During the past two weeks the liquidity crisis has grown worse literally by the day. And the bankruptcy of Lehman Brothers on Sept. 15 did indeed trigger this acute phase of the debacle. How big is it, really?
Perhaps this simple comparison can show the scale of the problem.
First, consider the Securities Investor Protection Corporation (SIPC), which does for investor securities sort of what the FDIC does for bank deposits -- namely recover funds if a bank/brokerage is insolvent. The SIPC will not cover market losses and does not actually insure investors' accounts (the FDIC does insure bank deposits), although Bloomberg recently reported that the SIPC "maintains about $1 billion in reserves." The SIPC also includes this language in all of its press releases:
"...funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash. From the time Congress created it in 1970 through December 2006, SIPC has advanced $505 million in order to make possible the recovery of $15.7 billion in assets for an estimated 626,000 investors."
Note the last sentence carefully: In 36 years that agency dispensed $505 million to help recover $15.7 billion for about 626,000 investors; it has $1 billion on hand today.
Now let's compare the above to just the Lehman Brothers bondholders, who alone represented 630,000 accounts, with a total face value of $138 billion in securities. And yes, those are the $138 billion in bonds I've been writing about for the past week.
The scale gets larger still: Lehman's total debts (as listed in its bankruptcy filing) amount to $613 billion, with a large percentage of those creditors located overseas.
There's more I could say, but I trust that you get the idea. There are other stories like this one. And I'm still spending a lot of time trying to learn why the Federal Reserve apparently became involved in covering that $138 billion; I'm digging into a possible role that the SIPC itself may also have played.
More on this tomorrow: in the meantime, you'll want to stay as close as you can get to tomorrow's news today. Click here to do just that.