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NY Times: Lehman Filing For Bankruptcy (Update: Gross Sees "Tsunami")

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Hat tip readers dd and viv on this update from the New York Times’ Dealbook:

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

But Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive as a going concern. It will instead liquidate its holdings.

It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation, or how big the financial backstop would be.

Lehman’s broker-deal subsidiaries would not be a part of the bankruptcy filing…bankruptcy lawyers say that customers are likely to receive their holdings back.

Moreover, changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.

Note we predicted that the authorities would lower collateral standards as a finesse for Lehman. This is a back-door bailout. Dow futures opened down 300 and S&P futures down 37, which would seem subdued ex the stealth provision of central bank support.

Update 6:55 PM Reader Jim Bianco e-mailed this observation on the futures trading:

It’s all about Merrill. They need to announce a deal with BAC before the open. If they do not, they plunge to $10 to $12 (from $17) on tomorrow’s open and no way does BAC pay $25 to $30. Then Merrill is at risk of blowing up and a crash becomes very possible.

Update 10:25 PM: Reader Saboor provided this cheery reaction from Bill Gross via Reuters:

Pimco’s Bill Gross said on Sunday that a Lehman Brother’s bankruptcy risks an “immediate tsunami” because of the unwinding of derivative and credit swap-related positions worldwide….

“It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buyside universe,” Gross, the chief investment officer of Pacific Investment Management Co (Pimco), told Reuters. Pimco oversees more than $812 billion in assets…

“The extraordinary trading session held today to facilitate a partial unwind of these positions saw very little trading — perhaps $1 billion total — but at much wider spread levels for corporate bonds,” Gross said….

“To some extent, the rumored bid for Merrill by Bank of America lends some confidence to all markets, although I am skeptical that BofA would pay such a premium on such short notice,” Gross added.

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34 comments

  1. m

    Can someone please explain to me why BAC would pay $25/share? They shouldn’t be paying a PREMIUM for MER, they should be paying a DISCOUT. What am I missing?

  2. doc holiday

    Kinda OT, but missed this yesterday (for some reason):

    Fannie, Freddie to Be Kept Off Federal Budget

    http://www.washingtonpost.com/wp…ml? hpid=topnews

    The White House budget office said yesterday that it has decided not to incorporate mortgage-finance giants Fannie Mae and Freddie Mac into the federal budget, citing the temporary nature of the Treasury Department’s takeover and “the level of federal ownership” of the firms.

    The decision affects the way public expenditures on the two companies will be reflected in official budget projections. Treasury Secretary Henry M. Paulson Jr. has pledged to invest as much as $200 billion to keep the firms solvent.

    On Tuesday, two days after the takeover, officials at the Congressional Budget Office announced that the deal had bound the government so tightly to the firms that their business operations, assets and liabilities should be included in the government’s balance sheets

  3. bg

    The Merrill chatter is self serving. Remember last week when Koreans, then Goldman were going to buy Lehman?

    The fed has twice valued the toxic assets of broker dealers at $30B (bear and Leh), and Merrill is likely in same range. If BAC is picking them up at all it is an act of ‘comedy of the commons’ (how would you say the converse of tragedy of commons)

  4. m

    bg: Maybe. BAC might be thinking that it’s too big to fail, so it can pick up MER at whatever price is necessary – the government will be a backstop if anything goes wrong whether they like it or not.

  5. mxq

    wow…i seriously still can’t believe this is happening.

    BOA should push for a takeunder…no doubt.

    Amazing WFC, USB and Buffet are nowhere to be seen…gotta say something about the BOA/CFC/MER crap barge.

  6. Anonymous

    Lehman isn’t a clearing bank so isn’t this ‘less bad’ than BS going under?
    Or is it that the Fed will need to print money to bail this whole thing out?

  7. dd

    “Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.”

    This is the fun part. Imagine the bankers invited to the Fed pow wow just matching out their books and leaving the hedge funds hanging.
    Its the logical end game. The Fed will save regulated banking. JMHO

  8. Matt Dubuque

    This is worrisome. What is Bianco’s perspective on AIG?

    Chapter 11 bankruptcy is a tea party compared to Chapter 7 which is brutal.

    And the news on the swaps is ominous.

    The ramifications of all this may not be apparent for 10 days as many sub-scenarios play out.

    But we are off to a bad, stumbling start.

    And Bush coming on the tube shortly before the Wall Street lunch hour tomorrow (as I am SURE is planned) with his “the fundamentals of the economy are strong” gibberish is likely to really anger the markets even further.

    Seems likely the markets will really tank after that.

    You’re doing a heckuva job Brownie.

