Who Will Save Lehman?

Folks, this is getting serious

The share price of US investment bank, Lehman Brothers, has fallen over 90% this year. Its bonds are trading at 65 cents on the $$. It has almost no chance of remaining as an independent company. Banks only remain in business if counterparties have confidence in their long term survival. Most people now doubt whether Lehman will even last the week.

So why is the fate of Lehman important and what to do?

A necessary but painful part of capitalism is the demise of individual businesses, even those that have been around for 150 years. Far from being ‘failings of capitalism’ as many cerebrally-challenged left-liberal  writers gleefully point out, recessions can be thought of as forest fires, laying the foundations for a more productive future.  I still believe the Fed was right to engineer an orderly liquidation of Bear Stearns (though the level of state aid provided to JPM was unacceptably high). Lehman is even more central to the global financial system.  The key is to find an orderly way to unwind all of Lehman’s counterparty trades whilst liquidating the rest of the company.

The alternative is for the Fed to engineer another Bear Stearns-like takeover, whereby a strong US bank would buy Lehman for a nominal price (say $1 a share) and the Fed would guarantee a huge chunk of its ‘black hole’ assets. However, the big banks are tripping over each other to rule themselves out.  Over the weekend, the last two remainaing hopefuls (Barclays and BoA) both walked away.  The sticking point is said to be Lehman’s book of ‘hard-to-value’ mortgage assets. Apparently Barclays were seeking Fed guarantees for the lot ($85bn) but Paulson, still under fire for his lavish guarantees of taxpayer money to JPMorgan, refused to write any cheques.

It’s not clear how this will end but either way it’s going to be very very messy.

Update 1

An incredible day on Wall Street.   Merrill Lynch, on hearing that a Lehman deal had failed, immediately agreed to a takeover from Bank of America – “better to save the relatively healthy patient instead of the dying one”, according to a source close to the transaction.

Lehman still without a bidder and S&P futures trading down 4%.

14 thoughts on “Who Will Save Lehman?

  1. On the weekend Lehman may declare bankruptcy the WSJ is reporting that BofA is preparing an all stock bid for Merrill somewhere around 25/30 bucks a share. Mer closed at 17 bucks making the potential bid 60% over the closing price. The irony is killing me.

    If this is true I guess this now puts a bid poential on Morgan Stanley. I just may buy some MS if the Merrills bid is true.

    In any event the entire NYC market is working overtime this weekend to novate their dealings with Lehman which means the poor customers will be left carrying the can along with the Fed if the bankruptcy filing goes ahead.

  2. jc – the Merrill bid is hilarious. you set up a meeting with Paulson to discuss buying Lehman and a day later you put in a bid for Merrill!

  3. Lehman bonds could be worth a bet here. The market is still pricing equity at around 4 bucks a share. Which means the bonds have value at anything above zero. The firm is also carrying a provision for bonuses of $3 billion according to the last filing. If the firm files Chap 11 the bonus provision is kaput – the firm simply won’t pay. Meanwhile the bonds are trading at around 60 cents in the dollar.

    Although it’s on the thin side the bonds could be worth north of 60 cents depending on their ranking. I think it’s worth looking into in terms of trying to catch a falling knife without cutting ones hands.

  4. Isn’t it hillarious, pom……:-) Only in America! You walk away from Lehman and then think about pitching a bid for Merrills on the same weekend.

    It makes Paulson look silly. i bet he’d be really pissed if it was true.

    This is like Walmarts….. Toilet paper aisle 2, investment banks 3rd aisle on the right in the specials section….


  5. Gold’s put on almost 40 bucks since the Thursdays/friday lows. I scooped a little down there. Not enough as I was too nervous.

  6. The one to watch, pom is AIG. If AIG collects a material downgrade (and they now may have some of the storm to contend with)… if they catch a downgrade they could be called for 50 billion in cash… If AIG goes it’s all over rover.

  7. [sarcasm]
    Isn’t capitalism great ?

    Instead of letting those pesky market forces choose who should succeed and prosper, and who should crash and burn for their mistakes, we have the wisdom of Washington to choose who gets bailed out by the tax payer and who will not be bailed out.

    Those founding fathers sure had a great system in mind when they gave Congress powers to regulate commerce, create a Central Bank, mint currency, regulate the financial sector and then bail out the banks that were “too big to fail”….

  8. Why save it?

    RAMS Ltd. were bought out by Wsetpac here in Australia with practically no Government intervention. RAMS had to accept a very hard bargain at the end of the day.

    Guarantees etc. could mean shareholders and taxpayers pay too much for crap assets such as non performing mortgages.

    I have to say though there was enough hysteria in Australia with RAMS. Mortgage holders thought their homes were going to get taken off them if their bank went bust. It is kind of embarrasing that this even made headlines when they could have refinanced from at a lower cost of borrowing if they had paid off any equity they were going to “lose”.

  9. Mark:

    You could be right and the street gets to buy Lehman’s assets on the cheapola. However they have $550 billion in loans. Fuck me…..

    The problem is the credit default swaps held by AIG and if they get downgraded tonight there’s a 50 billion hole as they have to find the money to support the collateral.

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