The noose is tightening, with the powers that be facing the unattractive choices of a politically unpopular bailout (and egg on their face) versus an unwind of Lehman with potentially disastrous consequences. Will Paulson blink? So far, the word is no. From the New York Times (Hat tip reader DaddyMac):
Unable to find a savior, Lehman Brothers appeared headed toward bankruptcy on Sunday, in what would be one of the biggest failures in Wall Street history…
But Barclays, considered the leading contender to buy all or part of Lehman, said on Sunday that it could not reach a deal without financial support from the federal government or other banks, making a bankruptcy filing more likely.
The leading proposal had been to divide Lehman into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.
But that plan fell apart on Sunday, making it likely that Lehman would be forced to file for bankruptcy protection.
What remained unclear was how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.
The overarching goal of the weekend talks was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world….
Some considered the weekend talks as high-stakes brinksmanship..
On our preceding post, there is a lengthy discussion in the text and more in comments, that there are reasons to doubt that regulated parties will be able to continue to trade with Lehman if it files for bankruptcy.
Update 1:30 PM Further commentary from Bloomberg (hat tip reader Jim B):
Barclays dropped out of discussions to buy all or parts of New York-based Lehman because it could not secure guarantees from the U.S. government or agree on terms to mitigate potential losses in the firm’s investment banking division, a London-based spokesman for Barclays said in a telephone interview today.
Reader Saboor sent a Wall Street Journal update that Barclays could return to negotiations. I cannot find it on the website yet. However, this is no surprise. They have made it abundantly clear what their walk away issue is and if the authorities relent, they would come back to the table. From the text of his message quoting the update:
Barclays claims to be walking away from a Lehman deal but could return, sources familiar with the situation say. The current deal structure would require a Barclays shareholder vote. Government reluctance to provide funding remains a deal hurdle. More details to come.
Paulson and Bernanke’s hands are tied. They want to print money to the moon, hyperinflate us to Zimbabwe, but China is preventing them:
” China may cut its dollar holdings – CICC
China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks.
The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world’s biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms’ debt, CICC Chief Economist Ha Jiming said in a report Thursday.
“The crisis has made Chinese officials realize it’s a bad idea to put all their eggs in one basket,” wrote Hong Kong-based Ha. “This will likely lead to greater diversification of foreign exchange reserve investments.””
China will have no choice soon. They are holding a lot of the derivatives and paper that Lehman and others are screwed with. If they do not let the bad money exchange begin they get zero. Better to get something, continue modernizing their military and confronting the U.S. via the acquisition of commodities and blocking any strategic influence in the Western Pacific with a strong military than to eat zeroes and create domestic discontent.
They will allow the great hyperinflation. And they will profit from it.
1700 EDT will prove interesting tonight….
Paul Volcker is still remembered for his “Saturday Night Special” rate hike of October 1979.
Will Hank Paulson be remembered for his “Sunday Night Special” Lehman rescue of Sep. 2008 — or as Herbert Hoover II?
It ain’t how big your bazooka is, Hank. It’s how you aim with it.
If anyone is looking for decent coverage, the Bloomberg TV station has up to the minute news. CNBC, on the other hand, is airing an infomercial for the “Cricket”, some sort of gizmo that makes fancy vinyl letters.
Great quote from CNBC:
“We [Wall Street] really dont have the money,” said one person close to the Lehman bailout. “But the alternative is worse.”
That just about sums it up. The problems are really too big for Wall Street to fix. Every single option – including govt. assistance – is bad, just of varying degrees.
Paulson will go down in infamy if he orchestrates a Lehman “rescue”.
Lehman needs to fail. They need to declare BK first thing Monday morning, and let the chips start falling.
The longer Paulson and the other idiots-in-charge keep trying to prop things up, the bigger they make the consequences when the failure comes (and it is coming).
They already prevented Bear from unwinding naturally, they already prevented Fannie and Freddie from unwinding naturally, they are just stacking this house of cards higher and higher.
Time to draw the line in the sand. Lehman, you are the weakest link, good-bye. Time to start defaulting.
I’m still trying to get my mind around this whole US debt angle.
Seems to me that if the creditor nations were reading Reuters on September 9th when they said
Treasury credit default swaps hit record: CMA, they might have figured that aside from the default risk itself, that as the CDS rate rises, the basic value of their holdings declines… but that’s just common sense and so probably irrelevant.
“Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world….”
Really? I’m still trying to find out why Lehman going bust starts the dominoes falling like Bear would have. Bear was huge in CDS’s and the counterparty risk would have done for the system.
Doesn’t Lehman have to be really big in something traded OTC for it to be a critical part of the system? As far as I can gather, the only meaningful share they had in anything was issuing commercial paper, and that doesn’t have the contagion risks required to mean it HAS TO BE SAVED.
