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.
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%.