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.