    Yves reasonably asked “Where’s the advance planning”? Will we forget her question in two weeks? I hope not. I won’t.

    This is the same crack suicide crisis management team that brought us Hurricane Katrina.

    Matt Dubuque

  9. dd

    AP business wire:

    NEW YORK (AP) — As the outlook for Lehman Brothers' future appeared to dim Sunday, U.S. and foreign banks joined forces to create a plan aimed at inoculating the global financial system against the investment bank's possible failure, a top investment banking official said.

    Banks are in tense talks to create a pool of money worth up to $50 billion to lend troubled financial companies, the official said on condition of anonymity because the discussions were ongoing. And officials at the U.S. Treasury and the Federal Reserve are expected to say they are prepared to be more generous in the Fed's emergency lending program for commercial and investment banks .
    http://hosted.ap.org/dynamic/stories/L/LEHMAN_BROTHERS?SITE=NJMOR&SECTION=HOME&TEMPLATE=DEFAULT

  10. dd

    Please note the bifurcation: The holding company is C11 and the b/d is C7. Leh will try to operate “solvent” subsidiaries under C11. In the olden days, before Greenspan holding companies were verboten because the SEC needed 100% access to all books and records for net capital computations; but that is ancient history.

  11. Anonymous

    It’s All Over Now, Baby Blue

    You must leave now, take what you need, you think will last.
    But whatever you wish to keep, you better grab it fast.
    Yonder stands your orphan with his gun,
    Crying like a fire in the sun.
    Look out the saints are comin’ through
    And it’s all over now, Baby Blue.

    The highway is for gamblers, better use your sense.
    Take what you have gathered from coincidence.
    The empty-handed painter from your streets
    Is drawing crazy patterns on your sheets.
    This sky, too, is folding under you
    And it’s all over now, Baby Blue.

    All your seasick sailors, they are rowing home.
    All your reindeer armies, are all going home.
    The lover who just walked out your door
    Has taken all his blankets from the floor.
    The carpet, too, is moving under you
    And it’s all over now, Baby Blue.

    Leave your stepping stones behind, something calls for you.
    Forget the dead you’ve left, they will not follow you.
    The vagabond who’s rapping at your door
    Is standing in the clothes that you once wore.
    Strike another match, go start anew
    And it’s all over now, Baby Blue.

    Copyright ©1965; renewed 1993 Special Rider Music

  12. m

    OMG!!!

    CNBC/WSJ reporting that the Fed is going to start accepting wider type of collateral, including EQUITIES.

    Someone needs to investigate Helicopter Ben’s actions. Are they legal? He is following on his 2002 speech though.

  13. Anonymous

    BAC’s exposure to MER must have been more than the premium paid in the deal had MER gone tits up…so I guess you do the deal at a premium??? What say ye???

  14. Abbott_Of_Iona

    Apologies Matt,

    from a previous thread.

    “Hank's bazooka isn't very effective in a nuclear war battlespace”

    I agree.

    My point was that;

    “Japan & China may be closed tomorrow. But they will wake up on Tuesday…”

    That is not to say that they are asleep.

    It is just that they are contemplating what they will do.

    Japan, of course will do nothing, as they have since they lost the Pacific War, other than watch what China does.

    China will wake up to (how can I put this politely) the bankrupt nature of American enterprise. And realise that, despite America owing China, a couple of months GDP, they will decide to cut their losses.

    In short Matt, this is no longer a matter for Wall Street or Main Street.

    It is a little bigger than that.

    It is a question of whether America is prepared to pay its debt to the rest of the world.

    If it chooses not to. Then so be it.

  15. m

    anonymous: no, they did the deal for the premium to help market stability. They have the implicit backing of the Fed and they’re too big to fail

  16. Cash Mundy

    What about derivatives? I’ve got some September MER@16 puts I’ll take fifty cents on the dollar for (conditional on Merrill being acquired, of course)… I want my reckless speculations bailed out along with everyone else’s, gol dangy! Equal rights for ruthless shorts NOW!!! [Of course after all the alleged offers for LEH, I'm not actually despondent over my MER puts yet...]

    Y’all ought to ease on over to Alphaville, where Paul has gone multimedia on the situation. [Que the obvious Wagner here, or would the less-obvious Barber be right, or perhaps a nice Bach organ adagio?]

    A cataclysmic financial finale

    Current FT headline: Wall Street banks fight for life

  17. mxq

    “Matt Dubuque, is that where you live? I was just there this weekend. Tom”

    I Call BS!!!

    Anon 8:14…MD didn’t say anything about where he lives.

