Emergency Fed Meeting: Paulson and Fed Attempt to Jawbone Wall Street to Rescue Lehman

Not surprisingly, it appears increasingly unlikely that private parties are wiling to take on a company that is pretty certain to have negative net worth, particularly when the point of a deal is to have someone, anyone take on the liabilities. But the Fed and Treasury are equally unwilling (at least as of now) to provide financial support to any rescuer of Lehman.

The Treasury and Fed are trying to surmount this impasse with brute force and according to the Wall Street Journal have convened a meeting to knock heads together and force a private-sector solution. Although the Wall Street Journal is comparing this effort to the rescue of Long Term Capital Management, that was a comparatively genteel affair. As told by Roger Lowenstein in his account, When Genius Failed, the mere act of convening the heads of 24 financial firms in the Fed’s board room had considerable shock value. The Fed simply pointed out that letting LTCM fail was a Bad Idea and told the attendees the would be well served to prevent that from happening.

There is no element of surprise here, and the firms that are being prevailed upon to rescue Lehman are themselves battered. Given Lehman’s long-standing denial about the precarious state of its finances, it isn’t clear whether either Lehman or those who have looked at its books can make a solid estimate of how much would be required to recapitalize the firm (even if it is dismembered, somewhere there will need to be sufficient equity to absorb the expected losses).

From the Financial Times:

The outcome of the discussions is crucial to Lehman as the bank attempts to restore the confidence of counterparties and creditors and to prevent Moody’s and Standard & Poor’s, the ratings agencies, from cutting its credit rating. However, it is far from clear on what terms Lehman is able to agree a deal – if at all.

People close to the discussions said Lehman’s $33bn portfolio of commercial real estate could prove a stumbling block for any deal. Potential buyers could be deterred by fears of further writedowns on the assets, which in turn would depress the value of Lehman’s other businesses.

From the Wall Street Journal:

The Federal Reserve Bank of New York held an emergency meeting Friday night….

The meeting, which began at 6 p.m., was called by the New York Fed in an attempt to find a solution to the problems plaguing Lehman. The group, which consisted of the heads of most major financial institutions, is expected to meet throughout the weekend to see if it can agree on some way to rescue the ailing firm….

Treasury Secretary Henry Paulson has made it clear to participants that no government bailout should be expected,…

One big issue: Most of the firms at the meeting have themselves been hit with big losses and may not have the excess capital to step in….

Because the 158-year-old Lehman does business with several other Wall Street firms, the damage from any failure there could have widespread effects,,,

As of late Friday, Bank of America Corp. was seen as the likeliest buyer, but Lehman and its investment bankers also were meeting with other potential bidders, including Barclays PLC and HSBC PLC, both of the U.K. Other parties were looking only at pieces of Lehman, with Goldman Sachs Group Inc. interested in some of the securities firm’s huge real-estate portfolio.

But suitors like Bank of America, worried about the risk of buying an ailing financial institution like Lehman, want the government to step in with a package similar to what was offered to J.P. Morgan when it bought Bear…

While talks continued Friday, Lehman was working on dual tracks. On the one hand, executives were negotiating to find a buyer for the company. At the same time, the company was moving ahead on other business, with bids for a stake in the pre-announced auction for its investment management unit due Friday night. The firm is also still planning to release its fiscal third-quarter earnings on Thursday.

We noted yesterday that the most likely outcome was a stealth bailout, such as liberalizing collateral rules on existing (or expanded) Fed facilities, and/or having banks that take on Lehman exposures make increased use of the Federal Home Loan Bank system.

Update 11:30 PM: Get a load of this tidbit from the New York Times:

Fed officials, for example, are now embedded at each of the big Wall Street investment banks and have at least some capacity gauge the firms’ exposure to hedge funds and other big players, as well as their positions in financial derivatives and other opaque markets. Fed and Treasury officials have also been taking the daily pulse of executives and traders on Wall Street for months, and much of that discussion has been about Lehman.

By what authority is the Fed supervising investment banks? This is completely outside their purview.

Update 12:40 AM: The Financial Times. contradicting the Journal and Times, says the meeting is not about rescuing Lehman:

The FT understands that the US authorities did not ask the banks present to chip in to save Lehman as they did in 1998 with LTCM – and focused instead on the implications of its troubles and potential demise for markets and the financial system.

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  1. Anonymous

    Your information has been inaccurate all week. You lied about Goldman Sachs buying Lehman. Why should anyone trust you now?

