'Brinksmanship' over Lehman; Will government give in?

The Lehman Brothers soap opera continues on Wall Street today, as the Bush administration tries to take a hard line and force Wall Street either to rescue one of its own or deal with the consequences.

In a situation the Wall Street Journal calls "highly fluid," the following questions were swirling: Could Lehman succeed in splitting itself into a "good bank" and a "bad bank," with all of its toxic assets shoved into the bad one? Will Wall Street firms -- some of them short on cash -- come up with $30 billion to keep the "bad bank" afloat? Or will the Bush administration blink and put federal guarantees behind the bad bank? If a buyer comes forward for the "good bank," will Lehman Brothers accept a low-ball bid? And if none of this happens, will global markets spin into panic or take the chaos at Lehman Brothers in stride?

Conventional wisdom says the drama must reach some sort of conclusion by later this afternoon, when Asian stock markets open. But conventional wisdom is on a long losing streak lately when it comes to the credit crunch and the spreading damage from the housing meltdown. The latest this morning:

CNBC.com:

As top Wall Street executives arrived Sunday morning for another round of talks to resolve the Lehman Brothers crisis, sources said the group continued to work on how to handle the possibility of a deal not getting done before Monday

The New York Times:

Some considered the weekend talks as high-stakes brinksmanship.

Both Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the government provide financial support. But 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.

The Wall Street Journal:

Barclays PLC, the U.K.'s third-largest bank, is emerging as a leading contender for Lehman Brothers  as discussions continued Sunday in London and New York in what is a highly fluid and pressure-charged environment.

A sale of Lehman to either Barclays or Bank of America Corp. remained dependent on government financial support, according to people familiar with the situation. According to these people, Barclays appeared to be moving more aggressively in trying to find a way to complete a deal.

...Demands by Bank of America and Barclays that the government somehow financially backstop the bad bank could be negotiating tactics during the talks.

--Peter Viles

Your thoughts? Comments? E-mail Peter Viles
Photo Credit: L.A. Times

Comments

[Uncle Billy Has Bad Teeth]

See what I mean? There's Barclay's again. They always seem to be looming in the background.

(But so does RBS and HSBC and everyone else I guess)

Remember too that Barclay's mutual fund owns a significant portion of BofA.

[Uncle Billy Has Bad Teeth]

...but this just in

Barclays Walks Away From Talks With Lehman

Barclays, the British bank that had emerged as the leading suitor for Lehman Brothers, said Sunday afternoon that it had pulled out of discussions to acquire the beleaguered investment bank.

(nytimes.com)

[Michael Snyder]

Somehow this repetitive "ripple effect" conversation is beginning to sound like the "domino effect" justification for the Viet Nam War. The domino argument didn't hold water then and I'm curious why the financial sector's worried about a "ripple" when they're facing a tsunami.
The real urgency in these weekend negotiations comes from the billions of dollars floating in the "derivatives" market; specifically Credit Default Swaps. This is the folly of trading what are essentially insurance contracts among those who have no proven ability to cover the loss should these entities default.
I also don't hear much in the way of specifics with regards to Lehman's balance sheet and trying to spin off the "bad" portions of the corporation into subsidiaries is just another way to screw the common shareholder. I feel bad for the folks at Lehman who've just seen their retirements go up in smoke. Many 401k programs vest an employees stock but do not allow them to trade it. So they're stuck with what top management wants to give them after their multi-million dollar cheques have cleared the bank.
What I really don't get is the lack of outrage. Lehman, Stearns, Citi, etc all have a lot of smart people working for them that had to see this coming. There has to be a Mafia like culture on Wall Street of insure the "silence of the lambs" as their futures are led to slaughter.

[El Guapo]

According to Calculated Risk, Barclays backed out because the Fed wouldn't back stop the debt.

[yourkillingmelarry]

http://calculatedrisk.blogspot.com/2008/09/ny-times-
lehman-appears-headed-towards.html

NY Times: Lehman Appears Headed Towards Liquidation

_______________________

Nouriel Roubini | Sep 13, 2008
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.

_____________________

Are they really going to let LEH liquidate?? Roubini has been eerily accurate over the past two years with the exception of timing of events. So I would pay very close attention to what is transpiring here.

[Anonymous]

I think this was the government's plan all along. They never wanted Barclays (a UK bank) to have Lehman. They can now say they were 'backed' into a corner and had to give Bank of America a backstop. I think this whole weekend was a charade to make it look like the government was 'forced' into doing this. I hope I am wrong.

[eprobert]

yep - looks like Paulson might have grown a pair over the weekend.

[l.a.guy]

Geez... how intertwined are these institutions? As this continues to unwind it looks like they just churn contracts with each other and then reward themselves with huge bonuses at the end of the year. Now we find out that the investment banks are nothing but powder kegs waiting to explode. It's hard to believe this is the same Lehman that issued 9.5 billion dollars in bonuses about nine months ago.

[mbob]

http://www.nytimes.com/2008/09/15/business/
15short.html?_r=1&oref=slogin

So now the NYT biz writers are the Kings O'Denial (not as good as Kings of Leon) when they print disingenuous junk like this.

Oooookaaayy, let's see if I get this right: pillory the realists, protect the liars, crooks and dishonest, then claim that

specialists
short sellers
profiteers
whatever hysterically funny exaggeration you imagine

are the "true" causes for insanely mismanaged financial services companies' implosions.

Since the Fed stepped to take over FM squared, we have just neatly doubled the US national debt -- excluding those stalwart, fiscally sound agencies like Medicare and Social Security.

Forget about dreading black holes showing up when the Cern collider fires up, they're already sucking our planet into oblivion from Washington DC.

[E]

This is how the mother of all Ponzi schemes ends.

What a tangled web we weave.

[Frank Miller]

This is unfortunate, but it should serve as a wake up call to all American investors. If you want to protect your money, you need to diversify and invest at least some of it overseas. These are hard times for American investing firms. I personally use offshore bank accounts and they have helped me with diversification and asset protection. If you want to read more on why offshore investing is smarter, feel free to visit my website.

Best,
Frank Miller
http://www.theoffshorebankaccount.com

[No Tears for Greed]

At one time people had Integrety....instead of stealing from people using credit schemes, there were usury laws...instead of lies, people told the truth....instead of bailing out bad investments using taxpayers money, companies took their own hits.....instead of huge monopolies, there was competition....but that was when the US was a demoncacy...now it's socialism....and all by the Republicans of all people who don't believe in BIG Govenment

[Bryan Morris]

No Tears for Greed,

A breathtakingly corrupt and incompetent Republican government and its appointees bailing out its rich friends after they've run the entire nation's economy into the ground (while demonstrating the complete bankruptcy of the idea of deregulation) may be a lot of things. But socialism it most definitely isn't. Try substituting the terms crony capitalism, corporatism, or fascsim instead.