• 14 Sep 2008 at 5:37 PM
  • Lehman

Lehman Employees Brace For Liquidation

Employees at the Lehman Brothers in midtown Manhattan are described as “crying, angry, distraught” by a witness. They’ve been filing out of the building this evening.
The bank was said by a person familiar with the matter to be close to confirming that it will file under Chapter 7 of the bankruptcy code, which means the firm will be liquidated.
However Robert Peston at the BBC says it will be Chapter 11 rather than Chapter 7. “Preparations have been made for Lehman Brothers, the substantial US investment bank, to obtain protection from its creditors under US Chapter 11 insolvency procedures,” he writes.
Meanwhile, talks continue at the New York Federal Reserve. With the two major buyers for Lehman Brothers, Barclays and Bank of America, having walked away from deals this afternoon, the talks now are focussed on limiting the damage from Lehman’s collapse. These talks include consideration of a merger between Merrill Lynch and Bank of America, hoping to stop the “who is next” question from toppling another Wall Street firm.

  • 14 Sep 2008 at 1:39 PM
  • Lehman

Barclays Pulls Out From Lehman Deal

Barclays has walked away from the negotiations on the fate of beleaguered Lehman Brothers, balking at the government’s refusal to provide guarantees that would shield Barclays from Lehman losses. Bank of America continues in talks, sources say.
We hear that Lehman CEO Dick Fuld is complicating negotiations, saying at first thatthe deals being worked out at the New York Federal Reserve would not benefit Lehman shareholders. He had threatened to pull Lehman out of talks and keep his investment bank independent. Many believe that survival as an independent entity is simply not feasible for Lehman, however. They predict that if a buyer or buyers for all or a large part of Lehman cannot be found the firm will have to be liquidated.
Today Fuld seems to have largely given up on autonomy for Lehman. He is said to favor a deal with Barclays in the lead and a government guarantee supporting the transaction. This position may risk alienating Bank of America.
Please keep in mind that the situation is very fluid, with deals apparently being reached and then collapsing.
Lehman Heads Toward Brink as Barclays Ends Talks [New York Times]
Barclays Ends Talks to Buy Lehman; BofA Still Involved [CNBC]
Barclays Walks from Lehman Deal [Wall Street Journal]

  • 14 Sep 2008 at 2:43 AM
  • Lehman

We Have Reached A Deal For Lehman, Sources Say

We understand that a deal has been reached to divide Lehman Brothers into two entities, with a “bad bank” taking the toxic, real-estate assets amounting to around $85 billion. The deal will be financed without any government backing. Lehman chief executive Dick Fuld will resign.
Bank of America will take the lion’s share of the good assets of Lehman, with Barclay’s and Nomura playing a role as well. An international consortium of financial firms will inject capital for the deal, preventing Lehman’s assets from flooding the market in a fire sale. Many US based firms have not played a large role, in part because they are facing their own financial challenges.
Dick Fuld’s resignation was demanded by Bank of America, which played a brinkmanship role in negotiations, threating to let Asian markets open tomorrow without a deal in place, a person familiar with the matter says. Many believe that a Monday market opening without a resolution would effectively have been the end of Lehman Brothers and could have spread financial turbulence to other securities firms. (On a side note: apparently, Japanese markets will be closed Monday morning for a holiday.)
Fuld is said to have taken tonight’s developments very badly. He does not believe that the situation is as desperate as others on Wall Street believe it is, and may be trying to negotiate an alternative deal, we’re told.
Of course, the situation remains fluid and there is still a possibility that the deal reached tonight could fall apart. Many of the details remain to be worked out, although there is widespread agreement on the outline of this deal.

The New York Post is reporting that Lehman was taking offers for its investment management business today.

The notion of a planned sale of its asset-management operation, which is anchored by Neuberger Berman, is alive because Lehman plans on using the offers, which were submitted yesterday, to help assign a value to the entire bank, sources said.

  • 13 Sep 2008 at 1:26 PM
  • Lehman

Could A Resolution On Lehman Be Reached Tonight?

The Wall Street Journal reports that “people familiar with the situation” say a solution to the Lehman Brothers problem could be reached as soon as tonight.

On Saturday, the main task ahead in discussions being led by the Federal Reserve is identifying whether a so-called “bad bank” structure could be designed to hold Lehman’s souring assets. That issue is now seen by people familiar with the situation as the key stumbling block to completing a deal, especially if Treasury and Fed officials keep digging in their heels on opposition to a government-backed rescue.
Potential buyers such as Bank of America Corp. and Barclays PLC are loathe to take on Lehman’s bad assets, which are seen as an immovable object to getting a deal done, according to people familiar with the situation.

