Lehman: Deal Sought Before Monday; BofA Most Likely Suitor (Updated Again)

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.

From Bloomberg:

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.

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  1. Dean

    What I don’t understand is this:

    At market closing LEH’s market value was, say $2.6 Bil. The headquarters’ building alone has a real estate value of $1.3 bil. So, why the reluctance for suitors, say BAC, to proceed? Do they expect skeletons in the closet?

  2. Matt Dubuque

    One item that may be the subject of hard bargaining is whether the acquirer automatically would acquire “primary dealer” status that Lehman currently has (assuming of course that the suitor is NOT already a primary dealer).

    As a general rule, primary dealers have an advantage over their competitors because they get a sense of the direction of Fed policy through their morning phone call with the open market desk.

    The Fed would likely want to discuss that issue thoroughly and it would be a key part of the transaction for any suitor that was not a primary dealer.

    Recall the hoops Nomura had to go through in the 1980s to achieve primary dealer status. It was a tough slog!

    Matt Dubuque

  3. doc holiday

    Instead of swift justice by DOJ or the potential for Congress to look at the realistic cause of lehman (fannie, bear, wamu, Mer, BAC, countrywide, etc, etc).. losses — Treasury once again has an open pocket book ready to help crook friends reap benefits from taxpayers. Treasury and FOMC are hell bent on saving their friends, versus serving and protecting the people that used to be called Americans.

    Re: Lehman Brothers Holdings Inc. (LEH.N: Quote, Profile, Research, Stock Buzz) was sued by an shareholder who said the investment bank manipulated stock option grants from 1998 to 2001 to secure a “huge financial windfall” for Chief Executive Richard Fuld and other top officials.

    In a complaint filed Friday with the U.S. district court in Manhattan, Robert Garber, a Pittsburgh resident and Lehman shareholder, accused 22 current and former executives and directors of allowing the backdating of stock options.

    He said this allowed the improper reaping of “hundreds of millions of dollars” at shareholders’ expense, and affected Lehman’s financial results through at least 2005.

  4. Alex

    Dean: They (rightfully) expect skeletons in the closet, living room, dining room, attic, kitchen, bedroom, and basement. The skeletons are piled up to the ceiling in most of these rooms. Lehman has so many skeletons that if only it were a little closer to Halloween, they might be able to recapitalize.

  5. Steve

    My guess: neither Bank of America nor Barclays can do a deal without putting the level 3 book to the government. A capital forbearance agreement such as the one JPM got won’t do by itself. A consortium of PE firms might get instant approval for a holding company to take Lehman under, but who’s going to finance them? And, assuming they are willing to absorb the unrealized losses in the whole loan book and can get financing, why would they offer more than pennies?

    At some point the market may fully realize that the Fed’s efforts to prevent another BSC have failed. The administration’s policy of extravagant liquidity combined with forbearance on insolvency hasn’t worked. Too many assets aren’t assets anymore.

  6. Anonymous

    “Bullet dodging,” for example, is the term for delaying options grants until just after the release of bad news (or moving up the release of bad news to precede an already scheduled grant). Because the grant comes after the news is out in the open, such behavior is nearly impossible to prosecute on insider-trading grounds.

    More problematic is “spring-loading” – timing an options grant to precede the announcement of good news (or delaying the happy announcement to follow an already scheduled grant).

    At Union Station, Grundfest divided this into “symmetric spring-loading,” where the members of the board of directors who approve the grant are fully aware of the good news to come, and “asymmetric spring-loading,” where they are not. Asymmetric spring-loading itself comes in two flavors: “with ratification,” when the board says after the fact that it’s okay, and without.

    As Grundfest reeled off these terms, I and the reporter sitting next to me giggled, mainly because they sounded so much like something from a diving meet. (“She’s going to attempt a reverse double asymmetric spring-loader and … she nailed it!”) But the distinctions may make all the difference, legally speaking.

    Current law on spring-loading dates to the case of Texas Gulf Sulphur, a company that in 1963 made a spectacular mineral find on property it owned in Canada. Executives wanted to keep the discovery quiet while the company bought up land around the site, and were afraid outside board members would leak the news.

    In the meantime, these executives accepted options grants from the board. In a 1968 ruling that became a key building block of insider-trading law, a federal appeals court agreed with the SEC that this spring-loading was fraud, even though the board members said afterward that they didn’t mind.

  7. esb

    Two things …

    The head of GS moves over to become the head of the Department of the Treasury. Then the Treasury begins to move public guarantees (effectively “treasure”) over to GS. Well hell, why not just move the DoT over into GS and let it run the operation. It probably would be better run from there.

    More seriously, the source of the problem here is that LEH is insolvent on a “mark” basis and everyone knows that. That is why the public must kick in something, to bring the true value up to zero.

    There are plenty of foreign buyers if the “something” being kicked in is preferential access to Administration decision makers.

    But then there is that inconvenient “change of government” thing arriving January 2009.

    So the something must be treasure.


    (And now, lets move on to WM. We’ve already spent an entire week on LEH, and other entities are stacked up behind WM.)

