A few hours ago, we went over the most recent report on the Lehman talks sponsored by the Fed (the Wall Street Journal had a remarkably detailed account), and it seemed as if the obstacles to getting a deal done were considerable. Although there was discussion of forming a “good bank/bad ban” structure, it sounded unlikely to fly. One of the suitors, meaning Barclays or Bank of America, winds up with the good part, and the Wall Street firms (which may include BofA0 pony up some equity to capitalize the bank bank.
One didn’t have to read much into the Journal story to see the idea faces obstacles that may prove insurmountable.
The problem, though, is getting enough banks to back that plan. While teams of bankers are working through structures, it’s clear that only a handful of banks are in a position to provide enough funding. Many banks are inclined to preserve capital ahead of third-quarter and year-end cash preservation moves. Also, banks aren’t keen to see a big rival such as Barclays or Bank of America walk away with valuable assets by only paying a pittance.
Yet that idea is going forward, at least as CNBC tells it. However, this may be a matter of form, to present the assembled bankers with more fleshed-out versions of their options as a preliminary to trying to force a resolution.
A deal has been drafted to buy Lehman Brothers’ bad assets and clear the way for an eventual sale of the troubled firm….
Under the terms of the proposal, which could still blow up, all the major Wall Street firms would pitch in $30 billion total to purchase Lehman’s bad real estate assets and create what’s knows as a “bad bank.”
The proposal is being drafted Saturday night and will be discussed Sunday morning, according to sources close to CNBC. If Wall Street agrees on the terms, which would amount to around $3 billion per firm, it would clear the way for the sale of Lehman Brothers itself to one of several suitors, including Bank of America, Barclays Plc and HSBC.
Executives remained less than pleased with the proposal as they left the New York Federal Reserve around 6 p.m. to convene again Sunday morning….
“Why should we give up capital so Barclays and Bank of America can buy a clean bank,” said one Wall Street executive.
Despite the grumbling, those in the know expect the deal to get done Sunday….
One Wall Street executive involved in the meetings put it this way: “I’m thinking logically; if they do nothing it’s Armageddon. That means they do a deal. It will be announced at 6 p.m. (ET) Sunday.”….
But with firms like Bank of America and Barclays refusing — at least so far — to budge on their position that they will only buy Lehman without the beaten down real estate assets, and the street balking on the government plan, which calls on the big firms to chip in a total of around $3 billion to purchase the Lehman assets, people with direct knowledge of the meeting say a deal may not get done.
The complicating factor here is that the participation of all (presumably ten) banks is crucial. In the LTCM rescue, the number of firms involved was much larger (my recollection is 24), so the defection of one would not greatly increase the burden on the rest. Even so, Bear Stearn’s refusal to participate was widely resented and many believe it contributed to the firm’s failure. Here, one holdout could produce a deadlock.