The meetings between Federal Reserve officials, senior bankers and regulators to discuss a rescue of Lehman Brothers ended without any clear resolution to the situation. At least some at the meetings now believe that Lehman may be beyond rescuing, and that the focus when the meetings resume tomorrow should be on an orderly unwinding of Lehman. A good bank, bad bank plan has been worked out but it’s unclear if Wall Street banks can provide adequate capital to fund the plan.
Although the formal meetings are over for the evening, across Wall Street executives and regulators continue working. New York Fed President Timothy Geithner is still at the bank’s headquarters, according to the Wall Street Journal.
“A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street,” the Journal reports.
CNBC reports: “Under the terms of the proposal, which could still blow up, all the major Wall Street firms would pitch in $30 billion total to purchase Lehman’s bad real estate assets and create what’s knows as a ‘bad bank.’”
We understand that as early as last night a major focus in the meetings has been addressing the possible domino effect from a Lehman being toppled. Many other Wall Street institutions have large counterparty exposure to Lehman, and a liquidation of the firm could be costly. The stock drops at AIG and Merrill Lynch on Friday are a major source of concern.
We’re going to be away from our desks for the evening but we’ve set up an account on twitter that will allow us to post updates on breaking news. Feel free to email us at tips@dealbreaker.com or call or text us at our special Lehman weekend tips line: 646-526-FEAR. Yes, that’s really the number.
Update: Here’s what Ben White and Eric Dash at the New York Times (and about five other journalists) are reporting:
One option discussed would be to have major banks and brokerage firms agree to do business with Lehman even as the 158-year-old firm, staggered by massive losses, liquidates itself. Another option — a daring rescue encouraged by nervous regulators — would be for a consortium of banks to provide financial backing for a sale of the firm.
Federal officials were adamant that no public money be used — a big point of contention, because many of the top Wall Street executives believe that their banks, which have each written down tens of billions of dollars in assets, do not have the capacity to lead the rescue on their own.
excellent, and the 526 refers to LostAllMoney?
212-526-7000 is Lehman’s main number. We just decided 526-FEAR seemed appropriate.
http://WWW.BANKOFLEHMAN.COM AND http://WWW.BARCLAYSBROTHERS.COM BOTH FOR SALE….CHECK OUT EBAY!!! LOL TYPE IN “LEHMAN BROTHERS” ON EBAY.
Does anyone find it as ironic as i do that Hank Paulsons brother is in fixed income at Lehman Brothers.
I bet Thanksgiving @ the Paulson pad circa 2008 will be one to remember.
I work at Lehman and I think I have a solution for this. The firm should try to get Putin to buy it. This way the Russians will own U.S. houses/offices and can choose to demolish them whenever they want. Also, they can get access to the Fed and destroy their balance sheet if they wish. Makes perfect sense for Russians to spend their money on this. Much more powerful move than buying over priced Manhattan penthouses. I’m sure the employees will be happy to get paid in oil for bonus.
so basically this last proposal would like a transfer of all equity to a consortium of banks at a potential share price of $0? who knows what the assets would be worth, but from a shareholder perspective you might as well go for BK and f**kall. at least bsc’s $2 bid was a gamble. if i were unlucky enough to be a shareholder i’d just go all in.
http://WWW.LEHMANBAILOUT.COM IS NOW AVAILABLE ON EBAY CHECK OUT OUT.
http://cgi.ebay.com/LEHMAN-BROTHERS-MERGER-BAILOUT-DOMAIN-NAMES_W0QQitemZ320299216040QQihZ011QQcategoryZ11153QQssPageNameZWDVWQQrdZ1QQcmdZViewItem
#7
When I submit the winning bid and you email me for payment guess what I’m going to say?
SPODE
this country is going to hell–
http://gawker.com/5048884/worst-of-sarah-palins-first-interview
i can’t believe you morons want to elect this dumb bitch (what you’d be doing, mccain’s going to die).
SHE DOESN’T KNOW WHAT THE BUSH DOCTRINE IS.
@9 neither does Bush.
@SPODE– are you going to shell out for http://www.bankofbrothers.com?
@10– love that that’s the republican’s response. well she’s not dumber than bush!
@12– I think he meant that there is no single definition of the Bush Doctrine..
http://www.realclearpolitics.com/articles/2008/09/charlie_gibsons_gaffe.html
@ 12 not a republican.
