FT now reporting Barclay’s is out.

The privately owned debt kiting scheme called the Federal Reserve will be totally eliminated or substantially re-organized in 2009.

…following is an essay entitled “Dearth of Credit” by Ludwig von Mises:

“An increase in the quantity of money or fiduciary media is an indispensable condition of the emergence of a boom. The recurrence of boom periods, followed by periods of depression, is the unavoidable outcome of repeated attempts to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Sorry to comment on your post when it seems you feel you’ve already posted too much, but haircuts are only one side to the story on a government backstop. One also has to consider how any possible future gains are divided up. It is not a coherent solution to make senior debtors take a haircut and let another institution walk away with all the potential upside on the deal (I know, not likely now, but who knows? The future is uncertain). One reason I think LEH never actually sold Neuberger is because any buyer knew the sale would be subject to fraudulent conveyance rules.

Anyway, as can be seen by the great comments and bankruptcy law lessons above, this is extremely complex. Let’s see what happens. I still think the government will blink. You know the old poker theory that if you look around the table and can’t spot the sucker, the sucker is you? Well, the sucker at this table is the US taxpayer. I really hate using charged labels like “thieving plutocrats” because a label often adds nothing to the discussion, but if it walks like a duck and talks like a duck, can’t you finally break down at some point and label it a “duck?”

You said that already, condense, edit, relax

I still think maybe the Fed isn’t bailing them out because the creditor countries said enough is enough.

The foreign creditor countries are worried about the long term value of US sovereign debt and their F&F bonds. This is why the US government was effectively forced to nationalise Fannie and Freddie. I expect that the threat they made was to stop underwriting the US deficits if no bail out og GSE bond holders was forthcoming. Most foreign creditors don't give a damn about protecting the necks of the Wall Street aristocracy. They know that when Empires fall ruling elites get wiped out. Ironically, their actions suggest that they may care more about the long term viability of the US economy more than many of its own corporate and political leaders

My understanding is that the bankruptcy courts authorized the debtor (Mirant and Calpine) to trade under the bankruptcy code provision 11 usc 363, which gives the bankruptcy court power to allow the debtor to enter into transactions (e.g, selling assets). My understanding is that FERC and the bankruptcy court disagreed over a separate issue, which was the ability of Mirant to terminate some pre-bankruptcy power purchase contracts. The court allowed the termination; FERC overruled; and I don’t recall what the 5th circuit did on appeal.

In any event, your other point regarding whether counterparties are willing to trade with Lehman is the more important one. Congress thought that if counterparties got a priority claim against the debtor on new trades, then counterparties would be willing to enter new trades. The bankruptcy court has zero power to force anyone to trade with the debtor, just ability to authorize the debtor to enter trades. Congress thought giving a priority claim would be enough of a carrot, but as you say, maybe Congress was wrong.

Or maybe Congress intentionally gave SIFMA half a loaf so that SIFMA would have to lobby Congress for more bankruptcy legislation. Always hard to tell whether Congress’ “mistakes” are intentional, or a fund-raising ploy.

I would likely support POSSIBLE US Government backstop IF:

1. all common of LEH wiped out
2. all preferred of LEH wiped out
3. 45% haircut on junior debt
4. 28% haircut on senior debt

Obviously simplistic, but general framework above.

Cut off one arm and one leg to save the patient in the nuclear battlefield.

Get me former Treasury Secretary James Baker on the phone please. I need him to get the Decider in Chief on board.

Silent for 10 posts. Over and out.

Matt Dubuque

I still demand participation (or access) for the exact time, hour, minute and second on when Moody’s plans the announcement. Give us one more hour.

I haven’t done much bankruptcy law, but we might be able to get a bit more time I believe (not sure) by filing Chapter 11 first and then converting to 7. If we file the papers in Federal court mid-morning, that could help a tiny bit. I’m clearly grasping for straws.

But the hoped for hard landing (instead of a crash landing) scenario looks increasingly problematic.

Looks like Bush is adamant about no taxpayer funds. I certainly would not want to use taxpayer funds to save the common stock or the preferreds, but if we take a haircut on some of the debt, I just don’t know….

Get me former Treasury secretary James Baker on the line please…. I need to talk to him…

As previously mentioned, Corrigan warned in 1985 about several money center banks going bankrupt ON THE SAME DAY.

Not pretty.

In terms of time, Asia open is not drop dead time. We’ve had drops of 5% before in Asia and London and Wall Street has opened OK.

But we need A CREDIBLE, COHERENT statement when Asia opens.

Joe, two factors contributed to my changing assessment as to likelihood of DEFLATIONARY BURST in the intermediate term.

I now view it as 53% yes, 47% no, plus or minus 5%. Changes daily when we are surrounded by all these nuclear implosions.

Two additional factors causing changed asssessment:

1. AIG collapse and
2. Sovereigns collapses (including, but not limited to bloodbath in Russian financial markets and likely contagion from that).

Over and out.

Matt Dubuque

I hate to be self-indulgent, but you made my day with the report that Dimon regrets the Bear deal. I wrote this on March 25 and have said similar things in passing since:

I believe JPM will regret this deal (assuming it comes off) and not simply for the impact it is having on Jamie Dimon’s reputation. Bear is stuffed with the some of riskiest assets in the credit game: mortgage debt credit defaults swaps, JPM is thus increasing its exposures at time when it would be more prudent to reduce risk, effectively doubling down.

Speaking of which, Alphaville is once again posting a weekend comment, which contains among other things, a gem of a quote from Nouriel Roubini:

It is now clear that we are again — as we were in mid- March at the time of the Bear Stearns collapse — an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

“massive systemic meltdown”… pure poetry… I love the smell of napalm in the morning…

Well, buckaroos and buckarettes, looks like ol’ Cash is gonna rake in a whole big pile of chips next week. Then, depending on who you believe, they will become priceless (MD’s pet hyperdeflation) or worthless (more common hyperinflation-to-kill-debt idea). Next play short everything, long guns and ammo and farm implements?

I still think maybe the Fed isn’t bailing them out because the creditor countries said enough is enough.