News reports appear to be converging on the hoped-for end game for Lehman. Whether that will come to pass is another thing entirely.
First, the Washington Post, New York Times, and Wall Street Journal all report that the Fed and Treasury are brokering a deal, but are trying to avoid the use of public funds. Query whether we might have some getting close to the line, as in the buyer(s) make heavier use of existing facilities (remember, with the existing worries about year-end liquidity stresses under discussion, existing programs are likely to be enlarged, but for a Lehman buyer to benefit, the collateral rules might need to be relaxed. Since it take time for any deal to close, a finesse may be seen as politically more palatable than something that in form looks more like a bailout.
Note also that the prominent suitors are banks (although Bloomberg says securities firm Normura is a candidate), and may be able to avail themselves of the Federal Home Loan Bank system). Consider the careful wording from the journal:
Any possible resolution is not expected to involve a government bailout along the lines of the rescues of investment bank Bear Stearns Cos. and mortgage giants Fannie Mae and Freddie Mac.
So the powers that be see obvious, specific-to -Lehman measures as politically charged, but that may not rule out other forms of assistance. And the New York Times said,
Among the potential suitors are Barclays of Britain and the Bank of America, these people said, as well as several private equity firms. In each case, the suitors are seeking help and assurances from the Federal Reserve to help make an acquisition palatable.
Barclays and Bank of America are seeking assurances that the Fed would guarantee a part of Lehman’s troubled assets, these people said, similar to the way it backstopped Bear Stearns’s portfolio during the sale to JPMorgan Chase.
So we may have a bit of brinksmanship going. It appeared during the Bear Stearns negotiations that Jamie Dimon played his position as the only game in town to considerable advantage. The Fed and Treasury would be advised not to make themselves again to be hostage to one bidder, but that may be unavoidable.
The Wall Street Journal indicated that other firms were not looking at a bid due to the lack of a government backstop, which implies that more might come forward if the authorities provided financial assistance. But if they are not at the table now, it might be difficult to bring them in at a later stage. The loss of a day is huge in the context of a fast-moving deal.
Second, no brokerage firms are among the firms currently said to be seriously looking at a deal. Bank of America is at the top of the list; Barclays is also mentioned as a remote possibility. This means that the earlier rumor we were sent by e-mail, that Lehman was going to need to wrap up a deal post haste and Goldman was a worst-case-scenario buyer, was apparently wrong as far as Goldman was concerned. However the source had been contacted by Lehman colleagues, so this could have been a
fantasy or mistaken understanding by some at the firm.
And despite the indications that the government is trying to avoid providing a guarantee or support, the subtext is that that it the Fed or Treasury may relent. From the New York Times:
… it remained unclear whether the Fed will help, these people said.
The notion of a providing a guarantee as part of sale to a foreign buyer would be a tricky issue for the Fed. Without such assistance, potential suitors have suggested they would “walk,”s according to person briefed on the discussion. Fed officials have hinted that they would be more receptive to a bank buying Lehman, rather than a private equity firm.
The New York Times further suggests Lehman may not make it to the weekend:
At this point, Lehman hopes to buy enough time to reach the weekend so that it can complete a deal. But as its share price continues to decline, Lehman is coming under increased pressure to get a deal done
Bloomberg’s report stressed the role of the rating agency sword of Damocles hanging over the firm. Recall it was downgrades by Moody’s and Standard & Poors’ that not only meant the game was over for Bear, but apparently led the Fed to reverse itself on providing a 28 day loan and merely extend funding through the weekend.
Lehman Brothers Holdings Inc. entered into talks with potential buyers of the securities firm after Moody’s Investors Service said the company must find a “stronger financial partner” and the shares plummeted….
Without a “strategic arrangement” in the “near term,” Lehman’s credit-ratings may be downgraded, Moody’s said yesterday …
“The likely solution is that someone will bail it out and at this rate it may be for a nominal sum,” said Simon Maughan, a London-based analyst at MF Global Securities Ltd. “The market is not going to give Lehman time to get on with its plan.”
Goldman Sachs Group Inc., the biggest U.S. securities firm, has no plan to buy Lehman without financial backing from the Federal Reserve or Treasury, which hasn’t been offered thus far, a person briefed on the matter said today. Goldman spokesman Michael DuVally said the investment bank “continues to do business” with Lehman.,,,
Private equity firms continued to weigh making bids for Lehman’s asset management business,…
Lehman would have to post $4.4 billion additional collateral for its derivative contracts in the event its rating is downgraded two notches, according to the firm’s quarterly report filed with regulators in July.
Peter Cohen, founder of Ramius Capital Group LLC, said the hedge fund is sticking with Lehman as one of its prime brokers for processing trades. Lehman is “very different” from Bear Stearns Cos., Cohen, the CEO of Shearson Lehman Brothers Inc. from 1983 to 1990, told CNBC in an interview today.
Fitch Ratings, which also placed Lehman on credit watch this week, said speculation about Lehman’s woes aren’t related to liquidity but to concern that it can’t raise more capital.
“At this point it’s an equity confidence issue,” said Fitch analyst Eileen Fahey in an interview. “They’ve raised capital over the past few quarters. Their ability to raise more equity, because the equity price keeps falling, is hampered.”
Update 11:00 PM: The Journal story now on its site gives more credence to the idea that government financial support might be forthcoming:
…prospective buyers would likely want the U.S. government to help shield them from future losses from any such transaction, these people said, as happened in March, when Bear Stearns Cos. was forced into a deal to be acquired by J.P. Morgan Chase & Co….
The Federal Reserve and Treasury Department have been working with Lehman to help resolve the bank’s troubles, including talking to potential buyers, according to people familiar with the matter. Federal officials are not expected to structure a bailout along the lines of the Bear transaction or this past weekend’s rescue of mortgage giants Fannie Mae and Freddie Mac.
Update 12:30 AM: The reports about Barclays being a possible suitor are apparently inaccurate. From the Telegraph:
British banks Barclays and HSBC are understood to have both ruled themselves out of the running, in spite of reports to the contrary elsewhere.