Lehman failure looms as British bank says it won't bid

From Times staff writers Walter Hamilton and Tom Petruno:

Barclays PLC dropped out of negotiations to buy Lehman Bros. Holdings Inc. today, and Wall Street began to prepare for the liquidation of the crumbling investment bank -- a move that could shake global financial markets.

Separately, the Wall Street Journal reported that Bank of America Corp. was in talks to buy Merrill Lynch & Co. A deal for Merrill could lessen the fallout from Lehman's demise, because Merrill had been viewed as the next weakest investment bank after Lehman.

Lehman's situation appeared increasingly hopeless, and the firm was expected to file for bankruptcy protection as early as this evening. Major brokerages began trying to work with each other to close out some of the trades they have with Lehman in so-called derivative securities, a multitrillion-dollar market.

Barclays, Britain’s third-largest bank, had emerged Saturday as the leading contender to acquire Lehman amid marathon negotiations in New York between federal regulators and Wall Street chiefs.

But all along, Barclays and U.S. banking firms reportedly had been pressing for some kind of aid package from the U.S. Treasury or the Federal Reserve to share the pain of dealing with Lehman’s potentially toxic real estate-related investments.

Barclays abandoned its bid after the government refused to financially guarantee any of Lehman’s troubled assets, according to a person familiar with the matter.

Likewise, Bank of America, which last week had appeared to be the most likely U.S. buyer for Lehman, indicated this morning that it wouldn’t bid without government help, the Wall Street Journal reported.

Barclays had hoped to buy Lehman’s viable assets -- the "good" bank -- while shunting billions of dollars in troubled loans and securities into a "bad" bank, as a separate legal entity.

One plan had called for other major investment banks to back the Lehman bad bank with a multibillion-dollar capital infusion.

But many U.S. financial giants are worried about shoring up their own balance sheets as defaults on real estate loans continue to rise, and so wanted the government to guarantee that a Lehman bad bank wouldn’t become a black hole for the rescuers.

However, the Treasury and the Federal Reserve have been adamant that they wouldn’t provide government aid to save Lehman, a 158-year-old Wall Street institution. The government drew a line in the sand after committing up to $200 billion last weekend to keep mortgage giants Fannie Mae and Freddie Mac solvent.

Although meetings continued in New York, it wasn’t clear whether the government and Wall Street could agree on some other plan that would result in the sale of Lehman or a breakup of the company that wouldn’t involve bankruptcy.

The clock was ticking because Asian financial markets open in late afternoon Pacific time, and those markets could react violently if investors fear that the U.S. financial system faces another serious hit.

The Journal's early report on talks between Bank of America and Merrill had few details. But a deal for Merrill could be crucial to shoring up confidence on Wall Street because of deepening fears late last week that Merrill could follow Lehman into a financial crisis.

With a Lehman collapse now a serious possibility, the International Swaps and Derivatives Assn. said securities dealers were meeting in New York to begin "netting out" derivatives trades they have with Lehman. In other words, a dealer on one side of a bet with Lehman -- say, on the direction of interest rates -- would try to find another dealer with the opposite bet with Lehman, and the two would then effectively consider those trades to be with each other rather than with Lehman.

The ISDA said that if Lehman didn’t file for bankruptcy by midnight tonight, the netted trades would be canceled.

It’s conceivable that Lehman could liquidate itself in an orderly manner as long as other Wall Street banks continue to trade with it, and with the help of short-term loans from the Federal Reserve -- a facility opened to brokerages in March after the demise of Bear Stearns Cos.

But the collapse of Lehman could wreak havoc with other financial firms that investors perceive to be in a weakened state, including insurance titan American International Group. AIG was said to be planning a major restructuring announcement for Monday.

Photo: Security guards outside the New York Federal Reserve branch on Saturday, where regulators and Wall Street chiefs were trying to negotiate the sale of Lehman Bros.  David Goldman /Associated Press

Comments

[buz]

Let Lehman and the other inept banks fail. As a taxpayer I am not interested in lending a hand to the "masters of the universe" on Wall Street.

[varun gajra]

Good Morning , would this user in realisation about the impending revaluation of all assets globaly or would the world rather be in denial for some time more . do email me what you think .