  2. Anonymous

    My plan: The Fed should let another firm take over Lehman and guarantee that any losses will be taken out of the salary/bonuses of all former Lehman employees that have made over 100K a year the last 5 years.

  3. bg

    Why is bankruptcy such a poor option? Do we really think settlements are impossible, and there will be cascading trade breaks? Bankruptcy would expose the bond holders who are the people who are supposed to be exposed after the equity is wiped out.

  4. Anonymous

    By all means save Lehman now. The blood must first be staunched before the patient can be heeled. Letting Lehman fail now with all financials gravely will will only hurt the body more.

    This is not like removing an abcess from a healthy body. Letting Lehman fail is like using leeches to bleed a patient suffering from anemia.

  5. Steve

    I don’t get the LTCM parallel in the WSJ article. For starters, Lehman is a public company. And the LTCM `bail-out’ was first and foremost an opportunity for people smarter than Jimmy Cayne to examine and front-run LTCM’s book.

    If this meeting was really an invitation to do something to save Lehman–as opposed to a `Gentlemen, net your exposures’ meeting–it’ll be interesting to see how the legal rights of Lehman’s shareholders and bondholders get handled without government intervention.

  6. Anonymous

    hello people. this is not about saving lehman. it’s about saving the 3 companies lined up behind it in the same damaged factory. what do you want, a bailout, or a domino effect creating systemic failure? don’t you think there was a reason resolution trust was formed?!

    my prescription for the FEDs is to create another RTC-like fund. that way you are not only bailing out LEH, you bail out the other iBanks who are only going to face the wrath of short selling if you don’t.

    no bailout for lehmans this weekend, but a bailout for the financial system for sure.

  7. Dude

    Everyone is so damn polite….let the bastards drown in their cess pool of greed, along with all the others’ in the boys club….this country has turned into a bunch of mamby,pamby’s….and if there was ever a “fox guarding the henhouse”, why is Paulson allowed to think anymore?….Regards everyone.

  8. Anonymous

    The group, which consisted of the heads of most major financial institutions

    A meeting of the den of thieves in the biggest banana republic in the world. Expect massive government intervention in the equities futures market and a rate cut by the FED on Tuesday at the latest.

  9. Anonymous

    The parade of pain seems to be continous these days and after billions of FED and taxpayer dollars have been tossed at the problem. Just maybe this credit crisis thingy may not end well..just saying

  10. David Merkel

    Yves, the Fed has many drones, all Ph.D. economists, and they attend all manner of events. I run into them at insurance conferences, and I ask, “What are you doing here?” and the answer is like this, “The Fed is interested in the whole financial system. This is a part of the financial system, so we are here.”

    They are unfailingly nice people, but they are wallflowers at such affairs. I am not surprised that they are hanging out in investment banks, and ineffective there.

  11. a

    “what do you want, a bailout, or a domino effect creating systemic failure?”

    The bailout of BS didn’t stop the dominoes. Bailout out Lehman isn’t going to help WaMu, Merrill, AIG, or Citibank. The dominoes will keep on falling, because the fundamental problem is insolvency of the institutions concerned.

  12. a

    “I am not surprised that they are hanging out in investment banks.”

    They started hanging out after the Fed bailed out BS. It makes sense to me.

  13. Yves Smith

    David Merkel,

    There is a big difference between going to a conference, which is open to the public, and being on premises of a private entity in a supervisory capacity.


    I may be a dinosaur, but I still believe in the importance of the rule of law. I am therefore distressed that, for instance, the Fed clearly overstepped its legal authority in arranging the Bear bailout. The Fed does not have the authority either to enter into loans longer than 28 days or encumber taxpayers without Congressional approval. Yet there has been no pushback. It also has not authority as reagards the stability of the financial system, even though that is its self-declared mission per its website.

    This lack of concern about restrictions and the limits of authority has become pervasive in our society, and I find it distressing. Having Fed officials hanging out at brokerage firms is no different than having Massachusetts state troopers operating in Oklahoma without any enabling legislation being passed in Oklahoma.

  14. doc holiday

    FYI: All of which raises the question of why Warren Buffett would want to pick up this particular piece of road kill–and yet he made a stab at doing exactly that. His move came on Wednesday, Sept. 23. It interrupted days of meetings that the New York Fed had been holding with the banks and brokerage firms that Long-Term Capital owed huge amounts of money to, which were being asked, in their own self-interest, to put up new money to stave off the fund’s bankruptcy. The participants were an extraordinarily powerful group–every bank and firm that attended had sent its CEO or another top honcho–and the atmosphere was contentious. None of the members really wanted to ante up the money, and yet they dreaded a bankruptcy.

