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Lehman Endgame Looks Ugly

Posted by: Matthew Goldstein on September 12, 2008

It’s looking like Lehman Brothers may not be able to count on the federal government for any help in its hour of need and that has all of Wall Street shaking. Shares of Lehman sunk deeper into penny stock territory on Friday, as the beleaguered firm races to find another bank to buy it in a bid to stave-off an imminent collapse of the historic 158-year-old firm.

In early Friday trading, Lehman’s stock fell 10% to $3.80, continuing a downward death spiral that began Sept. 8. Now that Wall Street has concluded Lehman CEO Dick Fuld won’t be able to pull-off his previously announced plan for shoring-up the investment firm’s balance sheet, it’s pretty much become a race against time for Fuld to find a buyer—at any price—for the firm. The speculation on Wall Street is that Bank of America, Barclays and consortium of private equity firms are the most interested suitors.

But it’s not clear if any of those potential buyers will want to do a deal with Fuld, as long as the acquirer must also take on some $30 billion in rotting commercial real estate assets that Fuld was planning to unload. Treasury Secretary Hank Paulson, according to wire service reports, say the federal government is unwilling provide any additional help to Lehman beyond allowing it continue borrowing short-term money from the Federal Reserve—-something the firm has been able to do since the spring.

When JPMorganChase agreed in March to a shot-gun marriage with Bear Stearns, to similarly save that investment firm from collapse, the Fed guaranteed up to $29 billion of Bear’s bad mortgage-related assets. The Fed backstop gave JPMorgan CEO Jamie Dimon enough security to take on the risk of rescuing Bear from a certain bankruptcy filing. This time, however, it doesn’t appear that either the Fed or Treasury is willing to provide a similar guarantee to Lehman’s would be savior.

And without that kind of government-backed guarantee it’s by no means certain any bank will be willing to take on the risk of adding Lehman’s questionable commercial real estate assets to its balance sheet. “There’s very little chance anyone will do a deal for Lehman without the government stepping in,’’ says Janet Tavakoli, a derivatives and structured finance consultant in Chicago.

That's why some of Lehman's trading partners are beginning to demand cash settlement for trades, meaning trades must be completed within a day instead of the typical three-day period, sources say. Hedge funds and other banks are still trading with Lehman. They are worried if Lehman will be around to make good on those transactions.

The apparent reluctance of either Treasury or the Fed to go the distance and insure that a deal gets done is why some on Wall Street are beginning to whisper the unthinkable: a Lehman bankruptcy filing at some point in time. A bankruptcy filing, of course, could be a real mess for Wall Street given all the tens of billions in short-term loans other banks have extended to Lehman, which are backed by collateral. And of course there are numerous other trades and transactions Lehman has done with hedge funds and other trading partners that also are backed by collateral—-in some cases potentially backed by pieces of the same assets.

Andrew Rahl, a bankruptcy lawyer with Reed Smith, says a Lehman bankruptcy filing would be an unprecedented event, given that some of Lehman's division, such as it brokerage arm, are regulated entities. "Clearly this would be a filing without any real precedent. There could be unintended consequences; there could even be some favorable consequences.’’ One favorable outcome might be the freezing of some of Lehman's ailing commercial real estate assets by the bankruptcy court--meaning those assets wouldn't find their way into the market anytime soon.

One way Lehman could avoid such a calamity would be to simply break itself up into many pieces and let would be acquirers buy what they like best. A bank could take on Lehman's investment banking arm, another buyer could get its Neuberger Berman operation and vulture investor might take a flyer on Lehman's distressed commercial real estate property.

The fear of Lehman failing is one reason shares of other financial firms with mountains of troubled-assets on their balance sheet are plunging too—most notably Merrill Lynch and American International Group. Wall Street is coming to grips with the reality that if the federal government can’t bailout all these institutions, there may be no buyers out there to save them. In the government’s bailout of Fannie Mae and Freddie Mac, it wasn’t just shareholders who got creamed---holders of Fannie and Freddie’s higher-yielding preferred shares also took a beating. To date, most Wall Street banks have been able to raise capital by selling preferred stock to deep-pocketed sovereign wealth funds and private equity firms. But Wall Street won’t be able to do those deals if there’s uncertainty about whether those preferred shares will have any value down the road.

It’s not a pretty picture. But it’s another reason why this yearlong mortgage-inspired credit crunch is shaping up as one of the worst financial disasters in decades.
---with David Henry

Reader Comments


September 12, 2008 12:40 PM

as we stated more than 10 yrs ago anyone who buys and owns a home is doing the gov a favor.everybody thought we were everybody can clearly see we were correct.the fed and the gov has drawn the line leter rip and fall in this rought and tumble world.and lets have more of this and vote mccain and palin...


September 12, 2008 1:09 PM

A system based on 'false' growth through the manipulation of interest rates and borrowing innevitably lead to this end. These companies deserve to go out of business--case closed.

David Huston

September 12, 2008 1:19 PM

Actually there is a precedent for a Lehman bankruptcy filing: Enron's bankruptcy. In it, the Court had to allocate the rights and responsibilities of many counterparties. Even though it was obvious that Enron couldmn't perform on its end of the bargain, the court nonetheless enforced many of its energy purchase/sale contracts in the face of documented fraud by Enron as to its ability to perform. Lehman, while clearly making bad bets, particularly in the mortgage markets, is a much cleaner bankrupt. The question will become, what counterparties will not be able to perform under those highly dubious credit default swap arrangements.