Lehman Deal Could Come Tonight As High-Level Talks Continue

  • 12 Sep 2008 at 4:08 PM
  • Lehman

Lehman: Heavy Call Volume

The phones at Lehman Brothers must be ringing off the hook. Callers to their offices this afternoon were greeted with a recorded message which said,”You have reached the offices of Lehman Brothers. Due to heavy call volume you may receive delays longer than usual. Please hold for the next available operator.”

Heavy call volume?
Oh, Lehman. We love you guys. Keep your chins up.

  • 11 Sep 2008 at 4:33 PM
  • Lehman

Lehman Hasn’t Tapped The Discount Window

Whatever else is going wrong at Lehman Brothers, the firm hasn’t had to tap the Fed’s primary dealer credit facility. A few moments ago the Fed released the latest numbers showing that the discount window for investment banks hasn’t had any drawings at all. This news was somewhat telegraphed by the successful commercial paper offering from Lehman earlier today.
Commercial banks, on the other hand, are borrowing heavily from the discount window.

There has been some speculation that Lehman cannot tap the discount window, either because it lacks adequate collateral or because the Fed has deemed that it is no longer eligible because it is not an ongoing concern. Our sources tell us that this is flatly wrong. The Fed takes a wide variety of collateral, which it values at prices far higher than the going rates in the markets. Lehman has plenty of junk in its trunk to trade for Fed ducets. And the “going concern” thing just hasn’t come up and its highly unlikely that the Fed will turn off this money spigot on that basis.

Bank of America In Preliminary Talks For Lehman Bid

We’ve known for most of the day that Lehman Brother has been actively shopping itself in a desperate attempt to avoid catastrophe. Now names of potential buyers are starting to come in. The Wall Street Journal is reporting that Bank of America is in talks with Lehman.
Perhaps most interesting is the Journal’s reporting on who isn’t participating. Up until just a few minutes ago we were hearing rumors that HSBC could put in a bid over night, despite earlier denials from the bank. Now the Journal says no bid is expected from HSBC. Others who aren’t “expected to participate” include Goldman Sachs, France’s BNP Paribas, Germany’s Deutsche Bank, and Spain’s Banco Santander. Barclays is a maybe.
While Lehman is looking for buyers, the potential buyers are looking for Hank Paulson and Ben Bernanke. Pressure is mounting on the government to become involved, as the Journal story makes clear.

But potential buyers remain wary about plugging holes in Lehman’s balance sheet, and are increasingly looking to the U.S. government to help backstop future losses, according to people familiar with the talks.
A number of these buyers would “come out of the woodwork,” if the U.S. were to step in, said one person monitoring the process. It remains unclear whether the U.S. Treasury or Federal Reserve would take such steps, as was done when the government assisted J.P. Morgan Chase & Co. in its Bear Stearns takeover in March.

Any government involvement would likely require an under-market price for shareholders. When the Fed and Treasury helped JP Morgan Chase buy Bear Stearns, the price of the stock was reduced from around $30 a share to $2 a share. A similar haircut for Lehman from recent market prices could result in a take-under priced at less than a dollar.
Lehman Brothers in Sales Talks; B of A Seen As a Potential Suitor [Wall Street Journal]

  • 11 Sep 2008 at 3:38 PM
  • Fed

The Fed Walks The Line On Lehman

We earlier reported that officials at the Federal Reserve and Treasury are scrambling to find a buyer for Lehman Brothers, perhaps going as far as bending or waiving rules that limit the ability of private equity firms to buy sizable stakes in investment banks. Part of the rationale for this may be because the Fed and Treasury want to avoid putting its own balance sheet or taxpayer funds into what would widely be perceived as another bailout.
There seems to be an increasing consensus among commentators that Lehman won’t be bailed out by the Federal Reserve or the Treasury. Over at RealTimeEconomics, Sudeep Reddy adds color to this idea by pointing out that to Fed officials it may well appear that they have already bailed out Lehman. The primary deal credit facility gives Lehman Brothers access to the discount window, allowing it to borrow cheaply against collateral arguably priced at inflated values. Indeed, Bill Gross of Pimco has publicly cited the facility as preventing him from withdrawing from trades with Lehman on the other side.
What’s more, the Treasury and the Fed may want to reduce the moral hazard issue in the market by allowing an institution to fail, Reddy says. But its not clear that they will have the luxury of adding discipline to the market. Lehman is deeply intertwined in the credit markets, particularly, and its failure could have unwanted ripple effects, rocking the stability of the broader financial markets. A better solution, some at the Fed believe, would be to find a willing buyer and arrange private financing without a Fed backstop. This most likely explains the Fed scramble to find a buyer.
Would the Fed Let Lehman Fail? [Wall Street Journal]