WSJ: Private Sector Resolution Looking Less Likely; Pressure Continues for Bailout (Updated)

The Wall Street provided an update on the Lehman rescue efforts which were consistent with its earlier coverage, which discussed considerable impediments to a “good bank/bad bank” solution with Wall Street firms providing the capital to support the bad bank. Note this contradicts the more optimistic report from CNBC on this approach (which we viewed with some skepticism).

Barclays is keen to conclude a deal for the brokerage firm but only if there is some form of government support. From the Wall Street Journal:

Barclays PLC, the U.K.’s third-largest bank, is emerging as a leading contender for Lehman Brothers…

A sale of Lehman to either Barclays or Bank of America Corp. remained dependent on government financial support…Barclays appeared to be moving more aggressively in trying to find a way to complete a deal.

That, however, would put any proposed deal at odds with the government’s reluctance to step in with funding….

Under a plan that was crystallizing Sunday, either Barclays PLC or Bank of America Corp. would buy Lehman’s “good assets”, such as its equities business, people familiar with the matter say. Lehman’s more toxic, real-estate assets would be ring-fenced into a “bad” bank that would contain about $85 billion in souring assets. The move would avert a flood of bad assets deluging the market, damaging the value of similar assets held by other banks and insurers.

On Saturday, one idea was for Wall Street firms to inject some capital into the bad bank. By Sunday morning, though, this option appeared to be losing support. Unlike when Wall Street firms stepped in to bail out hedge fund Long-Term Capital Management, today’s banks are much weaker financially. Some also are loathe to provide financial support at the same time a rival like Barclays has the potential to buy Lehman for a cheap price….

Demands by Bank of America and Barclays that the government somehow financially backstop the bad bank could be negotiating tactics during the talks. Barclays in the past has shown a discipline to not overextend on deals.

Jim Bianco e-mailed to tell us that the idea that Lehman can be wound down in an orderly fashion, with counterparties continuing to trade with it as assets are sold, is a non-starters:

Why does a deal have to be done today?

Moody’s warned last Wednesday that they will downgrade Lehman if they don’t either merge of raise capital immediately.

Why is a downgrade important?

“A downgrade would likely force Lehman to post additional collateral, increase short-term and long-term funding costs, and limit its ability to transact with partners which demand certain credit ratings,” Goldman Sachs Group Inc. analyst William Tanona wrote in a note today.

So, if nothing gets down, Moody’s downgrades them tomorrow and it’s over. To control the process, Lehman may file for bankruptcy tonight if nothing happens.

If Lehman does file, Moody’s has to downgrade their counter-party rating to junk. This forces everyone to stop doing business with Lehman. If you do business with a junk counter-party, you risk your rating falling to junk as well (you are only as good as your shakiest counter-party). Most buy-side accounts have fiduciary rules that bar them from doing business with a junk rated counter-party. Recall that this was the trigger that buried bear.

No way that Moody’s will agree to keep a bankrupt broker with an investment grade counter-party risk rating.

Update 11:40 AM:

Bianco’s comment suggests a narrower form of government support might work. Could the powers that be merely guarantee the actively traded counterparty exposures? You’d keep credit default swaps out of this. since there is (presumably) no good reason for firms to enter into new CDS agreements with Lehman at this juncture. But how would you draw the line between old exposures and new positions? If a simple trade date cutoff would work, that might be fine, but it isn’t hard to imagine how this could be gamed. (On further thought, the rating agency issue would be with exposure to Lehman, period, so the approach might be guaranteeing those counterparty exposures that need to be traded and/or would be subject to a quick exit).

The idea would have the advantage of giving the deal a different appearance to the public, even if the amount at risk was the sam. Paulson & Co. could stress that bondholders would take their lumps too. It would prevent rating agencies from downgrading firms that continued to trade with Lehman. In theory, the exposure ought to be less. but if this angle wasn’t already under consideration (almost certain not to have been, given Paulson’s unwilingness to consider a rescue), could a narrower backup plan be crafted on short notice?

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  1. Anonymous

    Guaranteed government subsidy for “bad bank” or for entire Lehman entity. Paulson/Bernanke will blink first. They don’ want to be remembered as the guys who started the great unwind, so they will throw taxpayer largesse into the mix. This deal will get done today.

  2. S

    BArlays has a $20B line in place at the FEd. This is from the bear windown I recall (?). Naturally it shouldn;t be shocking they rise to the top.

    Regardless of what happens with LEH it should be more than troubling that the heads of the respective banks have been drawn together to make pretend so no one has to true up their books. That is the scariest part of the whole ordeal. Not surprising at all. The charde continues for another few days, or not..