[Mas J]

This is so not good to let a piece of history fade way like this. According to another article, Lehmans helped build the railways to the west coast over a hundred years ago. Bad for other financial institutions too.

During next financial boom in 2011 maybe these companies will think twice about handing out $500k and $1M+ bonuses to random investment execs every year for 5 to 7 years who then just walk away with fat nest-eggs when the investments they pushed turn toxic for their employers and wait for the next boom to rake in big bonuses again.

[JayC]

It's possible a Lehman failure could trigger a worldwide breakdown in the financial markets. But does that mean the US should step in to guarantee Lehman's toxic waste? No. Ultimately Lehman will not be the only bank to fail. Merrill could be next, WaMu is becoming more of a certainty, AIG is looking flimsy, and many others are rocky. The US can't save all of the ailing banks without putting the country's already vulnerable finances in deeper long-term debt and frail circumstances. Banks WILL fail as a result of this mortgage fiasco - our best course of action is not to throw good money after bad, but to let the inevitable occur without wasting excessive amounts of taxpayer money.

[joe]

I have an account at Merrill Lynch. I hope I dont lose it.

[unlawflcombatnt]

Let 'em fail. They SHOULD take losses on the real estate holdings. It was these investment banks' purchase and sale of MBSs which made the housing bubble possible, and caused prices to skyrocket and become unaffordable to most people in some high-priced markets, like Southern California.

Let Lehman and all investment banks take the beating they so richly deserve. And leave working class and middle class taxpayers out of it. It wasn't their doing, and it isn't up to them to bail the real culprits.

[Ron Pitters]

You play, you pay.

[Jeffrey Goodrich]

Investment banks may fail, but there will always be investors and growing businesses that need them. Let Lehman fail and other, better managed and more prudent institutions will rise to take their place. To the Lehman employees, I say welcome to the capitalist world of "creative destruction" that your company has exploited since its inception. Trust me, change is inevitable. Just think of it as, say, somebody just moved your cheese.

[Xeric Clapton]

Listen, it's time to let the market operate for corps like Lehman. Whatever led these fools to believe that balancing "tranches" from the various mortgage pools would somehow create a silk purse from a sow's ear? Slices or marginal debt no matter how you repackage them are just that. The willingness to buy into such an absurd proposition means that they don't deserve to make it to the next trading day.

As for Fannie Mae and Freddie Mac, they never should have left the public fold. Time to nationalize them and to use the (eventual) proceeds as the basis for starting our very own Sovereign Wealth Fund. The endless chatter about health care could end tomorrow if we had such a fund in place to provide citizens with the revenue our selfish corporations have never been willing to consider.

Roothog or die.

[Trudy%20Self]

Remember the good old days-- 3 or 4 months ago-- when everyone was screaming about foreigners and sovereign wealth funds buying America. It would appear that after losing big in the first round they are all either going home or sitting on the sidelines this time.

[Kevin Lamson]

Six months after U. S. regulators hoped a bailout of Bear Stearns Cos. would help put an end to the credit crisis, the worst could be yet to come as fresh fears about the viability of financial firms are rocking Wall Street. Now, Lehman Brothers, until recently the fourth-largest securities firm on Wall Street just ahead of Bear Stearns, is facing the same fate.

In order to stave off a loss of faith in U.S financial institutions the U.S. Government decided in underwrite a sale of Bear Stearns to JP. Morgan. A conservative estimate of the cost of this bail out was thirty billion dollars $30,000,000,000,00. This was promoted by the Bush Administration, the Federal Reserve and the U.S. Treasury as necessary because a "collapse of Bear Stearns" would "stager the financial markets" and "undercut confidence in the U.S. Financial System".