    As the creditors’ group was about to reconvene on this Wednesday morning, William McDonough, president of the New York Fed, learned from Goldman Sachs–itself one of Long-Term Capital’s creditors–that it had an alternative financing proposition to present. McDonough recessed the meeting and listened to Goldman make the case for a bid, headed by Buffett’s Berkshire Hathaway, to take over the fund. The terms were complicated–more on that later–but essentially the Buffett group proposed to put up $4 billion and make itself the manager of Long-Term Capital. Of the $4 billion, $3 billion was to come from Berkshire, $700 million from insurer American International Group, and $300 million from Goldman Sachs.

    This bid then went to Meriwether, and that’s when it began to die. There is disagreement as to why. Buffett believes that the deal did not happen because Meriwether and the other LTCM principals simply did not want to accept his terms, which would have left LTCM’s principals with little money and no jobs. For their part, Meriwether and other LTCM partners told McDonough that the Buffett bid was structurally flawed and therefore not feasible.

  15. Steve


    Completely agree with your post of 12:26AM. The only comfort I take is that the Fed’s behavior is not a grab for power—it’s desperation, really—any kind of effective legislative control was surrendered time and again by politicians of both parties greedy for contributions from the Street. Even now, they’d rather have the Fed in a grey area than do anything to assume responsibility themselves for this financial catastrophe. If the Fed succeeds, great—but wag a finger at their audacity—if they fail, they’ll be the whipping boy. The same mealy-mouthed Senators who applauded the Fed in the Bear hearings will make unflattering noises if the Fed ponies up to rescue Lehman—and that’s all they’ll do—but they’ll scream bloody murder if the Fed withholds support and a Lehman failure produces even the smallest contagion. If there’s no contagion, they’ll wail about the stockholders and creditors.

  16. HardCorps

    Welcome every citizen to National Socialism. The first step is the “unification” of the financial system under the Unity State. As you all are good Patriots, rise and cheer for the strength of the state to protect your freedoms. After having the orgies of state worship in Denver and St. Paul, the two state glorification parties will now be Unified to one state party. War is Peace; Freedom is Slavery; Ignorance is Strength. – Ministry of Truth.

  17. David Merkel

    Yves, point taken. It just doesn’t surprise me that they are there, with all of the surplus bodies that they have. As for my conferences, why should the Fed care about Variable Annuity Guaranteed Living Benefit Hedging? The conference was that narrow…


    PS — This is why I want to eliminate the Fed regional banks and eliminate their broader mandates. They have too many people in places unrelated to their stated mission.

  18. alan von altendorf

    My thanks also. Naked Capitalism is a daily must-read. About Fed officials hanging around at bulge bracket i-banks: Probably froze all discussion, all rational thought. Who can talk freely with a compliance cop in the room?

  19. s

    I suspect if leh has a hint of bailout the markets will sell off hard. Any bailout by other institutions including the government that are short capital will only escalate suspicion and the impulse the press the case harder. History suggests that doing ygr exact popsite of the feds intended outcome has been the clear winner. Article on drudge about how the media is skating on think ice with its bias. I think the fed and teeairy are getting precariously close to violating not just laws as you point out but trust of the American people. this thing goes into bankruptcy and the market clearing bids will hurt all the other banks balance sheets. Perhaps gay is their alamo. Otherwise say good night. Has fld resigned from the ny fed yet? This small point may be the biggest disgrace of all

  20. ruetheday

    Anyone else getting the impression that virtually every firm on Wall Street is “too big to fail” now in the eyes of the market? Perhaps it’s unsupported fear running rampant, or perhaps it’s greed in everyone wanting to get themselves into the bailout line, or perhaps it’s a recognition that the system is presently so frail and unstable that even a minor shock will send it tumbling over.

  21. Anonymous

    ruetheday: Yes. And among many reasons is that Bernanke, Paulson and Company are essentially engaged in a shell game by which they hope and pray that somehow, someway the markets can re-start without any accounting for the all the bad assets, insolvency, and lack of transparency. They’ve either misread (trying to be generous) or cynically manipulated this horror story from day 1. And now they’ve gone way beyond moral hazard to essentially guaranteeing no loss/no risk to any player who could/might currently help with the bailouts. These free market ideologues have nationalized the financial system — and, get this, they continue to apply free market ideology even as they do so because, when in doubt, they avoid any ‘regulation’ even of those things they — or we the taxpayers — now own.

    Pure, unadulterated single-answer fundamentalism is antithetical to problem solving. And, in a complex world, that means ideologues are predictably and inevitably incompetent.