  3. Matt Dubuque

    The negotiations seem to have taken an unmistakeable turn for the worse.

    As a major power center in this fiasco/catastrophe, I would sincerely hope that the ratings agencies were included in these discussions.

    I have no evidence one way or the other whether this is the case. But they need to be at the table. All parties need to know exactly what needs to happen to avoid an immediate downgrade.

    If they are NOT at the table, then Bernanke and Geithner need to take their share of the blame for that. It would be a catastrophic mistake.

    If Moody's and S&P and Fitch ARE at the table, a deathbed type approach (which now may unfortunately be necessary) might be to get those three agencies to postpone any ratings change for 12 to 24 hours.

    That may be our next, best hope here.

    It looks grim and China is intent on establishing global supremacy in the financial arena now that the Olympics are over.

    Matt Dubuque

  4. AndyG

    I think Barclays are desperate for a deal here, but not for the reasons you might expect.

    My thinking is BARC do not want a liquidation of LEHs assets in a firesale. Given the fantasy pricing BARC currently has against it’s own questionable assets in a liquidation they have the most to lose. The risk is if there is price discovery BARC will not be able to get there current marks past the auditors come year end and will have to raise a substantial amount of capital.

  5. Gringcorp

    I’m not sure how the agencies could maintain any rating above D in the event of a bankruptcy. They’ve proved much more amenable to pressure than I’d have thought, particularly over the monolines, but a bankruptcy filing is one of those events they can’t really finesse.

  6. Anonymous

    Jim Bianco here ….

    The rating agencies are most likely NOT at the table. As a matter of practice, they will not get involved in any dealmaking. They believe it is not their job to run the company or tell them how to achieve a partucular rating (game the system). The are suppose to be an impartial non-observer. Recall the endless talks with NY Insurance commisioner Eric Danillo to save the monolines last winter from a downgrade. The rating agencies were not part of those talks either.

    That said, the parties at the table know exactly what they need to do to prevent a downgrade. So, the rating agencies are not required to be in the room.

  7. doc holiday

    As I recall with LCTM, the junk which was spun off (in that crisis) ended up making a profit for the rubes that held it, and for the most part, everything turned out happily ever after. However, it’s been years since I’ve read that quaint old story and those details, but perhaps the difference between then and now is that we have a far more corrupt government in place and far more greedy bankers that have very few incentives to do anything worthwhile. As some may recall, this is a matter related to insiders, board directors and the elite who wish to continue compensating themselves with far greater rewards and taking advantage of opportunities that exist under the current political coup which is struggling with selling the Ownership Society.

    I also recall that LTCM really pissed off Buffett, so maybe they should try calling him again, or maybe ring up Pimco?

  8. Matt Dubuque

    Jim Bianco my 2nd post in 10 because you apparently replied to my post:

    I understand your good points and example.

    But we need them in the same building, sequestered to preserve impartiality if you will, to let everyone know under what conditions they will postpone a downgrade.

    This has become a central and very important factor in these negotiations.

    So if in 6 hours the other parties say, “Look, we think we can arrive at a price, but Morgan and Goldman need 9 more hours to sort through the final 800 billion of credit default swaps and Bush wants to consult with an unnamed third party (former Treasury secretary James Baker?) before signing off on a public backstop (UGH!) then the onsite ratings agencies could say we only have 3 hours or we face a derivative shareholder lawsuit based on refusal to downgrade being a substantial factor in a Shanghai crash.

    And the bargaining with respect to a timetable and drop dead deadline before a downgrade would be far more efficient if they were in the same building.

    They can be sequestered to preserve impartiality. But they should be in same building, at least during this tumultuous climax.

    Matt Dubuque

  9. Stuart

    Paulson has drawn a line in the sand that no taxpayer funds will be at risk. Any option to guarantee the actively traded counterparty exposure crosses this line as most assuredly taxpayer money would be at risk.

    At the end of the day, good bank or bad bank, regardless, these bad assets have to have ownership taken for them… These efforts are just another in a long series, dating back to the M-LEC Super SIV concept of shuffling chairs on deck of the titanic.

  10. Anonymous

    Just as I predicted with FNM and FRE (that Paulson was merely in a months long charade to make it appear that he was backed into a corner when all along he knew he would bail them out), I fear this whole weekend was another charade to again make it appear that he was forced to bailout LEH at a time when bailouts were becoming more and more unpalatable to the public. I think Paulson et al have known all along this doesn’t get done without a government backstop, and that’s exactly why they said at the very beginning on Friday that there would be no backstop. Why release that information to the public at the very beginning unless you are trying to manage the public’s expectations? At the end of the weekend, you go back to the public hat-in-hand and say “I tried, but it was just impossible. We needed to backstop LEH. There was no other solution.” I sincerely hope I’m wrong. But isn’t that exactly what happened with FNM and FRE?

