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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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?