The short answer is yes, but we need to define fail And BTW, it’s very frustrating to be stuck on a plane waiting for the weather on the eastern seaboard to clear while the markets were having such an exciting day. As readers no doubt know, Lehman broke down after word got out that talks wtih Korean Development Bankhadfialed to produce an investment agreement.
After Freddie and Fannie, Paulson cannot be perceived to be rescuing another firm, particularly a private company that plays no special role (as far as most people are concerned) in things they care about, like housing. Unlike Bear, Lehman is not a big credit default swaps protection writer. That was the exposure that led the powers that be to worry about a systemic failure. Even though Bear and Lehman are similar in size, their business mix differs in ways that make Lehman dispensable. In fact, Paulson almost needs to let a financial player fail to prove that he is not a toady of the industry.
Mind you, that does not mean Lahman will go under. But they look like a fish on the dock, flailing and gasping for air. If they don’t secure some help soon, they are history.
Several financial experts said Paulson, a former Goldman Sachs chairman, was likely calling friends on Wall Street asking what people know, who is exposed and how much loss they are willing to take…
The Fed already has a borrowing facility open to Lehman, a measure offered to investment banks after the Bear Stearns failure. But it is meant to ensure short-term liquidity and not prop up an insolvent firm.
Yves here. Did you catch that? Reuters has in effect said that Lehman is insolvent. YIkes. That may reflect hasty editing, but is still pretty remarkable. Another noteworthy tidibt:
Lehman shares rose 8 cents to $7.87 in after-hours trading after Citigroup Inc, Goldman Sachs Group and Morgan Stanley all said they were still trading with Lehman.
These are remarkably weak endorsements. The fact that solvency is now a matter of speculation says how far gone the firm is.
From the New York Times:
On Wall Street, there is a growing sense that Lehman may have to solve its problems on its own, without drastic help from the government, which in March brokered the rescue of another Wall Street bank, Bear Stearns.
“Some may worry that Treasury has taken on so much taxpayer burden they don’t have any remaining capacity more to take on the burdens of Lehman,” said David Trone, an analyst at Fox-Pitt Kelton.