September 12, 2008 1:39 PM

Lehman sponsored Obama - no bail out.

Mahagwa Makokha

September 12, 2008 2:08 PM

The shakeout is coming. I am glad Paulson is standing on the sidelines. Let Capitalism work this out, let Lehman and others collapse. Then we can start afresh, being careful to not repeat the mistakes of the past.
The next administration (Whether McCain or Obama) should do the following:
a. Remove all incompetenet idiots from positions of authority (in the government)
b. Restore the integrity of the government by ensuring the government acts in the best interests of the country
c. Do a complete re-assessment of all economic related policies and thinking and develop new policies adapted to the 21st Century


September 12, 2008 3:22 PM

Mahagwa has a wonderful vision of the future. I would add:

d. Let there only be peace and joy in the world.

e. May Goldman Sachs only work for the benefit of its clients.


September 12, 2008 3:47 PM

Mahagwa says -- "Remove all incompetenet idiots from positions of authority (in the government)"

I'd have to say that from the performance of all these Wall Street firms, it is they who are staffed by incompetent idiots. Bear, Lehman, and others have been responsible for significant monetary destruction, and have spread collateral damage far and wide. They thought they knew it all, but now appear pretty stupid.

Drunken Sailor

September 12, 2008 4:03 PM

Are we still getting bonuses?

Tuff Stuff

September 12, 2008 6:00 PM

Watch the locusts feed on themselves! Gorging on putrid debt! Let's storm Wall St. and take the office furnishings!

Philip Hult

September 12, 2008 6:29 PM

We moved our assets to OTP Bank Private Banking


September 12, 2008 8:43 PM

Most of the good folks who where in the government have been replaced by political hacks or contractors yaers ago. These appointees and contractors only agenda is increasing the value of their next contract. At the behest of corporate America most oversite (read audits, inspection, etc) have be removed or mute in the last 30 years and this is the result. The stupid voters cheer when they get a $600 check (read borrowed) refund from the politicians while investors and CEO types whose greed and incompetance caused the problem are bailed out and get millions. Sounds like capitalism at work.


September 12, 2008 9:45 PM

I am with Drunken Sailor. Are we still getting bonuses? I did not see an answer

Donald B

September 12, 2008 10:05 PM

Let them all fry in Hell. Make sure that the CEO, CFO and all the rest of the upper management receive NOTHING in "golden parachute" land. Hopefully they will be subject to suits that will bankrupt each and every one of them! Every asset they own or have given to any family member, distant relative or friend over the last 15 years should be subject to recovery. And then let them have to work where 90% of their income goes to paying back the amounts they "stole." And if they don't work they should have to wear GPS bracelets and report their activities on a semidaily basis.

Frying Pig w/ Lipstick

September 12, 2008 11:55 PM

"Remove idiots . .. "

Seems to me that whenever any of these financial institution files for bankruptcy, the losers are the average Joe who entrusted their fortune to these 'idiots' and the tax payers who probably one way or another will bail them out. Do you seriously think that any of the management will have to endanger their personal fortune to cover the loss? They all had received their multi-million dollar bonus packages to keep them in good living for many years to come. Obama or McCain, either would not be able to solve this problem.

Joker of the Dark Knights

September 13, 2008 3:44 AM

There's two things that we feel simultaneously - One is that there will be a dark period in the global financial market and perhaps we are afraid to think about how much of distress we would have to face. The other feeling is that mostly nothing will happen, some people will lose saved money, their wealth will be wiped out, but, mostly people would continue to receive monthly wages and thus the economy would continue, may be grow a bit.

Meanwhile it's worth mentioning that the 2006 salary of GS CEO was $52M in total of salary, bonus and stock. Now everyone knows that these CEO guys are stupid, they are the ones responsible for this deep crisis and the ever jealous crowd would like to go after their head. But aren't the investors stupid who believe these stupid guys and after the crisis comes, the bigger fools fight with the stupid lots.

Well, being the Joker of "The Dark Knights", I am having lot of fun, mostly because I m paying very small price for this - the increased interests as a matter of rising cost of fund. And I am waiting for America to vote and bring back the republicans into power as a "wise-proof" permanent blockade to its economics.

OMG!!!! I just forgot to mention Harvard (well, the Business School, of course). What percentage of the globla CEOs are ... Blah .... Blah ...


September 13, 2008 10:43 AM

It's the approach of corporate culture where there is no room to question the executives that has to be change. Let your workers have the ability to question the strategies of the so called "banking gurus" who are placed as top decision makers of these companies. This will create fresh thinking,analytical and dynamic business approach to avoid all this happening to these Wall street companies.


September 22, 2008 3:54 PM

As much or more responsibility for all of this lies with the average American. For not knowing any of this was going on, for not caring, and for not voting so that it didn't happen. Not to mention the out of control borrowing that created it all. Shame on all of us. That is accountability, and where reform needs to start.


September 25, 2008 3:41 PM

For a long time, multiplying of wealth was done without any physical production.

Perhaps now the world will rethink abt "capitalism" and redefining wealth creation...

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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