquidity by the minute and can’t find a suitable donor to provide the necessary transfusion. Its most promising buyer, Korea Development Bank, reportedly backed out of the deal on September 10.
In hindsight, it may appear more-than-obvious that Lehman was next in the line of Wall Street firms going from “the good life” to life support. But what about before? The public was oblivious all the way up to the red-flashing LEH ticker tape. See:
“Dow Plunges 280 points. Today’s fall is a Lehman shock.” (Forbes) AND -- “People are running for safety. There’s just panic. Everyone is afraid to be caught on the other side of a Bear Stearns.” (Bloomberg)
Not that we blame them. After all, Wall Street has been riding a slope of hope regarding the banking crisis since the sector’s first subprime-induced seizure. Here, the following news items say plenty:
September 2006: The U.S. real estate market suffers its first annual home price decline in ten years. “This price drop has stopped the bleeding. It seems the sectors has now hit bottom.” (DJ MarketWatch)
March 2007: Fortune Magazine votes Lehman Brothers #1 “Most Admired Securities Firm.”
April 8-15, 2007: Heads of Lehman Brothers, Goldman Sachs, and Morgan Stanley exclaim: “The worst [of the credit crisis] is behind us.” “The collapse of the subprime market in the U.S. has reached its eighth inning, or maybe top of the ninth.”
July 13, 2007: London Conference, where Lehman’s CEO and others assure: “The subprime implosion is a contained, isolated, and temporary event with little risk of wider fallout.”
(Banking Sector On Life Support: The September 2008 Financial Forecast Service publications provide in-depth insight into whether the credit sector will return to stable condition anytime soon. Learn More)
As for seeing the potential for turmoil in the U.S. financial sector EVEN as it appeared to be the picture of health, Elliott Wave International’s team of experts stood prepared. On this, the following archive of our past analysis prevails:
September 2005 Elliott Wave Financial Forecast: “Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets… Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry…There is a larger, and more important message: Bad times are ahead in the financial industry.”
January 2007: Elliott Wave Financial Forecast foresaw “2007” to be “The Year of the Financial Flameout.”
May 2007 Elliott Wave Financial Forecast: Drew a parallel between the bank-backed pool operations of the late 1920s AND the “8 core poolers” of 2007 (Including Lehman) and observed a subtle inability of investment bank profits to surpass their February peak. “This is a critical divergence that should eventually be followed by a massive reversal of Wall Streets fortunes.”
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