Just pointing out the blantly obvious. Why should we be suprised that Sarah Palin is appealing to a large segement of the electorate. After all the voted for Bush/Cheney 2x!
She is the next logical step in the dumbing down of America.
http://WWW.LEHMANBAILOUT.COM IS NOW AVAILABLE ON EBAY CHECK OUT OUT.
http://cgi.ebay.com/LEHMAN-BROTHERS-MERGER-BAILOUT-DOMAIN-NAMES_W0QQitemZ320299216040QQihZ011QQcategoryZ11153QQssPageNameZWDVWQQrd
Next suggestion in the NYT is that “maybe everyone will just hold their nose, close their eyes and keep trading with Lehman”.
Anyone believe that this is a viable alternative?
#16
No.
@15
FUCK OFF
No one cares about the dumb ebay thread.
http://WWW.LEHMANBAILOUT.COM IS NOW AVAILABLE ON EBAY CHECK OUT OUT.
http://cgi.ebay.com/LEHMAN-BROTHERS-MERGER-BAILOUT-DOMAIN-NAMES_W0QQitemZ320299216040QQihZ011QQcategoryZ11153QQssPageNameZWDVWQQr
LEH should go nuclear.Other banks dont wanna play ball, fine. Lets see how naked everyone is (apologies to Buffet) once LEH dumps its assets in the market in a liquidation.
LEH shareholders are already at essentially 0. A majority of the employees are anyways going to lose their jobs. So why the fuck should Lehman play ball to save other banks’ asses. Let the games begin – lets see how well everyone else does.
Something tells me though that will not come to pass. The great trader Dick Fuld will give in to satisfy his friends.
@20
Although I agree with your logic, I don’t think it’s in the interest of anyone on Wall Street to blow everything up. This is a great money making machine and we should all try to keep it that way. Lehman employees will find jobs at other firms. If the whole industry gets hurt, then we’re really in trouble. Too late to go to medical school…
@20
Please explain LEH going nuclear. For the life of me, I can’t figure out what weapon they possess. They were not given a seat at the table, and they are not in position to say no to anything. The way I see it, they get a deal done in the next 18 hours and LEH is gone, or they liquidate beginning Monday and they’re toast. Thoughts?
@21
Much less than half will find jobs on Wall Street. And that after considerable amount of time.
let’s get specific people. now that everyone is calling for the end of the world, let’s see how it plays out in the nuclear scenario.
leh had $613 billion of liabilities on it’s books at 5/31. to repay those liabilities it had $639 billion in assets – some, of course, are questionable (including $4 billion of “intangibles”).
42% of the assets to repay these liabilities were in the “financial instruments and other inventory owned”, which totaled $269 billion. however, the 10Q at 5/31, shows 16.6% of these “assets” were in level III territory. a closer look reveals that 81.2% of those same “assets” were classified as level II or III (ie. the writing was on the wall). let’s assume the level III go to 0, and ½ of level II go to 0. that creates a hole of $122 billion. for argument’s sake, add back the untapped value of NB at ~ $10 billion, now the hole is a more reasonable number of $112 billion.
that takes care of the equity ($2.5 billion market cap) and pfd ($9.0 face). short/long term debt has a book value of $163 billion (fair value at 5/31 was $36.5 billion). all told, if these capital providers get a goose egg, the mutual funds, employees, and main street loses ~ $48.0 billion (assuming they were carrying the positions at fair value and not face). that’s just a little more than the current market cap of target (the retailer) and $89 billion LESS than the value of google – far from financial armageddon…
you also the have borrowers who are going to get left in the dust. on the latest call, the fin supplement showed $4.0 billion of unfunded acquisition facilities. this will need to be redistributed among the banks or we’ll see some pending transactions fall apart (that weren’t club deals).
on the CDS front, there were $25.6 billion were swaps (interest rate/credit default/options). however, you have to net out their hedges which drops the exposure to $15.9 billion – it’s unclear from the 10q who the counterparties are, but they probably are the ones who have been burning up hank’s answering machine.
