Breaking: Bloomberg is reporting that Bank of America is walking away from the deal for Lehman! The WSJ say BofA is in possible merger talks with Merrill Lynch!
Feelings of frustration turned to futility this afternoon, as many working on the frantic negotiations over the fate of Lehman Brothers acknowledged that an acquisition or division of the firm was looking less and less likely and the firm would probably be liquidated in a bankruptcy.
Late last night many believed a deal had been reached with a consortium of international financial firms contributing capital to fund a new "bad bank" entity that would take most of Lehman's toxic real estate assets while Barclays, Nomura and Bank of America acquired a "good bank" of Lehman's healthier business. That deal fell apart today, although the exact reasons remain unclear. Some say Dick Fuld played a role by initially resisting the deal on the grounds that it disadvantaged Lehman's shareholders, others say Barclays toppled it by holding out for a government backstop of Lehman's obligations.
At Lehman Brothers tensions became so intense that a fist fight broke out between two employees, according to a witness.
"It's over," one person familiar with the matter told DealBreaker.
CNBC's Charlie Gasparino reported earlier this afternoon that firms involved were preparing for an orderly bankruptcy, with Bank of America taking a role to back up Lehman's swap trades.
Of course, it's still possible that a deal for Lehman could be worked out. Many believe that the situation has now moved beyond Lehman, with the primary concern being on containing contagion from the collapse of Lehman. This may explain how Merrill and Bank of America have found themselves in merger talks.
Posted by guest , Sep 14, 2008 4:24PM
Too long, didn't read.
Posted by guest , Sep 14, 2008 4:25PM
the journal reported possible merger, not reuters:
http://online.wsj.com/article/SB122142278543033525.html?mod=hpp_us_whats_news
Posted by guest , Sep 14, 2008 4:26PM
MS and JPM merger next?
Posted by guest , Sep 14, 2008 4:26PM
This is the most unbelievable day ever and its only Sunday. Is the entire street melting down?
Posted by guest , Sep 14, 2008 4:27PM
OKAY NOW THIS WAS A SMART IDEA....
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=320299542422&_trksid=p3907.m32&_trkparms=tab%3DSelling
Much smarter than that other fucking ebay listing.
Posted by guest , Sep 14, 2008 4:29PM
first fight!
Posted by guest , Sep 14, 2008 4:30PM
Ho-ly shit.
Posted by guest , Sep 14, 2008 4:31PM
what will happen to the mkt tomorrow?
Posted by guest , Sep 14, 2008 4:31PM
also.. this shit is gonna spread
Posted by guest , Sep 14, 2008 4:32PM
"At Lehman Brothers tensions became so intense that a first fight broke out between two employees.
"It's over," one person familiar with the matter told DealBreaker."
ok jason blair.
Posted by guest , Sep 14, 2008 4:33PM
gs should buy them all
Posted by guest , Sep 14, 2008 4:35PM
they already moved beyond lehman to merrill - where's lehman going?
Posted by Seaman Bodine , Sep 14, 2008 4:36PM
gs should shut the f up and wait...soon, they will be the only legit broker dealer / i bank left, competing with opco, jeffries, and ... roth capital; wonder how long before they get bored and start trying to lose money, kind of like a handicap on each deal
Posted by guest , Sep 14, 2008 4:36PM
@12- just gonna let it die
Posted by guest , Sep 14, 2008 4:38PM
some good news from goldman on tues?
Posted by guest , Sep 14, 2008 4:39PM
Any fight video?
Posted by guest , Sep 14, 2008 4:39PM
NYT:
Bank of America in Talks to Buy Merrill Lynch
September 14, 2008, 4:22 pm
Bank of America is in advanced talks to buy Merrill Lynch for at least $38.25 billion in stock, people briefed on the negotiations said on Sunday, as a means to preserve that investment bank while Lehman Brothers looks likely to collapse.
A deal, at between $25 a share to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.