  22. dd

    The Fed meeting is about the derivatives unwind aka “netting” and an opaque resolution for an opaque instrument. So much for transparent markets but it’s only a matter of time before “long term” investors realize that netting gives OTC derivatives effective priority over bondholders leaving “investors” with the bankruptcy costs and fewer assets.

  23. Matt Dubuque

    Yves, there may have been two separate meetings, one with Geithner at the helm and the other with Bernanke front and center.

    The Fed’s enhanced role was made possible by the August (July?) legislation that was the first step towards rescuing the GSEs.

    The FT covered this little noticed part of the legislation (and I recall it discussed in the Senate Committee), but it was underreported in the stateside media.

    You may recall this legislation was rushed through Congress, with only Jim Bunning voicing competent (but incorrect in important respects) objections.

    This enhanced regulatory role of the Fed REMAINS insufficient. The SEC track record in supervising investment banks is ABYSMAL. Their failures of oversight were a substantial factor bringing us to this catastrophe that threaten the core tenets of free market capitalism. Now it’s payback time.

    We NEED the Fed in this mix, instead of the corrupt “oversight” supplied by the SEC and the CFTC. The Fed participated in the bailout of Bear Stearns for a price. That price was increased oversight.

    They didn’t get all that they wanted (Barney Frank made sure of that), but this is a start.

    Matt Dubuque

  24. Anonymous

    Wasn’t installing supervisors at the investment banks a quid pro quo provision for gaining access to the PDCF?

  25. Matt Dubuque

    A quick note about possible “RTC type” rescues here.

    This is a VERY different situation.

    That RTC situation was about liquidating enormous quantities of commercial real estate and establishing a market for it.

    By contrast, a this crisis is about RESIDENTIAL real estate. The bad assets are mortgages on people’s homes, so it is a very different process.

    Matt Dubuque

  26. Matt Dubuque

    Anonymous, you may well be correct on the quid pro quo and the PDCF; I may have been mistaken. At any rate is was thoroughly vetted by all parties, including the SEC.

    Matt Dubuque

  27. Anonymous

    Anonymous is right; Temporary Fed supervision of i-banks was the quid pro quo for access to the Fed’s liquidity. The real question is whether this supervision will last after the crisis. The Fed thinks it should, the i-banks don’t.

    In my view, the US allowed the development of a set of institutions that were effectively both largely unregulated, highly leveraged (there is a quip to the effect that the difference between an i-bank and a hedge fund is that the i-bank is more leveraged) and too systematically important to fail. This allowed because regulating the street is hard, the regulators weren’t sure it would be effective, there was no political will to do it and there was a strong perception that the “too systemically important to fail” institutions were also too good to fail. The last point, alas, didn’t prove true.

  28. Matt Dubuque

    Let’s ponder the options here.

    Data Point 1: Bear Stearns, under SEC jurisdiction threatens to take down democratic capitalism singlehandely without warning.

    Data Point 2: The GSEs use of reckless HYPERLEVERAGE while under OFHEO jurisdiction threatens to bring down the entire global financial system.

    Data Point 3: Lehman, under SEC jurisdiction threatens to pour gasoline on a raging conflagration burning out of control.

    Data Point 4: AIG under ZERO FEDERAL supervision threatens to singlehandedly DISMEMBER the CDS network.

    There are 15 more data points I could list in 12 minutes.

    Now. After this passes (and it will, but the inflation bugs will be PROFOUNDLY chastened) we want to let these CRETINS enumerated above go back to the status quo ante of before?

    My, my.

    The Fed is NOT stuck on stupid. It’s payback time. Fasten your seatbelt, gold bugs.

    Matt Dubuque

  29. Matt Dubuque

    When I say “Fasten your seatbelt gold bugs”, just so there can be no doubt, if you somehow think gold is any shred of a hedge against a deflationary burst that is NOW more likely than not, you are sorely and irrevocably wrong.

    Please don’t say you weren’t warned, or that “nobody could have known”.

    I’m set for life no matter what happens. I own land up the yin yang.

    But I feel as a patriotic American whose family came over on the Mayflower and includes Abraham Lincoln to warn my fellow citizens of the LIKELY deflationary burst.

    Gold doesn’t work for that scenario.

    It fails miserably.

    I am neither long nor short gold; I have no position in it.

    Matt Dubuque

  30. Yves Smith

    Recall that the PCDF was implemented in haste, in response to the sudden rise in Agency spreads in late February, which was understood at the time to have nasty knock-on effects. I recall that there were comments made in passing that this whole arrangement was questionable, since the Fed does not supervise investment banks, and the investment banks weren’t keen about being supervised. Plus the spin put on the facility was that it was temporary.