  8. Anonymous

    trying to avoid the use of public funds

    The public funds are not in The Treasury, the money is in Iraq… in wall street banks that have CDOs, SIVs, SPEs…

    You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?…Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan there’ll never be another decent house built in this town. He’s already got charge of the bank. He’s got the bus line. He’s got the department stores. And now he’s after us. Why? Well, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you lived in one of his houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments. You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter/Paulson isn’t selling. Potter’s buying (and selling/hedging)! And why? Because we’re panicky and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.

  9. Anonymous

    agreed to 10:24pm. remove one chair and start the music again for the other players.

    building worth $1.3bill? what about NB? that was worth $8bill! obviously there’s a lot of negative assets in there to get the market cap to $2bill, if it is indeed that.

    i thought bOa was still dealing/reeling with countrywide? why would they jump in without any guarantees?

    maybe they should take the $1.7bill nomura was waving about and run with it. less alpha-types there to emasculate them like a gs would, no?

  10. S

    Yves, I agree with your insinuation that FHLB is the easiest way to get assets off the books in a once removed fashion. TReasury put the line in place with the GSE deal. Also FEd put a facility in place back during BEar for $20B I belive for RBS and Barclays.

  11. Anonymous

    Maybe the government should play good cop/bad cop.

    How about, for every firm we have to backstop in a bailout, we raise the taxes on the remaining firms 5%.

    That would be an incentive for firms that can still breath to step up to the plate, like good Americans.

    I offer this freely, as a patriot.

  12. JP

    My guess: neither Bank of America nor Barclays can do a deal without putting the level 3 book to the government.

    I agree.
    Look, LEH is insolvent. It’s value is NEGATIVE, so a buyer should put an offer with a minus sign in front of it.

    There is no way that BAC can sign up for more after CFC. They are already pushing the bounds of fraudulent conveyance with their CFC structure and will probably die under the weight of the lawsuits.

    The deal happens with gov’t subsidy or not at all. I’m guessing “not at all” because Hank does not want to leave a legacy of financial socialism.

  13. JP

    BTW, it should also be noted that 1/2 of LEH bonuses were awarded mid-year.

    They knew EXACTLY what was coming, and they figured that the money might as well go into their pockets instead of the creditors.

    A bailout would indeed be an outrage.

  14. Cash Mundy

    I nearly bought calls on Lehman today. If not for that weird little spike right at the close (and what was that about) the order would have triggered. I figured I’d made so much on the way down I could afford to lose a bit in hoping they make it in some form.

    Apparently Merrill, WaMu and AIG are right behind Lehman. I would enjoy hearing informed speculation about the systemic sequelae of the present situation.

    In other news, Bolivia is expelling the US ambassador for allegedly fomenting insurrection in the lowland provinces. Not to be outdone, Hugo Chavez is following suite, saying “We will send an ambassador when there is a new government in the United States, a government that respects the people of Latin America,” meaning if Obama wins or hell freezes over.

    Brazil, no doubt reacting to sabotage of the pipeline from which it receives half of its natural gas, made its support for the present government clear.

    I spent some time in Santa Cruz de la Sierra last year. Nice place, good airport with easy access. My impression was that support for autonomy was much stronger than US meddling alone could make it. The lowland people are Chiquitano and Guarani, and are quite different from those of the altiplano, with whom they seem to enjoy a mutual antipathy.

  15. Jesse

    Yves suggestion about the FHLB is insightful.

    I’m still puzzled by the way this came out with a hard deadline set for Sunday night (again).

    Who would have leaked that? and for what motives.

    It does appear customers are pulling business. But even if the share price went lower tomorrow, how does that risk the ocmpany? they are not obtaining revenue from the stock price, or actively selling stock for capital that I know of.

    No I think that is more of a symptom rather than a cause.


  16. zerobeta

    I think there may be smoke and mirrors in regards to the LEH deal. It doesn’t really seem to make sense for BAC to buy LEH because they spent the last year trying to get out of most the businesses that LEH is in.

    I still think Goldman makes the most sense as they can scale a lot of LEH’s costs and eliminate a competitor. With the equity worth very little (and some think negative) any suitor wants to essentially get Lehman’s assets without paying equity investors and hope for the best. When Yves released the story today Lehman started to run, and fell off as CNBC announced it wasn’t going to happen All they said was that they wouldn’t buy without the Fed and the Treasury is a moot point as everybody seems to be making that case and Goldman is the best fit. On top of that Goldman is very image conscious and I dont’ think would want to have the assistance of the Treasury and Fed for two reasons:
    1) People will be very critical of Goldman and their obvious ties to Paulson.

    2) They would be perceived as “weak” since they needed help and they are one of the few financial firms that the market appears to have confidence in.

    Moreover if they go in there like JP Morgan in 1907 and save the world without the Fed and the Treasury they will look like saviors. Then if they need help down the road (for whatever reason) they can just blame it on Lehman and not risk their image all that much. Goldman gets off on stuff like that.

