‘Growing sense of gloom’ in Lehman rescue talks
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It’s looking like a second straight weekend of no Sunday football-watching for Wall Street or Washington.
Federal regulators and Wall Street executives finished meeting today without hammering out a plan to either sell crumbling Lehman Bros. Holdings Inc. to a bigger financial institution or to foster the orderly liquidation of the 158-year-old investment bank.
The Wall Street Journal’s website reported shortly before 4 p.m. PDT that the talks had ended for the day, and would restart on Sunday: ‘A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street,’ the Journal said.
A major sticking point continues to be that other investment banks want the government to provide a backstop for Lehman’s troubled real estate assets, so that the banks don’t have to absorb the full hit if they step in to rescue the firm.
From the Journal:
Under one plan, either Barclays PLC or Bank of America Corp. would buy Lehman’s ‘good assets,’ such as its equities business, people familiar with the matter say. Lehman’s more toxic real-estate assets would be ring-fenced into a ‘bad’ bank that would contain about $85 billion in souring assets. Other Wall Street firms would try to inject some capital into the bad bank to keep it afloat for a period of time so that a flood of bad assets don’t deluge the market, damaging the value of similar assets held by other banks and insurers. The banks are also looking for the government to somehow financially backstop the bad bank.
Many banks are worried about shoring up their own balance sheets as defaults on real estate loans continue to rise, and so want the government to guarantee that a Lehman bad bank wouldn’t become a black hole for the rescuers.
But the Treasury and the Federal Reserve have said they won’t provide government aid for a Lehman deal. The government is drawing a line in the sand after committing up to $200 billion last weekend to keep mortgage giants Fannie Mae and Freddie Mac solvent.
If no agreement on a good bank/bad bank arrangement can be reached, Lehman could have to be liquidated beginning on Monday. That was the subject of a second meeting at the Fed’s New York branch, the Journal said:
On Saturday afternoon, the credit-trading heads of major investment banks gathered at the meeting to discuss how to deal with their exposures to Lehman in the intertwined credit-default-swap market. The lack of a central clearinghouse in this market means that dealers, hedge funds and others are directly facing each other in insurance-like contracts that are tied to trillions of dollars in debt instruments. Credit derivative traders at some firms were asked to come to work over the weekend to help quantify their exposures to Lehman and compile lists of outstanding contracts they have with the investment bank.
The potential for a cataclysm in the giant derivatives market has long been a major concern on Wall Street, and has been one key element over the years in the argument that some financial firms were ‘too big to fail,’ as I note in my column this weekend in the Times. (Read it here.)
Lehman is looking like it’s going to be the biggest test case yet for dealing with a monumental disruption in derivatives trading.