    Note also that unlike the Term Auction Facility, which is used to its full extent, the PCDF has often had considerable unused capacity.

    I did a quick Google and have not been able to find anything confirming an extension of authority relative to investment banks. This is the most relevant discussion I located. From Jim Hamilton’s World of Securities Regulation in late June. The first part of the post discussed how the SEC is expanding its consolidated supervised entity (CSE) regime for investment banks:

    :Under the CSE program, the Commission supervises global securities firms on a group-wide basis. For such firms, the Commission oversees not only the U.S-registered broker-dealer, but also the consolidated entity, which may include foreign-registered broker-dealers and banks, as well as unregulated entities, such as derivatives dealers and the holding company itself. All of the CSEs are of potentially systemic importance since they trade a wide range of financial products, connected through counterparty relationships to other large institutions.

    Note that SEC capital requirements are (or maybe were, given changes being made) badly outmoded. Even when I was a young person on Wall Street in the earl 1980s, SEC capital requirements were in most cases less restrictive than what firms imposed on themselves (of course, in the days of private partnerships, they had reason to be conservative). That’s why the SEC looked a bit flat-footed when it said Bear was adequately capitalized. By the standards it had at the time, no doubt it was.

    The post had this bit regarding the Fed:

    For example, the Fed is now a very key player since, after Bear Stearns, the investment banks have temporary access to the primary dealer’s credit facility as a back-stop liquidity provider should circumstances require. Thus, the SEC is in frequent discussions with the Federal Reserve Bank of New York about the financial and liquidity positions of the investment banks and issues related to the use and potential use of the credit facility.

    Moreover, the director noted that the SEC and the Fed are nearing completion of a formal Memorandum of Understanding providing an agreed-upon scope and mechanism for information sharing related to the credit facility, as well as other areas of overlapping regulation. Under the current statutory framework, he observed, no agency is charged with the stability of the financial system broadly. The MOU will provide one mechanism for two of the critical agencies with responsibilities in this area to gain a broader and continuous perspective on key financial institutions and markets that could impact the stability of the financial system.

    The MOU will also provide a framework for bridging the period of time until Congress can address through legislation fundamental questions about the future of investment bank supervision, including which agency should have supervisory responsibility, what standards should apply to investment banks compared to other financial institutions, and whether investment banks should have access to an external liquidity provider under exigent conditions.

    If Ir read this correctly, the SEC may subcontract some of its authority to the Fed, but no new supervisory powers or scope appears to be in place.

    Anyone with more information is encouraged to speak up.

  31. Anonymous

    Matt Dubuque…..your assumptions about gold are flawed. What happens when the US govt. defaults on our debt? That won’t happen you say? Only a matter of time…..the dominoes are already falling….the rest of the world is waiting for just the right opportunity to end America’s stranglehold on world economies and politics….most nations would rejoice in seeing our nation implode.

  32. Matt Dubuque

    If the Treasury and the investment banks EACH consent to the Fed monitoring, i.e. adult supervision of the children playing with gasoline and matches, what is the issue?

    In terms of whether it is lawful, I’m sure neither Scalia, nor Thomas would support the proposition that the Fed overstepped its bounds. Scalia has been a leading exponent of administrative discretion, as long as the broad, general terms of the scope of authority are laid out by Congress. Scalia has written some of the lead opinions on this subject.

    Are we seeking activist, liberal judges to interfere here?

    If you let the police in your house to conduct a search, freely and voluntarily, you can’t later claim it’s an unlawful search. Same gig with the investment banks. The children let the big boys in and waived their right to object, especially because they begged the Fed for candy.

    So if the ENTIRE Supreme Court REFUSES to even listen to such a case, how can any person, in an alleged nation of laws, contend it is illegal?

    What the Supreme Court says, is the law of the land.

    To claim otherwise is anarchy.

    It’s best not to trash talk the surgeon before your child goes into surgery.

    Matt Dubuque

  33. doc holiday

    The solution to this mess goes back to a post here on June 27:

    FYI: One Method to Flush Out Oil Speculators: "Liquidation Only" Restriction

    Daniel Dicker, a former oil trader writing at TheStreet.com, contends that there is a way to test the hypothesis that speculation is influencing oil prices (a view that Dicker supports). Exchanges could impost a "liquidiation only" requirement, which was last used to break the Hunt brothers' attempted corner of the silver market in the early 1980s (hat tip reader Michael).

