Sunday, September 14, 2008

Lehman's Fate

The forced breakup of Lehman Bros. or even its liquidation became a possible scenario over the weekend as talks dragged on unsuccessfully Saturday between top U.S. financial officials and executives at major Wall Street firms trying to forestall the collapse of the investment firm and to keep weakness among financials from spreading.

According to a report in the online edition of the Wall Street Journal citing people familiar with the matter, the outlines of a rescue plan emerged, but at the same time talks revealed that a sale of the entire firm to a big bank could probably not be managed.

The Federal Reserve Bank of New York, Treasury officials and banking executives have been meeting since Friday evening in the hopes of engineering a plan for a private-sector rescue for the once-venerable investment firm before Asian markets open for trading Monday.

Shortly before 7 p.m. Eastern on Saturday, media outlets reported that no deal had been reached over Lehman’s fate but that negotiations would likely continue between the Fed and bank executives on Sunday.

As expectations of a deal swung to doubt, the Journal reported, plans emerged for firms to either buy pieces of Lehman or for an orderly winding down of the firm.

The Journal said that under one scenario, Barclays PLC or Bank of America Corp. would buy Lehman’s valuable assets, such as its equities business, while the more risky real-estate assets would be merged into a another entity that would contain about $85 billion in souring assets.

Other Wall Street firms would try to inject some capital into that “bad bank” so that a flood of bad assets doesn’t deluge the market, damaging the value of similar assets held by other banks and insurers, according to the report. The banks are also looking for the government to somehow support the bad bank.

An earlier story in the Journal reported that Treasury Secretary Henry Paulson has made it clear to participants in the talks, called Friday by the New York Federal Reserve, that no government bailout for Lehman should be expected.

The Journal reported that while teams of bankers are working on the plans, it appears few banks are in a position to provide enough funding. Many banks are inclined to preserve capital ahead of third-quarter and year-end cash preservation moves. Also, the report noted, banks don’t want to see rivals such as Barclays or Bank of America pay so little for the valuable assets.

Citing people familiar with the matter, the Journal said Bank of America, until today considered Lehman’s most likely savior, seems to be less interested in a deal. Neither Barclays nor Bank of America wants to buy all of Lehman without some government assistance, the Journal said.

In addition to Paulson, New York Fed President Timothy Geithner and Securities and Exchange Commission Chairman Christopher Cox were present at the weekend talks. According to media reports, Federal Reserve Chairman Ben Bernanke is involved in the deliberations, but did not attend Friday night’s meeting.

The Wall Street executives attending included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp., as well as others, according to the Journal.

As hopes fade for a sale, a second group of bankers reportedly is weighing the alternative of liquidating the firm’s business, according to reports.

The Journal reported many Wall Street traders met Saturday to weigh their options if Lehman is forced into liquidation. One unnamed trader said conditions in the credit default swap market and the short-term repo markets are more stable today than they were in March, when Bear Stearns nearly collapsed, but said that if Lehman is forced to liquidate, Monday could be a grim day for financial markets.

Source - Market Watch


Anonymous Anonymous said...

Wow; this sure reminds Sparky of the infamous Long Term Capital Management (LTCM) collapse about ten years back.

It’s also interesting to note that some of the very same slippery players who were present at that LTCM-prompted meeting in 1998 are also in attendance at the big ongoing LEH-related meeting!

Also interesting is this: The main reason LTCM got into so much trouble a decade ago was because of greed-drive leverage; leverage that was fueled by US-based “financials” that were so eager for LTCM’s burgeoning business that they fronted the hedge fund way, way too much cash, and at far too low a cost.

This time around, the exact same thing happened; but this time it was the Federal Reserve under Greenspan that cranked out way, way too much overly cheap money after the 9/11/2001 attack. And this time around it was the US-based "financials" that played the LTCM-like greed-leverage game! So now, the US-based "financials" are paying the price, just like LTCM did.

We’re in very, very deep trouble folks; just watch!

Lehman is but the tip of the proverbial iceberg; Wachovia Bank [WB] is close behind; Merrill Lynch [MER] sports a balance sheet that is obviously cooked, as its stock's recent behavior is trying so hard to tell the world; Citigroup [C] is clearly bordering on insolvency, and once all its globs of Level III crap is eventually marked to market it will be bankrupt; and the bottom-of-the-ninth predicting, SEC-evading John J Mack will soon see the pathetic balance sheet Morgan Stanley [MS] is married to crumble like an over-cooked cookie.

Stay tuned folks; and unless you want to play the US-based financials Put Option game, stay safely sidelined.

Best Regards,


7:40 PM


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