I’m no restructuring expert, so I’m going to go have a drink and let one of you guys tell us how the assets will get split up amongst the “creditors”. looking forward to some insights.
an another note: did anyone else notice that the unrealized loss in residential mortgages in the 3rd quarter were equal to 31% of the book value (and that the 3q loss was ~50% of the ytd losses)? what does that mean for the other big guys holding mortgages, wm, wb, wfc?
@24
I’ll have my people get crackin’ on that first thing Monday.
@24
Don’t forget that as a broker/dealer, client assets are commingled with Lehman firm assets in a liquidation. While its likely they’d get most/all of their money back, its not right away, and its not pretty.
LEH = DIH -Dick in Hand-
Gunshot to the face or tossed in a wood chipper, if your done your done.
The hound of the baskervilles is ready to hunt again. MER, AIG, WB. I’m a little nervous seeing MER with a 7.5% common yield.
MER going under ?
possible yes
probable ?
How realistic is this, less than 20%?
SPODE
@26 — that’s false and was disproven during the bsc scramble. check the sipc rules.
@cluz — why would the level III’s go to zero? at their worst you would assume some residual value for the optionality alone. (which is why bankrupt company stocks never actually go to zero.) this ain’t over, even if they have to go bk to extract the remaining “value”. that’s why fuld didn’t need to be there, since his bk option is already a given.
The mortgage marks are very very conservative now. I’d buy at that price; there may be value here.
Next: The trading operations do make money. There is value in buying the business; it would be a drop-in for BOA; not sure about Barclays.
Finally: Level 3 assets do not have zero value.
If I could, I’d start shorting the crap out of anyone with significant NYC real estate exposure — 25k people are about to clam up their wallets, and probably several thousand baby ballers are headed home to mom and dad.
@30
Any chance you were in Manhattan in 1991? Anybody who purchased an apartment in NY in 1989 (top of the market) took ten years to get even. They wouldn’t give a mortgage on studios and one bedrooms for several years. Prices fell by more than 50%. If it cracks now, it will be worse.
@ Spode
What about WM or AIG?
NYC real estate has been resiliant so far; too much foreign money flooding in to buy premium NYC addresses. I don’t know if the liquidation of 15,000+ jobs at LEH is going to be enough to break it.
As far as the LEH Level III, answer me this: Would YOU buy it without a backstop ala BSC? Based on the Merrill sale where they had to discount the already slaughtered value 75% through fianance to get a taker, no one else will buy this crap either.
Level III may not be worth zero, but no one has the cash to dabble in this junk right now on the hope that it actually is worth something. If it was as simple as offloading it to someone who can hold it to maturity i.e. Citadel ala E*Trade’s trash portfolio, I have to believe that LEH would have done it by now.
I think there honestly are no takers at more than a nominal price.
As far as MER…mathematically based on the size of their book o’ garbage, they *shouldn’t* be going under. However, that’s not touching any consequences of a counterparty bomb if LEH goes blammo.
This one (the whole credit markets fuckup) is a real doozy. It’s going to take a decade if not more to rebuild the machine – once things stop getting worse and new and stupid losses stop getting announced.
What’s going to happen to my Lehman Indices? How can I show my clients what a wonderful bond manager I am without my indices? Why isn’t this even being discussed by the Fed. Forget the bailout, forget NB, I want my indices intact!
What’s going to happen to my Lehman Indices? How can I show my clients what a wonderful bond manager I am without my indices? Why isn’t this even being discussed by the Fed. Forget the bailout, forget NB, I want my indices intact!
What’s going to happen to my Lehman Indices? How can I show my clients what a wonderful bond manager I am without my indices? Why isn’t this even being discussed by the Fed. Forget the bailout, forget NB, I want my indices Dick!
What’s going to happen to my Lehman Indices? How can I show my clients what a wonderful bond manager I am without my indices? Why isn’t this even being discussed by the Fed. Forget the bailout, forget NB, I want my indices Dick!
There is no way this deal is getting done by Asian open. BSC at least knew what had to be done by now.
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=320299216040
@39
Its either a deal or liquidation. Not a fucking chance LEH can trade with anybody under these circumstances…..your thought?
Moron @9,
The Palin “interview” was heavily edited to make Palin look bad.
The full transcript has been made available:
http://www.pajamasmedia.com/instapundit/archives2/024281.php
@42
A friend of mine worked at ABC news for years (now at NBC) and LOVED Charlie Gibson……nice guy, perfect gentleman, fair, etc…..Even she is totally offended about the interview…..the attitude, the editing, camera angles, etc……She is shocked he’d be so manipulative, especially during an election…..