    >>> The Treasury/FTC/SEC/ Fed have to shut down derivatives and stop these banker crooks from spinning out more chaos in the form of synthetic derivatives. The crooked casinos have to be shut down ASAP! These crooks may cut the dividends and restructure and repackage garbage and toxic trash, but as soon as the smoke clears, these bums will issue themselves more option grants and link this trash to un-observable Level Three junk that is linked to more Level Three trash and these fraudulent illusions will make for a far better systemic collapse later — when these crooks have their loot off shore and safe from the meltdown they are engineering! These crooks need to be stopped dead in their tracks today and face prison time, and obviously, no law enforcement entities are in the room watching this hat trick!!!

  34. Matt Dubuque

    Here is my take on the negotiations:

    1. The Fed does not want to take on the toxic waste of Lehman, for the reasons set forth in Rogoff’s warning that Yves posted last week.

    2. The Great Decider does not want Lehman’s toxic waste on the government books. One reason is that Karl Rove told him another bail out would be unwise.

    3. B of A was interested in some of the assets, but wanted a subsidy. The Fed was willing to offer primary dealer status to the Chinese contingent, but B of A says this is not enough.

    4. Geithner has therefore gathered a group of primary dealers to demand that they all drink Lehman’s toxic Kool-Aid together (except for the Fed). As in Jonestown, many are currently objecting.

    5. The Fed has responded by telling them that failure to do so would cause a Depression.

    6. The primary dealers are responding by saying that we are going to have a Depression anyway.

    That’s how it stands at the moment, in my opinion.

    Matt Dubuque

  35. JosephS

    In regards to Lehman, Wamu, AIG and so many others the main issue at this point is capital versus access to funding. Funding remains available via various Fed faciltiies and the repo markets remain open as well, despite seeing lower transaction flows recently. Capital on the other hand, is disasterous and the run on the equities in all these entities has created a neccessity to either raise new fresh capital or else face the risk of being downgraded and then really providing a crisis on funding – in regards to today’s meetings in Ny i can see firms, and I agree with the earlier post – viewing their exposures to the Lehman Brother Special Financing Inc entity, which is where all the derivatives contracts sit – part of the complication here is netting contracts between counterparties is quite easy – but which ones do you net and at which market value? If the end game here is to let Lehman go down the LBSF entity will needed to be spared somehow in this process to immunize the rest of the system for the time being from the systemic cascade that BSC derivatives counterparty exposure would have caused. It seems to me that if the Fed/Treasury can manage the ‘street’ to guarentee the LBSF entity then they can let the rest fall as it may – or possibly break it up as well into pieces that bidders may want – if that doesn’t workout then the end game is difficult as lehman only has days left before one could question their access to ‘funding’ – cause we know they are cut off from fresh capital injections (without selling the best assets to obtain it). One thing about the derivatives exposure – it is one thing for the street to net out exposure amongst themselves, however, it is also the common exposures between other parties as well that may present the real problem – and the fact that these derivatives may not all be just offsetting buys and sells to the street and other hedge funds/asset managers but also be ‘risky positions’ that are naked or used as a hedges against other assets that sit within the Lehman Inc IB

    I think that if they manage to figure a way to remove the LBSF entity and capitalize it to retain the neccessary ratings to be a highly rated derivatives counterparty, then net out contracts common amongst the dealers, then figure out how to net out contracts to hedge funds and asset managers – they can remove the derivative systemic risk and then see if the good and bad assets left at the lehman holdco and Inc boxes can find a home, or just file it on the follow and seek a resolution to recovery, but at least they would not trigger the derivatives they had written cause that would have been removed/sold from the company already (basically sold for a market value of all the contracts if positive value exists)…

  36. bg

    The silence this weekend is deafening. In every other of the weekend-at-hank adventures, they promised resolution prior to Asian markets opening. Now the signal is ‘we won’t provide a backstop’.

    Given the obvious observation that lehman either has negative value or plausibly severely negative value, then the end game is near.

    With a downgrade they must post $4B in collateral, which I would assume would trigger a BK the same day … i.e. Monday.

    Ear-boxing by treasury to create a private bailout consortium may be desirable, but treasury lacks the moral authority post Bear/Frannie.

    what lovely drama.

