What Will Happen To Lehman Over The Weekend?

Friday, September 12, 2008

Bankers and financial authorities are becoming busy bees these days. After last weekend's overtime that led to a potential doubling of US public debt for the "rescue" of Freddie Mac and Fannie Mae this weekend will be spent on a rescue plan for Wall Street's oldest firm, Lehman brothers.
Bloomberg headlined "Lehman's Fuld Races to Sell Firm as Fed Balks at Deal"
and the Wall Street Journal topped its webpage with "Lehman Races to Find a Buyer"
The WSJ opens with a meaner tone:
The investment bank Lehman Brothers Holdings Inc. spent Thursday energetically shopping itself to potential buyers -- among them Bank of America Corp. -- just a day after insisting it had found a way to patch up its massive real-estate-related losses.
According to the paper the Fed balks at a similar bailout along the lines of BearStearns, which JP Morgan was ordered to buy in the new world of capitalist socialism (if such countersubjects can ever be written side by side.) Fedization or Fed bailouts and nationalization have become the buzz words in circles who had fed off the cream of free market theoretics - while the US government's share in GDP has been soaring to new records. Keynesianism hiding under a bull's hide.
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 currently aren't 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.
Let's not forget that the Bear rescue may cost the Fed $29 billion while the Treasury has earmarked $200 for the Frannie survival.
Bloomberg is a little more kind to Lehman CEO Richard Fuld.
Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld is seeking buyers for the investment bank amid signs that the U.S. government may balk at providing the funding that enabled Bear Stearns Cos. to sell itself and avoid bankruptcy.
Fuld, who built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the firm, was cornered into a potential forced sale after talks about a cash infusion from Korea Development Bank ended, sparking a 70 percent drop in the firm's market value during the past three days. Unlike when JPMorgan Chase & Co. took over Bear Stearns, the Federal Reserve and Treasury aren't likely to put up money for a purchase of Lehman, people briefed on the matter said yesterday.
Worse may come to worse, though. Moody's put Lehman on his watch list, saying its A2 rating may be downgraded if the firm finds no strategic partner.
As it has become a custom that bank failures are announced on Fridays while any government intervention is done during the weekend it will be most interesting to watch the wires for today's last statement on Lehman. If they don't close shop today there may be a faint chance for some kind of continuation, dressed in some innovative words.
This Will Not Be the Last Bank Failure
The WSJ finished off with observations of Lehman employees:
Outside Lehman's headquarters in midtown Manhattan, employees taking lunch breaks or a few minutes for a smoke early on Thursday afternoon discussed the firm's future. Many sounded dazed. "It's over, man...unless we get bought out in the next 24 hours, it's over," said a young man, in conversation with someone on his cellphone. He said he was a Lehman employee and declined to answer further questions.
At a fast-food vendor across the street, people waiting to order food discussed the dive in Lehman's share price this week, and the latest headlines from CNBC. Outside, a group of three men, wearing Lehman badges and walking back into headquarters, discussed the fallout for other firms on Wall Street. "At some point, where does it stop?" one said, as he headed back to the office.
I am inclined to be of the strong opinion that this credit crunch will see many more bank failures and it will not spare the behemoths of the industry as these are the institutions most entangled in a web of derivatives with a potential risk that runs into the trillions
Only yesterday Banque de France governor Christian Noyer had warned in a Reuters dispatch:
EU states will dodge the thorny question of who bails out a cross-border bank when they meet to streamline supervision this week and a bigger role for the European Central Bank seems unlikely.
Banking supervision is still done largely on a national basis and if a major bank with a multinational presence fails there is currently no mechanism for dealing with it at the EU level.
The EU's 27 finance ministers meet in Nice, France on Friday and Saturday and are due to back a simpler system for the 50 or 60 multinational banks to report to regulators from 2012.
As the ECB has no treasury standing behind it a failure of a European bank operating in several EU countries will be a new challenge for the Eurozone. While Germany has already seen a bank merger wave, other Eurozone countries may only begin to calculate the total fallout from investments in wrongly AAA-rated US MBS and their banks exposure to the looming derivatives disaster.

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