Financial Times: BofA, JC Flowers, CIC Joint Lehman Bidders

The Financial Times tells us that a consortium, Bank of America, bank investor JC Flowers, and Chinese Investment Company are pursuing a joint bid for Lehman.

At least on paper, this makes far more sense than a solo BofA bid. The bank already has a garbage barge on its hands in the form of Countrywide, (yes, this is allegedly a zero cost deal due to the tax losses, but paying zero for something with negative net present value overall, admittedly held in a bankruptcy-remote sub, is still not a great deal. The management distraction s likely to offset whatever value they might extract from it). Sharing the risks, and getting a second set of eyes (Flowers is a savvy deal-doer) is of considerable benefit to BofA.

But the gorilla is still in the room: if this deals does have negative net worth, any buyer is going to want support from the government for preventing damage to the financial system. However, the article alludes to a new angle: making the creditors take a haircut instead. How such a resturcturing could be effected in absence of a bankruptcy filing is unclear (recall that the trigger for the Bear deal was the desire to avoid a bankruptcy filing, which was seen at the time as having nasty consequences). But the view, according to the FT, is that mechanisms are now in place to prevent a “disorderly liquidation”. The article states a prepackaged bankruptcy is a possible, but hopefully unlikely, outcome.

From the Financial Times (hat tip reader Saboor):

Bank of America, JC Flowers & Co, the financial investor, and China Investment Co., the Chinese sovereign wealth fund, are considering a possible joint bid for Lehman Brothers…

A forced sale of Lehman Brothers at a fire sale price appears to be the most likely option in the wake of the massive drop in Lehman’s share price over the last few days, people familiar with the matter add. “The only question now is what price,” says one person who has been in discussions with Lehman over possible asset sales as well as with regulators.

While the details of any proposal haven’t yet been fully worked out, a bid from the BofA-led group may involve losses for holders of the debt as well as shareholders….

Regulators will most probably remain on the sidelines….

“Bear Stearns happened so quickly,” says one former Fed official. “At the time, there was no infrastructure to keep Bear alive. Now, there is an infrastructure to prevent a disorderly liquidation with the Fed willing to lend against good collateral.”

Moreover, while Bear Stearns was a big player in the credit default swap market, ran an important prime brokerage business and had a big role in the clearing system, Lehman poses less of a threat to financial stability, many of these people believe. ”Lehman may be the poster child for enough is enough,” says a senior executive at one major private equity firm that has been in talks with Lehman regarding possible asset sales….

Mr Flowers, a former Goldman Sachs partner who is close to BofA, currently manages about $3.2 bn of CIC’s money in a fund dedicated to taking stakes in financial institutions…

The CIC fund complements a $7bn fund that Mr Flowers has just raised from a wider group of investors. Mr Flowers has structured that fund so that he can exercise control rather than take minority stakes as private equity firms have done in the past. CIC may invest additional sums in Lehman alongside Mr Flowers and Bank of America…

There remains a slight chance that Lehman might be forced into a pre-packaged bankruptcy, some of these people believe….

Lehman’s plight is sure to raise questions both about regulatory oversight and the consequences of mark to market accounting. Some bankers and private equity tycoons including David Bonderman, co-founder of TPG and a minority investor in troubled Washington Mutual, believe that in times of stress, such accounting treatment can lead to a death spiral. That’s because the sale of a small portion of assets at distressed prices can force a firm to mark down the value of all its holdings, leading to rising funding costs—the lifeblood of a securities firm —and plunging share prices.

Even before Lehman’s fate has been sealed, there has been quiet finger pointing, with the Securities & Exchange Commission likely to come under increasing criticism. That is because the SEC is supposed to monitor broker-dealers to ensure that they hold enough capital to support illiquid holdings such as Lehman’s real estate investments. But Lehman held these investments outside that entity, and thus avoided heavy capital charges to which regulators seemingly turned a blind eye.

If the regulators refuse to offer a sweetheart deal to a potential buyer, it will change the trading dynamic around troubled financial institutions, creating uncertainty about what was becoming a safe one-way bet. So far, shareholders have been almost completely wiped out while debt holders have been protected.

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  1. Stuart

    I’m thinking that certain people reading that headline and that have deposits at WaMu are now thinking,
    “sell MY deposit, not bloody likely”.

    I’ll pick Bank Run 101, Alex for $200.

  2. AG

    Wall Street's finest are going to have their work cut out in the coming weeks, we are now looking at CDS triggers on:

    – FNM & FRE
    – LEH
    – WaMu
    – AIG (outside bet but possible)

    Will the CDS market be able to handle this? What will it do to credit spreads?

  3. Anonymous

    ***Anonymous said…

    I have an account (under $100,000) at Wamu. If my deposit is sold, is it still safe?

    Yes. Go google or wikipedia “FDIC”

    So please spare yourself the anxiety and DON’T go to your nearest WaMu branch to pull your money.

  4. k

    Here comes the Chinese.

    It makes perfect sense on paper. CIC provides capital (actually, a full sovereign backup), JC Flowers with general management (any IBs left not taken over by GS alumnus?) and BAC administers managerial control, excellent division of labor.

    Now with CIC 10% stake in MS, unknown possible stake in LEH, likely role in MER if it comes to that, and GS already in the same bed with China, my!

    And you call Chinese “communists”?

    I see the future…

  5. Anonymous

    Debtholders have been expecting a free ride since the Bear-out in March…pre-packaged bkptcy sounds like the right way to go. Sell that bldg, pay off some of the debt, maybe sell use of the name, Nb takes itself out. No more government bailouts.