Bank of America, the nation’s second largest bank by asset size, had been mulling buying Lehman, perhaps in a consortium with other financial players. But with financial aid from the government looking unlikely, Bank of America has moved on to Merrill, these people said.
As Lehman began to totter in recent weeks, investors feared that Merrill would be the next victim of the credit squeeze. Shares in Merrill, which has already reported tens of billions of dollars in losses, have plunged more than 68 percent over the past year.
Posted by guest , Sep 14, 2008 4:39PM
@ 12
Chapter 7
Posted by guest , Sep 14, 2008 4:40PM
What will happen to Merrill shares tomorrow on the back of this?
Posted by guest , Sep 14, 2008 4:43PM
American International Group plans to disclose a comprehensive restructuring by early Monday morning that is likely to include the disposal of major assets including its aircraft-leasing business and other holdings. Full story coming shortly.
(From the WSJ homepage)
So now we're waiting on WaMu, and then what? In the free and clear???
Posted by Seaman Bodine , Sep 14, 2008 4:45PM
BAC + MER ===== C
ugh, what am ess
Posted by guest , Sep 14, 2008 4:45PM
Why acquire MER at a 50-75% premium? This is just a negotiating tactic by BAC.
Posted by guest , Sep 14, 2008 4:46PM
@20
"So now we're waiting on WaMu, and then what? In the free and clear???"
We won't be free and clear for a long time. You thought the bear collapse was big? Just wait until this all pans out.
Posted by guest , Sep 14, 2008 4:46PM
BankofLynchBrothers.com
Sounds kind of racist.
Posted by guest , Sep 14, 2008 4:47PM
Bleh, what a mess. Still, probably the right thing if the catching point was gov't money to close the deal.
I own some of the Lehman preferreds, but other than that I am clear on this one.
Posted by guest , Sep 14, 2008 4:47PM
Bleh, what a mess. Still, probably the right thing if the catching point was gov't money to close the deal.
I own some of the Lehman preferreds, but other than that I am clear on this one.
Posted by guest , Sep 14, 2008 4:49PM
Is Lehman's board still behind Fuld?
Posted by guest , Sep 14, 2008 4:50PM
GS won't have anyone to trade with...
Posted by guest , Sep 14, 2008 4:50PM
@23
Of course, sorry -- my comment was entirely tongue in cheek, except for the WaMu part...what do you say? Within the hour?
I can't even begin to wrap my head around what the fallout from this will be...given the precariousness of the HF world these days, looks like I'll be heading to law school a year or two ahead of schedule -- this is going to be a legal nightmare...
Posted by guest , Sep 14, 2008 4:51PM
MS and GS are next. Thain tried to head off the shorts at the pass but this only implies the weakness of MS and GS. Game set match. See you at the bottom!
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.
Let me elaborate in much detail on these issues…
This bail-in of investors is the opposite of a bailout of investors like the one that was done in the case of Bear Stearns and Fannie and Freddie. It is thus akin to the bail-in of investors that was done in the case of LTCM in the summer of 1998 and the bail-in of the interbank creditors of Korean banks in the winter of 1997. I wrote in 2004 with Brad Setser an entire book titled “Bailouts versus Bailins: Responding to Financial Crises in Emerging Markets” that discusses these policy tradeoffs in financial crises where you have runs on the liquid liabilities of either illiquid and/or insolvent countries. Those were the international equivalent of the banks runs and financial crises that we are now seeing in the cases of Bear Stearns, Lehman and Fannie and Freddie.