  11. ParisW

    “So if in 6 hours the other parties say, “Look, we think we can arrive at a price, but Morgan and Goldman need 9 more hours to sort through the final 800 billion of credit default swaps and Bush wants to consult with an unnamed third party (former Treasury secretary James Baker?) before signing off on a public backstop (UGH!) then the onsite ratings agencies could say we only have 3 hours or we face a derivative shareholder lawsuit based on refusal to downgrade being a substantial factor in a Shanghai crash.”

  12. parisw

    …. Shanghai is closed on Monday. So is Tokyo. Only Sydney is open. The powers that be have until European markets open.

  13. Matt Dubuque


    3rd post in 10 because this is a sigma 6 event. I promise to shut up for 10 more posts.

    With respect to your idea of:

    “Could the powers that be merely guarantee the ACTIVELY TRADED counterparty exposures?”

    I would say that “actively traded” could be defined as a particular security changing hands, for example, 3 times in the last month.

    That’s just an example out of my hat. But the volume of recent trades could help define the term “actively traded”.

    But the key point is time. We need Moody’s in the building, sequestered to preserve impartiality, to give us minute by minute updates on when they will pull the plug on us all with a ratings downgrade.

    Back to silence.

    Great job by the way. Who the hell needs CNBC when you are the reporter on the beat?

    Matt Dubuque

  14. ss

    They actually have longer as GWB can declare a bank holiday if so inclined.

    I tend to agree with the argument that Paulson will blink and that this weekend has been theatre. I think he honestly wanted to press the banks to chip in but they just aren’t buying it — as he wouldn’t have.

    I don’t see that guarantees of any kind change the basic situation that LEH is insolvent. The only question is who pays to prevent an event of default so the CDS’s don’t go nuclear and the RE assets don’t hit the market at fair value. The bondholders are just beneficiaries of the inability of the market to manage the CDS risk.

    Arguably, this brings up an interesting point regarding why it is taking so long to set up a clearing system. It’s not the technology. Surely, they could have come up with some way to value contracts with different terms by now…

  15. Anonymous

    Matt Dubuque-

    From looking at your last several posts it would seem as if your concerns about a deflationary burst have recently reached new levels. I was wondering if you would be kind enough to share the reasons for this.


  16. private

    bianco says, “If Lehman does file, Moody’s has to downgrade their counter-party rating to junk. This forces everyone to stop doing business with Lehman.”

    bianco is wrong about this. Filing bankruptcy could help Lehman, and make people MORE WILLING to trade with Lehman.

    If parties think Lehman is a credit risk (especially one at risk of filing bankruptcy), then parties will stop trading with Lehman out of fear that if trades lose money before Lehman’s bankruptcy filing they have to pay Lehman 100 cents on the dollar but if trades make money before Lehman’s bankruptcy filing they only get a unsecured claim subject to the same haircut as all Lehman’s general unsecured creditors.

    However, if Lehman files bankruptcy, and persuades the bankruptcy court that it’s worthwhile to let it keep trading, trades closed after Lehman files bankruptcy get a priority on Lehman assets above those of Lehman’s general unsecured creditors, and trades entered with Lehman before the bankrutpcy filing get a priority for appreciation that occurs *after* the bankruptcy filing.

    Calpine and Mirant were examples of this. They were energy trading operations, and people kept trading with them after they filed bankruptcy because counterparties got priority claims for appreciation in their rights that occurred after the bankruptcy filing. And only took haircuts on their claims attributable to appreciation that occurred before bankruptcy.

  17. Anonymous

    Jim Bianco here ….


    The rating agencies do not move on the weekend. A downgrade will come tomorrow, if necessary. If a deal is forthcoming, the parties can contact the rating agencies tomorrow morning and tell them a significant change in their capital structure has taken place, or is about to take place. It is then up to the rating agencies to decide what to do. Most likely they will wait.

    Remember, the rating agencies will NOT be part of this process. They will not be in another room giving thumbs up or down to anything Paulson or Geithener runs through the door with. This is exactly what Dinallo wanted and they refused to play with him.