In place of determining what these bonds were really worth, the U.S. Government decided to step in and blindly guarantee up to 30 billion dollars of supposedly bad paper using the full faith and of the U.S. taxpayers. Our Government took this action on the premise that a "collapse of Bear Stearns" would "stager the financial markets" and "undercut confidence in the "U.S. Financial System". As can be seen from events over the last three months this Bear Stearn’s bailout and Guarantee by our government did nothing much to reassure investor confidence in the bailout U.S. Financial System.
Over the past week alone, the United States' two main mortgage-finance firms -- Fannie Mae and Freddie Mac, in place of filing bankruptcy, were put into a "conservatorship" under government, while Lehman Brothers Holdings Inc. is now being pushed by the Government into a possible take over by a rival bank and foreign investors, in place of seeking bankruptcy protection. A Bankruptcy proceeding by design would of course require a complete accounting and valuation of Lehman’s various assets to determine the value of assets vs. the liabilities. Heaven forbid anyone knowing what their bonds are really worth!

Even though Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Bros, have so far escaped having to expose the true value of their respective assets by filing bankrutpcy, their respective shareholder’s lost hundreds of billions of dollars, despite being repeatedly assured by management in press release after press release that everything was OK. The U.S. Government along with the management of these once prestigious firms went so far as attacking anyone who was publically warning people that these entities might acutally be insolvent or on the edge of insolvancy.

The stocks of other U. S. financial firms, including savings and loan giant Washington Mutual, Wall Street investment bank Merrill Lynch & Co. and insurance behemoth American International Group Inc. (AIG) have been whipsawed this week as investors fret about further dominoes to fall.
The immediate challenge for the Bush administration is resolving the fate of Lehman Brothers. It was again reported that "Global fears intensified over the weekend that Lehman's collapse would "stagger markets" and "undercut confidence in the U.S. financial system". Will the U.S Government once again try to calm "Global fears" by forcing a U.S Investment Bank to sell its good operations and assets to a rival bank while the U.S. Government puts its tax payers on the hook for taking the bad assets? This continued scheme of privatizing profits while socializing losses to ensure "Global confidence in the U.S. Financial System" is in this writers view short sited and doomed to fail, costing U.S. Taxpayers billions if not trillions of dollars. I mean really who in their right mind would guaranty a debt owed by someone else that was already in default and where the asset backing the debt was of questionable value? The answer appears to be no one will do this other than the good old U.S. Government. The only unanswered questions are; 1) how much will the U.S. Government ultimately lose by gambling tax payer money to bailout all these U.S. Financial Institutions and; 2) How much can the U.S. Treasury borrow from the Federal Reserve to finance the losses it takes from these bailouts?

Your considered opinions and thoughtful comments are invited.

[Mas J]

@Trudy%20Self

Bear Sterns is hindsight, which is always 20/20. The government hoped to cap the domino effect early and relied on the banks to shore up their books asap. The government saw a landslide coming and now made it clear to other banks that they will not save their butts anymore. Now they are scrambling to raise capital by any means and will pay very dearly in terms of dilution of existing shareholders and loss of control. These banks can't be allowed to fail since they are all weak and deeply interconnected. If there is any hope of pulling out of a recession within the next 2 years, the bleeding needs to be controlled. Don't forget, public deposits are government insured and a loss of confidence of the public in banks means people won't invest so event less money will be around.

The real culprits here are the huge hedge funds and private equity firms which take a weak company, sell massive shorts and then spread a rumor of bankruptcy, creating a self fulfilling rumor while their short selling nets them billions. The SEC needs to crack down on these sharks. Lehmans was likely viable and would have earned its way out of debt over the next decade. Their downfall is huge and rippling.

[Mas J]

@Kevin Lamson

One twist on Lehmans and Merill is that the investment banks act like cogs in the machine overall. They help make IPOs and other financings happen across the board for other sectors. Less competition in this arena and less players to spread the risk by consortium means other companies can't raise money or will pay a higher price.

In answer to your question, the government will do what it takes to sort this out, even if it means adding debt to the books. It will just be smarter about which books it goes on and will prefer to do it indirectly. Unless the system is restored to working order so taxes flow in, the government's own huge debts will come back to haunt them too.

BTW, the prior comment was obviously in response to your post and not the post before it.

[The Great]

Real Talk. If the Government wont help Lehman, then the corporations that Lehman has helped over 189+ years, needs to step it up and return a favor. I cant believe that these corporations are sitting back and watching Lehman go through this bankruptcy. Their (lehman) portfolio is massive, and not to mention very impressive. I just think it is time to look out for the ones that looked out for you. Lehman shouldn't be going through the motions, not any day of the week!