Round 1 was associated with robust global growth – foreign banks and sovereign wealth funds could prop up Wall Street while the rest of the world "decoupled" from America’s slowdown. Now that the theory of "decoupling" has been taken to the cleaners, the rest of the world is slowing down.
Round 2 will probably be associated with slowing global growth – as a result, foreign banks and sovereign wealth funds may be unable to come to Wall Street’s rescue. Due to a global economic slowdown, the next $500 billion in writedowns will be harder to get through than the first $500 billion.
In a way, Lehman’s demise represents this shifting landscape. A few months ago, state-owned Korea Development Bank might have bought into the broker, but political authorities have now halted negotiations. Admittedly it is an unlikely scenario, but the Koreans have a potential currency crisis on their hands, and now is not the time for imperialistic adventures. According to reports, Lehman also had talks with Japan’s Nomura, but the Land of the Rising Sun’s economic outlook is not looking too bright.
Lehman’s inability to raise capital is perhaps the most important development in the credit crisis. Foreigners have been burned badly by round 1 of the credit crisis, and they may stay away during round 2 as their own economies slow down.
Disclaimer: I own SDS and DXD (short U.S. equities)