    At the same time you have Wamu going under. BAC buying Wamu would make more sense in my mind since strategically it seems to be using this credit crunch as a way to become more of a bank (what a novel idea!). The Fed and the Treasury would probably support them with Wamu as not to test the FDIC. Wamu made a huge move this afternoon as well.

    At this point I think everybody is buying time so that both firms simply slowly suffocate and are on their last breath before they swoop in.

  17. Francois

    Could someone explain to me why the Fed, Treasury et al. should even focus one nanocalorie of their energy to help Lehman?

    Would the financial system crash if Lehman was allowed to die?

  18. zerobeta

    Lehman’s already dead – this is more akin to arguing over who pays for the funeral.

    As for the financial system, it doesn’t matter what happens to Lehman, at this point the events have been set in motion and the crash will occur if it can and should occur – regardless of what the powers that be do. BSC was bailed out and we’re still where we are today. At this point we’ve gotten too deep for this to be a crisis of confidence. Confidence is in its nature priced into debt and is the first to get priced out. The problem is that when it comes to debt and derivatives, one person’s asset is another one’s liability. When assets are measured as a stream of cash flows, once the cash stops flowing assets are worth less and cash that was counted on to pay off a liability is gone and the process continues and even accelerates. The ghost of Lehman (or Fannie or Freddie or whoever) will live on, but on someone else’s balance sheet perhaps with a new group of shareholders to haunt.

  19. Anonymous

    > 1) People will be very critical of Goldman and their obvious ties to Paulson.

    Critical smitical. Incest hardly stopped Dead Eye Dick and Halliburton.

  20. Anonymous

    The powers that be have 12 hours extra on Monday– just enough to include that 11th hour negotiation!

    Chinese, Japanese, HK and S. Korean markets are closed for a holiday.

  21. ruetheday

    “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.”

    Public funds are technically already at stake, since Lehman has been given access to the discount window.

    And in any deal that involves a complete takeover of LEH as opposed to cherry piccking one of their better businesses, the acquiring firm is going to want some sort of gov’t guarantee on their portfolio ala BSC.

    My prediction: if nothing happens today (and something certainly might), we’ll witness another Sunday morning backroom deal this weekend.

  22. Richard Kline

    LEH, WaMu, AIG, Mother Merrill, oh and let’s not forget CITI, that leaning tower, and BoA strangulating on the goat-corpse of CFC it can’t swallow or spit out: Look, these firms have been gorked, capital-dead, since July _07_. When short-term paper froze and ABS prices started to bleed out, the firms stuffed with their paper were dead, _dead_, DEAD. Now, (maybe) finally they are starting to go down like ninepins.

    The public authorities have been pretending, in denial, in collusion, playing for time, praying for capital from heaven, or looking for a sacrificial virgin variously, but nothing they have done could reverse the capital-death here. The idea that public investors would throw their wallets onto the fire as a way of smothering the burn rate was a looney tune, even if surprisingly many did just that. Let them die; let them thrash; let’s have a wake; let’s get on with it. The banking system can survive and function, and far more sanely, without these failed univeral masters. Let the behemoths croak sans ventilators and capital drip lines from the Treasury, and we will be surprised at how well middling mammal-sized banks take up the slack.

    And puh-leeeeze, NO Federal backstop guarantee. If one is made here, after the miserable ‘precedent’ of BSC, where does it end? The public gets stiffed with the losses into double digit billions soon tripled while the assets go to the surviving plutocrats?? I’d rather see them up against the wall, and I _don’t_ mean in a police lineup where they belong.

  23. Anonymous

    And as the way thing seem to go these days, then BOA folds ( FDID takover ) or gets a bailout . The shell game continues . Taxpayers lose again .

  24. S


    Not to be forgottonn is the most recent add to the Treasury dept: the former hea dof the sponsors business at GS. It should not be shocking at all to see PE be brought in as a conduit either.

  25. Stuart

    Rumor: bid to buy Lehman now tendered from Little Jimmy and his growing Ant farm business in Comebychance Yukon. Lehman shares pop 12% on the news. BKX does an about turnaround. Flatly denied by Little Jimmy, Bloomberg, CNBC and most headline writers continue to push the story to the ignorant (sheep) masses still reading earlier headlines about lipstick on pigs. Full news story at 10. ABC news poll on the most important topics of upcoming election are in; top result was; why do lipstick wear pigs and how we can stop such animal abuse. Second most concerned topic was how can we get public/electorate to get their heads out of their asses and start to see BS for what BS is…aka… start THINKING!!!!!

  26. S

    FT reporting JC Flowers interested. JC = GS = Paulson = where is the JC capital coming from. The equation is starting to take shape

  27. Anonymous

    “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.”

    Paulson’s action on GSEs killed LEH and any other financial institution that needs equity. History will show that he made a disastrous decision that made things worse, not better. Gov’t theft of equity capital is not a good idea in a capitalist system.

  28. Anonymous

    To 11:03…oh yes, right, bailing out the GSEs killed LEH. You know, in hindsight, you are probably right…letting them fail would have been infinitely better.

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