Since government bailouts put at risk public money and create moral hazard Treasury and the Fed decided that they need to draw a line somewhere after the bailouts of Bear Stearns creditors, of Fannie and Freddie and all the other actions aimed at backstopping the financial system. These actions have included the creation of the TAF, TSLF, PDCF, the use of the FHLBs to provide liquidity to distressed mortgage lenders, the provision of Treasury liquidity to the FHLBs, the outright purchase of agency MBS by the Treasury, the swapping of two thirds of the safe Treasuries of the Fed for toxic illiquid securities of banks and non banks, etc. So after having created the mother of all moral hazard with their actions (including the biggest bailout of all, i.e. the rescue of Fannie and Freddie) the Fed and Treasury are playing a chicken game with the financial system. Tim Geithner told clearly to the heads of all the major Wall Street firms that if they pull the plug on Lehman and Lehman collapses they are next in line for a run on their institutions. So if a buyer for Lehman is not found (or even if it is found and the counterparty lines are still pulled) not only Lehman will collapse but the run will extend to all of the other major broker dealers and banks that are the counterparties of Lehman.
The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: after all Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).
The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.
But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found or put capital into a bad bank that would take the toxic assets off Lehman's balance sheet. Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman or fork new money to support a bad bank full of junky toxic waste. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case).
Paulson and Bernanke and Geithner (the troika managing this financial crisis) have all made public statements in the last few month to the necessity of finding an orderly way to close down – rather than bailout – a major and systemically important non bank financial institutions: the embarrassment and losses for the Fed that the bailout of the creditors of Bear led made it paramount to avoid another Bear like bailout. That is why they are now playing tough with Lehman and its creditors. But in this game of chicken the Fed and the Treasury may end up being the ones to blink. Faced with the risk of a generalized run on the other broker dealers they may decide that greasing again a deal for the purchase of Lehman may be less costly and less risky than testing whether the system can orderly work out a collapse of Lehman (something that is highly uncertain). Even in the case of the Bank of America purchase of Countrywide such public subsidy was significant (the FHLB of Atlanta lent to Countrywide over $50 billion and Bank of America has most likely received plenty of tacit forbearance from the Fed to support its takeover of an insolvent Countrywide). So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.
The trouble is that, in spite of all public statements regarding the need to provide an orderly demise of large broker dealers, the Fed and the Treasury have done nothing to create such insolvency regime for such broker dealers. So the only option for Lehman – if a buyer is not found - will be the one of ending up in Chapter 11 and trigger massive losses on its counterparties that will in turn trigger a run on such counterparties.
In February of 2008 I predicted – in my “12 Steps to a Financial Disaster” – that one or two major broker dealers would go bankrupt. A month later Bear Stearns went bust and the collapse of the other ones was avoided for a time by the most radical change in monetary policy since the Great Depression, i.e. the creation of the PDCF that extended the lender of last resort (LOLR) role of the Fed to non-bank systemically important broker dealers (i.e. all of the bank and non bank primary dealers of the Fed).
I next argued in June that such action would not prevent a run on other broker dealers such Lehman as to avoid a run you need both deposit insurance and unlimited and unconditional access to the Fed LOLR support. I also discussed why Lehman was next in line for a collapse and why the PDCF would not prevent a run on Lehman.
I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.
The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.
What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.
This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.
Posted by guest , Sep 14, 2008 4:51PM
Who cares ... LEH is done ... Ancient fucking history ... We want to know who the fuck is NEXT
Posted by guest , Sep 14, 2008 4:52PM
In the 90s it was the fallout of the airline and manufacturing industries. In the 00s it is the fallout of the real estate and financial industries. America is now officially a hollow shell of what is used to be. The only thing American knows how to do is bomb and occupy foreign countries and that is even debatable.
Posted by daytraitor , Sep 14, 2008 4:53PM
Time to move to Montana, amass an arsenal and start an organic farm?
Or buy as blood runs like a river through the street?
Undecided.
Posted by guest , Sep 14, 2008 4:55PM
the sky is falling
Posted by guest , Sep 14, 2008 4:55PM
the sky is falling
Posted by guest , Sep 14, 2008 4:55PM
30
Looks like you wrote another book.
