Better minds than mine don't quite understand the complications that Lehman Brothers enmeshed themselves in:
What little faith I had in financial wizardry was blown away 10 years ago when Long Term Capital Management, a hedge fund set up by a couple of economists with Nobel Prizes in the cupboard, went pop. Lehman, I'm afraid, went the same way: bamboozling itself. Over lunch at its Canary Wharf offices, you could feel the heat from all those first-class brains, working out how to make billions from financial products that only an expert in nuclear fusion could comprehend. I didn't have a clue what they were talking about. The trouble is, it turns out, neither did they.Christopher Wood, who predicted the 2003 US housing crisis, says that the leverage on Wall Street was "ludicrous" and that the credit crunch will now have an "inevitable toll on real economic growth." Wood estimates that total writedowns and losses at the world's largest financial institutions will be $1.5 trillion.
What is key to understanding the entire "credit crunch" is the idea of securitisation.
Normal bank debt (your mortgages) was packaged into "marketable instruments" and the risk of that debt (some of it based on people who can't afford mortgages, but were given ones anyway) was spread across a wide base. In English, last autumn, everyone realised that they had became infected with bad sub-prime debt.
We didn't hear anything about this, on a mass level, before last September. A month ago, no one was talking about Lehman Brothers share price being down 90% on August 2007. A month ago, no one was talking on the front page of newspapers of the fragility of the Lehman business model. Now, 24 000 employees are redundant, and it's portrayed as a sudden event.
Banks treated loans for house mortgages on the assumption of ever-rising prices. That's just silly. Houses are something you live in. They aren't casino chips. Banks bought into the entire idea of "Location Location Location" house porn.
The most spooky thing about the collapse of this bank here, this investment bank there, is that people don't seem to know what happens next. Certain banks are far more exposed to Lehman Brothers than others. Regulators and policymakers seem to be crossing their fingers and hoping for the best.
What else aren't we being told about? What are the other unknown-unknowns, to use Rumsfeld-ese?