    Final thought. Let’s say they have a deal in principal and need another day or two to finalize it out? What happens to Lehman tomorrow? Under this scenario, their employees go to work and do absoutely nothing. no trades, no research reports, and probably will not even be allowed to make a call or send an email. In fact, their bankruptcy lwayers will probably tell them not to pay any debt or repo due tomorrow. If they do, it could be taken back in a subsequent bankruptcy filing.

    So, you don’t get 9 more hours. It’s today (Sunday) or nothing (bankruptcy). This process will not allow someone yell “wait, we are close.”

  18. private

    bianco says, “In fact, their bankruptcy lwayers will probably tell them not to pay any debt or repo due tomorrow. If they do, it could be taken back in a subsequent bankruptcy filing.”

    bianco is wrong about bankruptcy –again. When a company files chapter 11 bankruptcy, it makes same day motions for authority to ensure it can continue normal business operations. The court gives these motions a priority hearing for a ruling on an interim basis, until there’s time to hold regular hearings.

    If Lehman was going to file, they’d be ready to do it the minute the court opened. And if they’ve got a deal agreed to before-hand, they could walk into a court with the deal, and try to get it approved, i.e., try for a pre-packaged bankruptcy.

    Making assertions without cursory research makes you look foolish. Like Johnnie Hussman talking about what would happen to trades in a Bear Stearns bankruptcy, and saying counterparties’ pre-bankruptcy trades were protected. WRONG. Johnnie kept saying the counterparties were “customers” entitled to protection. WRONG. As I explained in my prior comment.

  19. Anonymous

    Jim Bianco here …


    To your second post. Lehman is not expect to file Chapter 11 (reorganziation). They are expected file Chapter 7 (liquidation).

    To your first post …

    Energy trading is unregulated and the rules are looser on who trades with whom. Recall that Calpine was a junk credit to begin with and it never stopped anyone from trading with them. Energy trading is the Wild West whereas investment banking is tightly regulated and has lots of rules and regulators.

    Brokers and the buy-side will be forced to stop doing business by law, not economic rationalization. They have rules that prevent them from having a non-investment grade counter-party. Recall, this is exactly what buried bear. They lost their investment grade rating on Thursday March 13. This forced everyone to stop doing business with them on Friday, the stock plunged and the Fed agreed to let them to use the window through their clearing broker, J.P. Morgan. By then the damage was done and they were forced into a buyout with Morgan at $2/share on Sunday night, March 16. (It was subsequently changed to $10/share when Morgan screwed up the merger agreement).

    Additionally, Lehman is so leveraged and has such a huge negative net worth, they cannot afford the additional collateral requirements to keep doing business that a downgrade requires.


    Finally thought, Charles Peabody of Portales Partners has an interesting report out. He says if you add up all the costs to J.P. Morgan, the true cost of taking Bear was $106/share. He also notes that Jamie Dimon has repeatedly said it was a mistake for Morgan to do the deal and if he had it to do all over again, he would not have done it unless the Government offered him more support.

    I agree with Peabody that the Bear deal was not the good for Morgan and everyone in the room knows it. Why do you think no one is interested in Lehman without Government support? In fact, they probably want more support than Morgan got for Bear.

    Football time!

  20. Anonymous

    The worst case would be that a Lehman deal does get done … then the market opens Monday, and Merrill and AIG just carry on swirling down the drain to oblivion.

    If bailing out Bear, then Fannie & Freddie, and then Lehman doesn't stop the rot — then we are in a world of hurt.

    Dr. Bernanke — START YOUR PRESSES!

  21. David Pearson


    Perhaps you could tell us how bankruptcy affected Drexel as it wound down operations. I don’t remember it disrupting trading.

    It seems to me Lehman has more than enough liquidity to settle trades and unwind trading positions. To unwind, of course, you must get people to trade with you, so I understand the counterparty issue. Can’t they trade through another Wall Street firm by putting up collateral?

  22. Anonymous

    Jim Bianco here ….

    Screaming Bloomberg headline time stamped 12:57


    I guess we will find out if Private is correct and if an investment bank can continue to do business while in Chapter 7.

  23. private

    bianci says, “I guess we will find out if Private is correct and if an investment bank can continue to do business while in Chapter 7.”

    It is easy to continue to business in a liquidating bankruptcy. The debtor files chapter 11, and uses the bankruptcy to liquidate. This is a so-called liquidating chapter 11.

    If bianco is right that counterparties won’t trade with a securities broker that’s a debtor in bankruptcy — even though bankruptcy law gives them a priority claim for trades closed after the bankruptcy filing — then Congress failed miserably. I’d be surprised if SIFMA didn’t educate Congress enough to get it right. But we will see.