  37. Yves Smith


    I provided commentary from a source that specialized in financial services regulation and asked if anyone had further information. You offered instead rank speculation, that the Fed had been invited in. That may be correct, but you have no factual support for your assertion. You then proceed to make a specious argument, that the Supreme Court would approve such a move. Since the Supreme Court has made no such ruling, nor are any cases before it in this area, this is merely an irrelevant opinion that detracts from more useful and informed discussion. And as before, you also engaged in a gratituous and unwarranted attack. I’ve told you before to refrain from attacks, and launching into me, particularly on such dubious grounds, is not wise.

    I warned you previously both about your tone and the amount of comments you make here. A reader whose commentary I value e-mailed me and said a rule of thumb he had seen (he thought at Marginal Revolution but wasn’t 100% certain) was that a sensible rule of thumb for blog commenting manners is: one comment per 10 comments. 2 comments per 10 only if directly addressed and 3-4 comments per 10 should be rare/non-existent, regardless. You are often way outside those levels.

    I have warned you about this before. You need to be more selective about commenting and watch your propensity to adopt a presumptuous, dismissive, borderline abusive tone. You are crowding out other commentary,

    If you want a soapbox, start your own blog.

  38. doc holiday

    Thought I'd add this to the longest blog ever generated:

    FYI: The United States Senate Committee on Banking, Housing, and Urban Affairs has jurisdiction over matters related to: banks and banking, price controls, deposit insurance, export promotion and controls, federal monetary policy, financial aid to commerce and industry, issuance of redemption of notes, currency and coinage, public and private housing, urban development and mass transit, and government contracts.
    In June 2008, the committee chairman, Christopher Dodd, was linked to troubled subprime mortgage lender Countrywide Financial. Published reports revealed Dodd had received mortgages on favorable terms owing to being a "FOA"–a Friend Of embattled Countrywide head Angelo Mozilo (Angelo R. Mozilo).

    >> The reason I add this, is because we have a room full of bankers re-inventing banking on-the-fly and playing with realtime crisis intervention, which is based on a lack of disclosure, making this private backroom manipulation a matter of non-disclosure, versus having this as a public debate, involving Congess, or some type of public servant that apparently not connected to this extortion!

    See Also: Due process under the U.S. Constitution not only restrains the executive and judicial branches, but additionally restrains the legislative branch. For example, as long ago as 1855, the Supreme Court explained that, in order to ascertain whether a process is due process, the first step is to “examine the constitution itself, to see whether this process be in conflict with any of its provisions….”[15] In case a person is deprived of liberty by a process that conflicts with some provision of the Constitution, then the Due Process Clause normally prescribes the remedy: restoration of that person's liberty. The Supreme Court held in 1967 that “we cannot leave to the States the formulation of the authoritative … remedies designed to protect people from infractions by the States of federally guaranteed rights.”

  39. dh

    Opps, forgot to add that banks are people too….

    FYI: The due process clause applies to “legal persons” (that is, corporate personhood) as well as to individuals. Many state constitutions also have their own guarantees of due process (or the equivalent) that may, by their own terms or by the interpretation of that State’s judiciary, extend even more protection to certain individuals than under federal law.

  40. Abbott_Of_Iona

    From the FT (Possibly old news)

    “BoA, Barclays and Lehman are not represented in the meeting, which is taking place at the Manhattan headquarters of the New York Fed.”

    From the New York Times

    The meetings, which involved top executives from Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup and other financial companies, continued on Saturday.

    Question: Are Bernanke & Bair and the CEOs (nor TOP EXECTUTIVES) having a different meeting with a different agenda?

  41. Matt Dubuque

    I apologize Yves-

    I had no idea that there were such quantitative norms for blogs. I hadn’t seen those quotas or targets published anywhere before.

    I’m new to blogging.

    I’ll post less. You can be sure of that.

    If I’m able to persuade you, through proper authority to your satisfaction that the Fed’s conduct is lawful, are you willing to make a public retraction of your repeated claims that their conduct is unlawful?

    If I am able to convince you through competent authority that you would understand and agree to, such a public retracton would seem warranted.

    I’ve got several items happening that are quite beautiful in my life. Taking the time out of my schedule to prove to you, to your complete and absolute satisfaction in a separate email exchange would take both statutory and administrative research on my part.

    I’ve never encountered any attorney with that opinion which you express so publicly; among attorneys it has never seemed to be a serious issue.
    And to publicly charge a person with unlawful conduct is of course libelous per se; similarly it is viewed as outlier behavior in civilized society to accuse any organization of unlawful conduct incorrectly. Indeed in many countries that is a criminal offense.

    But I might consider doing the necessary legwork to convince even you that the Fed is not breaking the law.

    But I wouldn’t want to waste my time unless I knew that you would in exchange publicly retract such a remarkable, bold and extraordinary claim, shared by no attorney I know of.