Posted by guest , Sep 14, 2008 4:56PM
@30 Too long didn't read
Posted by Seaman Bodine , Sep 14, 2008 4:58PM
@30 - go back to your basement and jerk off on your keyboard, you dipshit
a couple firms go BK, they dump their crap real estate, and the game begins again...you are either a democrat or a douche (or both) if you think otherwise
Posted by guest , Sep 14, 2008 4:58PM
33 - BUY
Posted by guest , Sep 14, 2008 5:00PM
#36, @37
That was a C&P from Roubini - you must be employed or have recently been "let go" at one of the firms he names!
Posted by guest , Sep 14, 2008 5:01PM
Just vote for Pailn-McCain. When you are drafted, no worries about job or health insurance. Our family can hunt just like Sarah to get meat on the table. Woo-hoo!
Posted by guest , Sep 14, 2008 5:01PM
only thing left to do is buy something on monday i guess
Posted by guest , Sep 14, 2008 5:02PM
@30
too long, didn't read
Posted by Jesse Livermore , Sep 14, 2008 5:02PM
daytraitor
Have you even spent a winter in Montana?
Carefully picking over the bloody remains is much less distasteful.
Jesse
Posted by guest , Sep 14, 2008 5:04PM
@30
Nouriel Roubini? From Stern?
Can you explain the counterparty risk that other banks are facing? Is this really like LTCM? If so, why are the other banks not playing ball?
Posted by guest , Sep 14, 2008 5:05PM
http://www.survivalblog.com/
for all of you TEOTWAWKI folks...
Posted by guest , Sep 14, 2008 5:06PM
who's going to crack first, classic poker game between paulson and the banks, why would barclays and boa "walk away" so early, they're clearly piling pressure on paulson who's readjusting his cap, sunglasses and ipod earphones.
Fuld should shut the f up, he's only making things worst. Protecting shareholder value? let me laugh dick? it's like if madonna gave an abstinence class at school
o
Posted by Jesse Livermore , Sep 14, 2008 5:07PM
@30
I am a bit uncertain, did you formerly post your screed on Yahoo or the Boston Globe real estate message boards?
In any event they miss both your epistles, please go home and take your “12 Steps to a Financial Disaster” with you.
Thanks in advance.
Jesse
Posted by guest , Sep 14, 2008 5:09PM
Fuck. Just ... fuck.
Posted by guest , Sep 14, 2008 5:10PM
@ 30..tell us something we don't know, you're probably lost, this is not the finance 101 class internet forum
Posted by guest , Sep 14, 2008 5:12PM
"Late last night many believed a deal had been reached with a consortium of international financial firms contributing capital to fund a new "bad bank" entity that would take most of Lehman's toxic real estate assets while Barclays, Nomura and Bank of America acquired a "good bank" of Lehman's healthier business."
many = you
"That deal fell apart today, although the exact reasons remain unclear."
cause you made it up
Posted by guest , Sep 14, 2008 5:12PM
Who is this Nouriel Roubini fellow everyone keeps talking about?
Frankly it sounds made up
Posted by daytraitor , Sep 14, 2008 5:17PM
@52
Google. It's a search tool for the interweb.
Posted by guest , Sep 14, 2008 5:18PM
If BofA and ML hook up, then that opens the door wide open for Bob Steel to whore Wachovia out to his old crew. No way Blankfein lets Merrill get access to BofA's deposits and doesnt do anything about it. Of course, this leaves MS as the odd man out....
Posted by Jesse Livermore , Sep 14, 2008 5:18PM
@52
http://pages.stern.nyu.edu/~nroubini/
Interesting read.
Jesse
Posted by guest , Sep 14, 2008 5:20PM
Merrill Lynch in talks to sell itself to Bank of America for at least $38.25 billion -Reuters
Posted by guest , Sep 14, 2008 5:22PM
What time does Honkers open?
Posted by guest , Sep 14, 2008 5:22PM
@54, nah, Morgan Family Reunion.
If Lloyd is smart he'll try to buy a smaller European Bank so that he can continue to run his own show.... or maybe he can get Sumitomo to ride to GS's rescue again.
Posted by guest , Sep 14, 2008 5:42PM
@55
too long, didn't.... ah you know