Portfolio management: lessons learned from Lehman collapse

I have NOT added any new money to my brokrage account since Sept 15 2008 Lehman Brothers collapse, so it’s easier to calculate the performance of my portfolio (+25%, from Sept 30 2009 to today Sept 14 2009), and compare to benchmark (S&P -16.75%, from Sept 15 2008 to Sept 14 2009). We can not predict catastropic events, if we really want to predict future or talk about any lessons for industry, I think one thing is clear:

one either becomes too big to fail (like AIG), or becomes the first to fail (like Bear Stearns), the last thing one wants to be is being No. 4 investment bank, leverage heavily and caught in the financial and political turmoil. We all know the day before Lehman fall, Merril Lynch (No. 3 investment bank) got bought by B of A, and shortly after that No. 1 Goldman and No. 2 Morgan Stanely converted into bank holding company.

For me personally, I can think of the following.

The great bailout of 2008: bail, baby, bail

March 16: Bear Stearns, $29 billon

Sept. 6: Fannie/Freddie, $200 billion

Lehman Brothers: sorry baby no bail

AIG: $85 billion

Who is the next???

Essentially Fed/Treasury are transfering the downside risks from individual companies to the fed/treasury/greenbacks. Note the money pledged to support Fannie/Freddie/AIG could exceed the original number if the problem worsens.

I can only say: gold, baby, gold!

Most severe crisis since the great depression

and here is President Bush has to say this morning (source: yahoo):

“We are working to reduce disruptions and minimize the impact of these financial market developments on the broader economy,” Bush said in the Rose Garden, choosing to address the market turmoil at the top of an appearance with visiting Ghanian President John Kufuor. “The policymakers will focus on the health of the financial system as a whole,” Bush said.

In the weekend, the No. 4 US invesetment bank Lehman Brothers went under, the No. 3. US investment bank Merrill Lynch was bought by Bank of America under recommendation by Fed (Bloomberg news). The goal was to make the buck stop at the Merrill. No one wants to see the No. 1 Goldman and No. 2 Morgan Stanley go under.

But they only got a temporary break. The focus now is on AIG and Washington Mutual. The problem for GS and MS, with BoA got Merrill, no company in the world has the resource to buy GS/MS without any goverment help. And the US goverment set a precedent they are not going to bail out anyone (Lehman, for example).