    And surely attorneys know something about the law.

    Does that sound fair to you?

    Posting far less now.

    Matt Dubuque

  42. bg

    Uh-oh, Lehman bondholders are squealing:

    Germany urges US to find solution for Lehman Brothers crisis before Asian markets reopen
    Associated Press

    Last update: September 13, 2008 – 8:23 AM

    Featured comment

    I’m sure
    the CEO and the board members will vote themselves million dollar bonuses and exit packages for saving the company from bankruptcy. … read more Taxpayer expense of course.
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    NICE, France – Germany called on U.S. authorities Saturday to find a solution for crisis-hit bank Lehman Brothers before Asian markets reopen for trading early Monday.

    U.S. officials have so far talked down a government rescue for the country’s fourth-largest investment bank, which is racing to find a buyer to raise badly needed money it lost on bad bets on real estate holdings.

    Finance Minister Peer Steinbrueck — who manages the EU’s largest economy — told reporters that “the news that is coming out of the U.S. is bad,” confirming that financial markets are still suffering sharply from a credit crisis that started last year.

    Observers who had prematurely spoken of “a light at the end of the tunnel” now had to make sure that they weren’t facing an oncoming train, he warned.

    “We expect that a solution will be put forward before Asian markets open on Monday,” Steinbrueck said on the sidelines of an EU finance ministers’ meeting in Nice.

  43. General Glut


    Please give us some more concrete idea of what “jawboning” Wall Street actually constitutes. Do Paulson and Bernanke simply try to scare the bejeezus out of firms concerning the knock-off effects of a Lehman bankruptcy so that they buy it out of rank fear? Is Paulson’s “no government bailout” line then simply a means of scaring Wall Street into a private takeover?

    Is this just one giant game of chicken in the end?


  44. JosephS


    wall street firms have a pretty good idea how fragile the position is – in fact they were the ones telling the Fed and Treasury all about BSC when it was happening. There is enough fear already instilled in massive 62 trillion credit derivative market already. Which is why firms all over were present at the Fed today in NY: speaking about their specific exposures in a collapse/bankrupty scenario. De-leveraging is here to stay – especially is Lehman goes into a forced liquidation…

  45. mxq

    MD…you’re totally rambling…to the max.

    Seriously, no one on this blog cares about the “beautiful items” in your life, as it has nothing to do with Hank Paulson’s expertise in Jboning, much less anything else that I’ve every seen this blog address.

    I can’t believe anyone is even taking the time away from their own respetive “beatiful items” in their lives to address your serially nonsensical jabber.

  46. Matt Dubuque

    Yves, my understand of the new Fed arrangement with the SEC here is that the Fed “monitors” in place at the key institutions have no increased jurisdictional authority.

    Rather they are consultative and advisory in nature only. But they do have cell phones and are allowed to make recommendations to the SEC about how to proceed.

    Perhaps you can think of them as UN peacekeepers. Now warfighting authorization, but more boots on the ground to monitor the situation.

    Matt Dubuque

  47. dave

    Where is JP Morgan when we need him? Something similar went on about a hundred years went down and he came into save the possible bust of the major banks. Sorry, my finacial history is only being enhanced by much reading here. Thx, again to Yves.

    The political situation isn’t good for another bail-out. John McCain, possible future president is against it. (But he lies constantly of late.) Obama? He is nuancing it with his friends from the Chicago commodities trade center perhaps? And wondering do I really want this job?

    Alan Greenspam? effing A? Both Republicans and Democrats are piling on him justifiably for causing this whole house of cards to be empty.

    Me? I lay yet another rock on the tomb of Reagan’s Godhead and his Deregulation revolution (and his hireing of Alan Greenspan). It’ll take the US about 30 years to get out of this mess. I hope Obama will steps up to the plate….and shows some steel as Tom Freidman puts it.

  48. dave

    at the risk of violating the rules…Once again I learn something valuable here. And apologies for my misspellings and bad grammar in last post.

    From Yves: “(he thought at Marginal Revolution but wasn’t 100% certain) was that a sensible rule of thumb for blog commenting manners is: one comment per 10 comments. 2 comments per 10 only if directly addressed and 3-4 comments per 10 should be rare/non-existent, regardless. You are often way outside those levels.

    awesome, I am going to print that and post it next to my computer.

    And that’ll give me more time to do things worthwhile in the real world. thanx AGAIN!

  49. mxq

    MD might be a robot…or some other form of a pseudo-sentient program…that can only explain how he overcomes the captcha.

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