  6. Mac

    “Lehman’s plight is sure to raise questions both about regulatory oversight and the consequences of mark to market accounting. Some bankers and private equity tycoons including David Bonderman, co-founder of TPG and a minority investor in troubled Washington Mutual, believe that in times of stress, such accounting treatment can lead to a death spiral.”

    Translation: not only do we want to get a hefty bonus when mark-to-market shows a profit, we want to continue to get a hefty bonus when mark-to-market would show a loss.

  7. S

    JC flowers is a hitter in financials PE. Paulson just brought on board Wilson to execute his super SIV idea…

    “As chairman of Goldman’s Financial Institutions Group, Mr. Wilson has proved to be a big player in capital raisings and reorganizations across the banking sector. In joining Mr. Paulson, a close friend and longtime colleague, Mr. Wilson will try to address issues from a more macro perspective. The Treasury and Federal Reserve are grappling with how to respond to the threat of bank failures, flagging capital levels and crises of confidence in important institutions such as Fannie Mae and Freddie Mac.”

  8. Anonymous

    jc flowers is way overrated. his signature shinsei deal was shooting fish in the barrel. all the deals he’s done so far (HRE, NIBCAP etc) are under water.

  9. doc holiday

    It may be God’s will that a bunch of pirates go together to to help one of the pirates that had to much cocaine. This is like bats that share blood, so they essentially are doing unto their fellow pirates as they would do unto other piratas, it’s like a code on honor!

  10. Dave Raithel

    When it rains, I can’t work; so I get to watch TV… Leaseman (Lessman?) on Squawk Box was reporting that his reliable source said (in paraphrase) that the various possible Lehman purchasers wanted the same kind of deal that Jamie Diamond got for Bear, but that the Feds were not going to do it. Then I switched over to C-Span, where Krishna Guha of the FT was taking his abuse from callers. One of them – whose name I did not catch – claimed to be a finance professor the last 30 years. Guha took his remarks respectfully. The alleged finance prof said, (paraphrased) that Lehman is not big enough to bail out – the market can eat it…. Let’s add these points to Yves Smith’s observation that Paulson and Company might need to let something of note go belly-up to prove (my phrasing, I think) they are not Wall Street Stooges. Introduce the CIC, and it seems, from a coherent point of view, that this time the “market” will do what it does … not that no politics are involved….

  11. Mara

    For the person who asked if their WaMu money (<100K) was safe, yes technically the FDIC is supposed to cover you. But the FDIC's been handling a lot of garbage lately. I don't know what the numbers look like if a bailout of WaMu is required vs how much money the FDIC has to cover it all.
    I already told my mother-in-law to liquidate her accts with WaMu on monday. If it were my acct, I'd probably move it to a Fed member bank (except BofA or Citi). Not that they aren't schmucks too, but they are currently viable schmucks…

  12. jmf

    Moin from Germany,

    “jc flowers is way overrated”

    I couldn´t agree more!

    They have done two deals in Germany so far.

    The first is an outright disaster. They were the first private owner that bought into one of the Landesbanken ( HSH Nordbank ). The Landesbanken are usually owned viadifferent ways owned through several state or municipal entities. HSH is in deep trouble and the owners had to bolster the capital base at least once during the past 6 month… Probably more to come.

    The secound deal is only a few month old. They bought 25% percent of one of the biggest commercial real estate lenders ( also with big US exposure ) called Hypo Real Estate to 22,5 €. Now close to 16 €.

    It´s too early to tell if this will work out but i assume they will have to raise capital very soon……

  13. curious-er

    I think Paulson means it this time. No help for Lehman from the Fed. So either somebody will buy it for “pennies” over the weekend, or they’re gone.

    No rate cut, either. Come Monday morning, the markets will be disappointed, I think.

  14. Anonymous

    I think it’s interesting that Paulson is floating that he’s “adamant” about not using Fed or Treasury money on this one. That will be one hell of a big tree to climb down from if it turns out to be the only way to fix this, and I don’t see them allowing Lehman to fail.

    Perhaps that means he knows there is a deal incoming, and is taking advantage of the opportunity to look tough.

  15. Matt Dubuque

    As usual, the FT provides the SCOOP that investors need to know to make informed decisions. DECISIVELY the best paper in the world, period. And not just for finance; they opposed the Iraq war BEFORE it started….

    In this 3.5 minute video at, the Banking Editor of the FT who broke this particular story adds further essential detail to the story giving it even more credibility:

    Matt Dubuque

  16. dd

    The FT is for shit as is WSJ. Only the Fed and Treasury know what is going down. There is no credibility anymore anywhere because only the Fed and Treasury have relevant info and heavens knows who else has access. The rest is just details.

  17. Richard Kline

    ‘A forced sale of Lehman Brothers at a fire sale price . . . .’

    “Yes, friends, we are more indeed prepared to sell you some of our fire so that you can burn down your house, too. We have all the rapid oxidation that we need, so we’ll make this opportunity available to you for a nominal fee, hardly more than the price of a ticket to get out of Dodge and a cup of coffee from the station vending machine while we wait for the stage. Sign here, please [stone chump sucker].”

    No one could even put a figure on Lehmann’s possible losses, but still there are buyers. The only way to buy them isn’t even to take them for free but to be paid to haul the stuff away.

    “Oh, yoo-hoo, Uncle Feddie, I think I’d like $30B just like Jippy Morgan got for throwing his body on the burning bush in March. Is that a yes?”

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