    Not that anyone cares, but he did vapidly mention, in a totally different comment thread, that he just came back from a very large picnic in “California hills.”

    But to tell me, some random guy named “tom” read a comment thread a few posts back and actually remembered the trivial comment about where MD lives (“California hills”…wow real unique, i bet only a few million people live there) and in an apparent rabbid inquisitive lust for banal information regarding Matt D, forgot that this thread had nothing to do with the information the Anon “Tom” supposedly wanted, is saying way too much.

    Either “Tom” needs to get a life, or MD is just posting comments under Anons to make it look like readers actually care about his pointless jabber.

    If you’re gonna be a phony, MD, at least keep your fake ducks in a row!

    …Back to your regularly scheduled meltdown-ing

  18. Cash Mundy

    @DD,

    Tim, It’s OK, I understand. For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath. and all that rot. I think that’s from the Constitution. Anyways, I will console myself with my 10 (yes, just 10) BAC puts. They run to January and February, which seems like forever tonight. Love, Cash.

  19. Anonymous

    We have insolvent companies taking over other insolvent companies. Yeah, this is going to turn out great!

  20. Cash Mundy

    Yves,

    Y Gads! You really have been hiding your light under a bushel. If I wasn’t already a loyal Dog Soldier of your blog, you would have had me if you had just claimed to have been in the same room with Peter Sellars for five minutes.

    Isn’t the Net just sooo Kewel? Why, 30 seconds ago I had never even heard of Carmina Burana and now I can even quote some and pretend like I’m more than an old AI simulation running on a PDP-11 that someone forgot to disconnect…


    O Fortune, like the moon of ever changing state, you are always waxing or waning; hateful life now is brutal, now pampers our feelings with its game; poverty, power, it melts them like ice.

    Fate, savage and empty, you are a turning wheel, your position is uncertain, your favour is idle and always likely to disappear; covered in shadows and veiled you bear upon me too; now my back is naked through the sport of your wickedness.

    The chance of prosperity and of virtue is not now mine; whether willing or not, a man is always liable for Fortune’s service. At this hour without delay touch the strings! Because through luck she lays low the brave, all join with me in lamentation!

  21. Yves Smith

    Cash,

    It is also hugely bombastic, noisy choral music.

    Another even more over the top bit of choral music which is just about never performed because it requires too many bodies (double choir, double brass section) is Walton’s Belshazzar’s Feast, based on the Book of Daniel that gave us “the handwriting is on the wall” and “you have been weighed, measured and found wanting.”

    The Babylonians have a very noisy party when they sing to the gods of gold and iron (among other things), desecrate the Jew’s sacred vessels, and wind up dead. Very rousing stuff.

  22. CTMM

    No no, “Carmina Burana” is better.

    What with the level of moral hazard that has just been floated, a chorus of drunk lecherous monks make a most excellent parable.

    ***

  23. Cash Mundy

    Yves and CTMM,

    I was going to try to pull something out of Gilgamesh or Beowulf, then remembered this gem. I can’t find it on the Net, and hope memory serves. I came across it in college while researching Troy back in the days of yore.

    The last Hittite emperor, who I believe was about to have his head smashed in in the contemporary version of bankrupcty proceedings, said:

    “Nuwa ugga SAH-as iwar wijami, nammawa agallu”, or “Now will I squeal like a pig, and then die.”

    Tim,


    By spreading risk more broadly, providing opportunities to manage and hedge risk, and making it possible to trade and price credit risk, credit market innovation should help make markets both more efficient and more resilient. They should help make markets better able to allocate capital to its highest return and better able to absorb stress. Broad, deep and well-functioning capital markets complemented by strong, well-capitalized banks, able to provide liquidity in times of strain, make for a more efficient financial system: one which contributes to better economic growth outcomes over time.

    I couldn’t agree with you more. Tomorrow I promise I will burn my own shorts, squeal like a pig, and then die. So long, and thanks for all the fish.

    Your most humble and obedient servant,

    Cash

  24. Matt Dubuque

    Bad, bad job NYT for “reporting” yesterday that this Lehman’s would be a Chapter 7 (not 11) filing.

    Such a waste of time, some of the drivel in that paper.

    I wasted 20 precious minutes yesterday trying to figure out how a Chapter 7 filing would be possible, thinking that somehow the NYT must have some clue.

    Banana republic newspaper. Rant rant deleted.

    Matt Dubuque

  25. Anonymous

    Was Gross also holding LEH debt, hoping for another bailout ? I hope he doubled-down on his last bet.

    BofA isn’t purchasing Merrill until the deal gets signed off. Won’t happen imo.

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