Why would any company agree to ‘absorb losses from troubled assets’? That is just plain absurd.
Sept. 14 (Bloomberg) — A group of banks and brokers began preparing for a potential Lehman Brothers Holdings Inc. bankruptcy filing today, addressing outstanding trades that the company has in over-the-counter derivatives markets.
Financial firms have started “netting” Lehman trades on credit, equity, interest-rate, foreign exchange, and commodity derivatives, according to a statement from the International Swaps and Derivatives Association e-mailed to Bloomberg News.
“ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,” the ISDA said. “Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.”
The announcement came after Barclays Plc, the U.K.’s third- biggest bank, said it abandoned talks to buy Lehman, contending it couldn’t obtain guarantees to protect against potential losses at the U.S. securities firm.
So the financial dystrophy telethon was a bust. Now Hank & Ben can do a bailout, since the private sector bad bank initiative only amounted to a roomful of smirking CEOs who gave up tennis and the beach for this nonsense. But at least everybody tried, as the saying goes, and Hank & Ben can take that before Congress in the next set of bailout hearings. They're gonna flinch.
“Paulson and Bernanke’s hands are tied. They want to print money to the moon, hyperinflate us to Zimbabwe, but China is preventing them”
Exactly – I put an article suspecting this on Friday afternoon. ‘Coincidentally’ the Dollar started tanking on Friday. Someone working at the CME also confirmed to one of my readers today that the there was a large sale of U.S. treasuries coming out of China:
Yves – hope it’s okay to post this link here. If you have any issues please feel free to remove it.
yves, says “On our preceding post, there is a lengthy discussion in the text and more in comments, that there are reasons to doubt that regulated parties will be able to continue to trade with Lehman if it files for bankruptcy.”
If securities or banking regulation prevents a counterparty from entering trades with Lehman if it files bkcy, then I imagine the applicable regulator (SEC, CFTC, Fed, or OCC) would relax or suspend the restriction. FERC relaxed rules on energy trading so that people could trade with Calpine.
And of course, the bkcy court can authorize the debtor itself to trade (if it’s in the interest of the bankruptcy estate (ie, the unsecured creditors to allow the trading business to continue)), as opposed to shutting it down.
An interesting point would be how the bkcy court deals with a creditor with enough votes to sink any bkcy plan, that wants to sink Lehman in order to make money of the creditor’s short positions on Lehman debt or equity (eg, credit default swaps). I have no doubt there is a hedge fund that will try something like this in a bkcy in the next couple years.
Here we go! Wall Street preparing for LEH bankruptcy:
Latest from WSJ
Barclays Walks from Lehman Deal;
Likelihood for Transaction Narrows
With many trading desks open, investors rushed to buy credit default swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher….
With each failure the “tide” of a systemic financial crisis seems to reach ever higher. Watching as our “leaders” scramble ever more frantically to paper-over the crisis du jour I vacillate between thinking that our “leaders” are simply hoping to keep things afloat until November . . . or they really think postponing the inevitable is possible. Neither conclusion is comforting.
I am currently sitting in our trading office in th Uk awaiting the Asian open ,all the talk we are hearing is pointing towards a lehman bankruptcy particularly in light of the most recent news coming out of the ISDA. As a result we are forseeing signifiant dollar weakness, treasury strength and uncertainty within equities.
As the guy above said…..
I’ve just seen BoA have pulled out of the deal, suppose that lends more credence to your comments. It seems hard to imagine any other outcome now for Lehman now.
BAnk of america is reportedly walking away. Will US markets open? well there is always the AIG call to look forward to, next…
Rumor is going around now that BAC has pulled out. Cannot confirm at this time.
Kwark, the reason our “leaders” want to postpone the inevitable is because they want to dump the entire shitload into the next administration’s lap.
If Obama wins, then the steaming load lands with the Democrats, which suits the current administration fine.
McCain and Palin are sacrificial lambs. McCain isn’t loyal to the party and Palin is a nobody. If they win then the party can afford to have them go down in flames.
Bank of America,
In Merger Talks
By MATTHEW KARNITSCHNIG, SUSANNE CRAIG and DENNIS K. BERMAN
September 14, 2008 4:08 p.m.
Bank of America and Merrill Lynch & Co. Inc. are in merger discussions, according to people familiar with the matter.
The talks come amid a Wall Street scramble to sort out a potential liquidation of Lehman Brothers Holdings Inc.
Bank of America had considered buying Lehman, but when those talks failed to result in a deal, BofA turned its attention to Merrill, which is considered a better fit for the bank.
Much remains uncertain and conditions were fluid.
If you wanted to know what happens when a stick save is not used, you are about to find out.
The US Treasury called the arm twisting meetings so I would think they are just playing to use as little money possible to backstop a deal.
Even a downgrade of Lehman triggers a waterfall of selling and that’s the best case scenario.