  24. doc holiday

    FYI, Background Check:

    Enron Bankruptcy: Counter-Party Rights Under Derivative Contracts…cts-12-05-2001/

    Preferences and fraudulent conveyances. A preference payment under the bankruptcy code is a payment made to a creditor on an pre-existing debt within 90 days of the bankruptcy filing. Preference payments must be returned to the bankrupt debtor, and the person who received the preference payment becomes a creditor in the bankruptcy. Similarly, a fraudulent conveyance is a transfer by a debtor where reasonably equivalent value is not received by the debtor, if the debtor is or is rendered insolvent or certain other conditions are met. Fraudulent conveyances may be avoided in bankruptcy…..

  25. Anonymous

    So Treasury is hanging tough; not just doing theatrics before scourging the taxpayers again.

    Okay, fine. Looking forward to having a front-row seat at the train wreck.

    Guess we’re back to the Greenspandian modus operandi — don’t be pro-active; just wait till stuff breaks, then scrape up the mangled roadkill.

  26. Dave

    So perhaps at last we are near the end game of this slow moving asset bubble.

    The problem all along has been that most assets were too rich (houses, bonds, stocks, etc.) based on long-term fundamentals.

    The Establishment’s belief has been that if it could slow down or stop the fall in house prices then everything would be o.k. But the problem is that house prices have been falling because they are too expensive based on fundamentals. And the Establishment can’t change those fundamentals. All they can do is work some short-term voodoo to confuse folks, which actually worked for quite some time.

    Apparently voodoo time is just about over barring some miracle.

  27. Anonymous

    Breaking good news out of NYC: It sounds like Barclays has backed completely out and Lehman will be filing BK tomorrow.

    Thank god the unwinding can finally begin.

  28. AndyG

    Paulson is going to bend over and take it I guarantee you.

    US taxpayers you are about to take responsibility for another $30bn of garbage.

  29. AndyG

    There is no way Paulson is going to let Lehman file BK, not in a million years and the guys in the room with him know that.

    The guy has no guts.

  30. Anonymous

    Jim Bianco here …


    I just talked to bankruptcy expert …

    Calpine was allowed to continue trading because the energy trades were deemed FERC jurisdictional. In other words, the bankruptcy court said energy trades were outside the bankruptcy rules because they were regulated by FERC. FERC rules on these trades took precedence over bankruptcy rules. A district court agreed. This is why the energy traders can continue to trade in bankruptcy. My bankruptcy expert also said this is an apple to orange comparison to Lehman.

    Hope this helps

  31. Anonymous

    “Apparently voodoo time is just about over barring some miracle.” — Dave

    We are out of the voodoo, and into the doodoo.

    Please stand back from the turbo fan blades.

  32. Anonymous

    There seems to be some equivocation regarding Barclay’s position on the wires — i.e. if the Fed blinks they’ll come back to the table.

  33. Cash Mundy

    The “taken away and shot” part was certainly interesting to see on

    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.

  34. Mark

    Unlike when Wall Street firms stepped in to bail out hedge fund Long-Term Capital Management, today’s banks are much weaker financially. Some also are loathe providing financial support at the same time.

  35. Yves Smith


    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.

  36. Matt Dubuque

    Bianco, those are all good points you make. I wish you were wrong on most of them, but I doubt you are.

    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

  37. Matt Dubuque

    Just one more post because 2 people asked questions/responded to an earlier post. Then I’m silent for 10 or more.

    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

  38. private

    bianco says, “Calpine was allowed to continue trading because the energy trades were deemed FERC jurisdictional. In other words, the bankruptcy court said energy trades were outside the bankruptcy rules because they were regulated by FERC.”

    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.

  39. Anonymous


    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

  40. Anonymous

    Matt —

    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?”

  41. Carlosjii

    I still don’t understand why most Americans think there will be no consequences to Bush devaluing the US dollar to pay for the Iraq war. This is just like LBJ – the last ignorant, arm-twisting guns-and-butter President. Remember silver quarters, big clunky half dollars???????? Remember the ’73-’74 bear market that followed.

    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.

  42. Cash Mundy

    Anon. of 2:26pm: I agree with and think I understand everything you said about the creditor countries. A case could be made for them demanding the Fed bail out LEH to avoid systemic decompensation, but given the lack of a bailout, it appears that if the creditors have a strong view, it is against a bailout, no? Or am I still missing something? If Nouriel Roubini is right (and I think he makes a habit of that) no political considerations would prevent a bailout given the political implications of crashing the whole system.

    FT now reporting Barclay’s is out.

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