Palin is a moron. That’s not seriously up for debate and such debate is a waste of bytes.
Dumb bitch thinks we should get nuked for shitbag countries like Georgia. Fuck that.
-
As far as LEH, I don’t see evidence that the Lehman people have come to grips with the route they want to go. Considering Asian open, that’s a problem.
You’re going to get a complex and novel deal done in less than 20 hours? BSC was in motion before the weekend, with Dimon basically insulated from losses by the Fed so he didn’t need to do exhaustive due dilligence, and that was still a rushed fuckup of a deal.
The Feds have been adament this time that there will be no federal financing. So that’s out. I personally view rounding up $30b+ in capital from this Street to be a pipe dream. Such capital would have to be heavily weighted in favor of the few banks that are not horribly screwed up in their own right.
Any agreement to support the LEH trades while the thing is unwound is going to run into a major Prisoner’s Dilemma issue: There are going to be some people who think they can profit by defecting from any such agreement. You know it will happen, and so does everyone who is floating this as an idea.
I view it as less than a 30% probability that something is in place by the time Asia opens. Too many people in these meetings and too many different ideas.
@44
Okay, no deal when the markets opens. Describe what happens then…..if it sounds like a screenplay so be it, but let me hear it…..
Keep in mind Japan is closed on Monday (Respect for the Aged Day)
@35-38, switch to another provider for your fixed income benchmarks — how about Merrill (for the week or two that they have left) or Citi?
@44
I assume you were not politically astute from 1980-88. A solid 40% of America thought Reagan was a moron. Missile defense ( star Wars, the guy is lost in a movie) Evil empire (you can’t say that) Tear down this wall (how naive) Clark Clifford, democratic braintrust: “Reagan is an amiable dunce.” Suffice it to say, we’ve heard ALL of this crap before.
I remember Anita Kolleeny going on and on about z-scores back in 2001 as if it was this second coming of Christ. Annoying as fuck. I remember sitting there thinking, I would definitely lick your ass and you’re an idiot if you think this “great strategy” is going to help this new pig. Again, cute ass.
Considering “total assets” is the denominator for four out of five parts of the equation it’s probably safe to say it’s a waste of time to calculate the z for any of these financials.
Crank it out Level I bitches I know you know this shit.
Maybe this will be the push that’s needed to move GAAP to fair value.
http://www.cfo.com/article.cfm/12001891?f=related
SPODE
Delaying the liquidation will just make things worse. The Great Depression and Japan 1990-present are perfect examples of what happens when you deny reality and delay the liquidation and adjustment of the capital structure.
Lehman clearly doesn’t think they can make it another week. They have Weil working on a BK filing right now. I doubt that is just a BATNA to add some urgency to the negotiations. Keep in mind that there’s a pending downgrade that would require this no-capital bank to post IIRC $4 billion in new capital. Lehman no doubt deserves the downgrade.
What happens if LEH liquidates? Who knows. That’s what that “third meeting” is about, but this isn’t something that people have any experience with. All we know is that Dimon and the others involved with the BSC fiasco were very concerned about the system nexus that existed at Bear. Lehman is similar.
The stock market here (almost) does not matter. The concern would be what happens to Lehman’s counterparties. That’s the, ah, $64 billion question. Paulson apparently feels that Lehman collapse is survivable, as he has really dug in his heels on no federal money. We shall see. There is no way he can really *know* that, as we’ve never had one of these guys blow up with the modern derivatives market.
I do not think that Paulson’s iron stand on this is just a negogiating tactic. You do not want the Treasury losing credibilty on moral hazard to that degree, and this is severe enough that it wouldn’t be leaking that that was the Treasury position if they didn’t want that to leak.
Self Destruction
Bib Laden is laughing at our lust for greed and self destruction. We play into his grand plan. If the distorting shorts are not stopped the system will collapse and the next world wide depression will be a very violent one. Americans must wake up.
Source: http://seekingalpha.com/article/95256-aig-the-mark-to-lehman-market
When will the SEC wake up?
#50, The counterparties angle is not the only one. If Lehman’s significantly holdings are liquidated at firesale prices and others forced to mark to market, then MER may not be around till the end of the week and a lot more people will be left naked.
