Wall St is supposed to be about financing economic growth. Lending money for construction projects, inventory purchase, plant and equipment. All of which are long term investments.
Why then the existence of the "repo" market. According to the Wall St Journal, a repo is a short term loan, from one bank to another. The borrower posts collateral, in the form of securities (stocks and bonds) in return for cash. The borrower promises to repay the loan in a few days, the lender returns the securities when the loan is paid off. The Journal's financial reporters describe the repo market as "the life blood of Wall St."
Why does anyone need money for only a few days? None of the investments in economic growth will pay off in a few days. Surely any deal could be postponed for a few days while the buyer raises the money? Or the seller could be willing to accept a short delay in payment? Certainly in the ordinary business world, we will do damn near anything to make a sale, we certainly would not be stuffy about a few days delay in payment. Hell, most deals are done with purchase orders, not cash, and you have 30 days to make good on a purchase order.
So why are short term loans "the life blood of Wall St"? What economically useful activity can be completed in a few days?
Other tidbits from the article. Apparently Lehman crashed after it ran out of securities to borrow upon. And, Lehman tried to use worthless securities to borrow against. J.P. Morgan demanded Lehman come up with better collateral or repay the loan. This happened just days before Lehman went under for good.
Lehman also did the old "treat a loan as a sale" trick to make their books look better at the end of each quarter. If you call a repo deal a sale, then the money is income and an asset. If you treat it as a loan , then the money is a liability which you owe. Your balance sheet looks better with assents than liabilities. Apparently no US law firm would OK this scam, and Lehman used a letter from a British law firm as justification.
So what was Lehman doing, banking or gambling? I say gambling. In which case flushing Lehman was a good idea.