That is one of the sticks the Feds are using. I think they will push it sufficiently to get the banks to get together to take on some stake in the ‘bad bank’ or asset package. Of course, there is a lot of game theory shit going on out there. Folks want to save their own asses but do not want their competitors (Barclays or BofA) to gain out of it. Crazy times, but we have seen this before.
#22 beentheredonethat, if you do not understand what weapon Lehman possesses then you are an idiot. It is the same weapon using which bsc managed to up the proce from 2 to 10. If is called shareholders refusing to vote for the plan. It does not matter much whether you get 50 cents of 0. However, if Leh folks feel that they are being slaughtered while others (in not necessarily much better position themselves) are feasting on the remains, it wont take much for them to throw a spanner in the works.
If it didnt matter then the heads of all banks wouldn’t be burning the midnight oil trying to arrange something, they would have just let Lehman liquidate. Unfortunately they (unlike you) realize the consequences of such a liquidation.
@52
I appreciate your attitude very much, but you need to consider that as a primary dealer, the firm can be seized if they fall under minimal capital requirements, which they surely will by Monday morning. The government requires LEH approval for NOTHING. Once the firm is seized, the shareholders have nothing.
@52
Exactly how much of influence did the shareholders FRE and FNM exert over their transaction? What price did they get for there shares? Were they in a position to object to the seizure. That would be NONE, JACKSHIT, and NO!
Just an FYI … PAYDAY is Monday at most firms.
It will be interesting to see whether Lehman’s checks clear — any current employees reading this, please confirm on Monday if the money hits your account.
just checked bloomberg for the few people I knew there, all removed in the past couple days, MD level people. not a good sign….
52/53
The government doesn’t require LEH shareholder to liquidate/penalize the firm if they fail regulatory requirements, are insolvent. The government however ABSOLUTELY requires shareholder approval to sell THEIR shares to Barclays/BofA/whoever for $0.50!!!!! What world do you live in!?!
FNM/FRE was not sold to anyone. The government injected capital in the form of preferreds. Also, if need be the shareholders could reject the deal to see themselves totally liquidated with the government taking over.
The government was anyways (implicitly) the ultimate supporter of the firms. The fact just became more explicit. The two cases are nowhere the same. The government is actively putting in technically infinite funds to run the entities.
In the case of Lehman, the shareholders can hold out for a higher bid as the alternative would be disastrous for the very bidders. Nothing of the same existed for the agencies. Controlling outcomes only works where there is some difference between the outcomes. FRE/FNM shareholders trying to vote down (if they theoretically could) the plan would mean jackshit to anyone. LEH shareholders forcing liquidation would mean a lot.
I’m not disputing they shareholders can vote there shares on a deal. A seizure followed by a liquidation they have no control over, which is why it is called a seizure. However, it seems to have be avoided with a deal. You will see Fuld had to resign in order to get the deal. Considering the employees own 30% of the shares, and Fuld could direct a huge portion of those votes, but was still forced out anyway, tells us that your theory really doesn’t hold up under the gun, and is more academic than realistic. LEH has gone on, and Fuld, with 30% of the shares under his influence, was powerless to stop it. End of story.
@28 – I was taking the doomsday scnario; it would be highly unlikely that level II or III assets would go to 0. that said, if you want to take 50% of the level III assets to 0 and 25% of level II to 0, the deficit declines to $61.1 billion, which furthers my point that we are not facing financial armageddon.
with regard to housing prices in nyc, the soft dollar has enabled prices to increase as a result of foreign buyers. that said, as the dollar strenghthens, the populations of foreign buyers will be reduced. nonetheless, I don’t see a repeat of the ’91 scenario with prices dropping 50% (primarily b/c of replacement cost and the current rental market and the fact that IB no longer rules the world of manhattan real estate). further, hedge funds and private equity are the ones propping up real estate in the manhattan – the closure of bofa, will not create a talent drain.
forgot to mention – while it took a couple of hours, it’s still easy. the key is setting rules up front…think about it.
last comment; I heard tricky dick wante to keep mgmt in power, which caused a few potential buyers to walk. explains why they are now in desperation mode.
nighty, night!
A BK filing is the worst possible outcome for all parties.