Lehman is dead: will Paulsson save the Queen? How?


As we already forecasted in March (on reading  Lehman Brothers budgets, Finch data and RGE analysis), and repeated meanwhile in many blog posts (search Lehman  in this blog), the 4th US financial bank is now a walking dead, and after the end of the prospective acquisition by Korea developent  bank, its shares lost 50% in 2 days (43% in a day), then another 40% on Sept. 11. In the last Q it lost another $4 bn.

Sept. 13 update. 

Slate summary: The New York Times and the Wall Street Journal lead with, and the Los Angeles Times fronts, an emergency meeting between major bank heads and the Federal Reserve. Sick of underwriting bailouts, the government is hoping to broker an “industry solution” for the impending liquidation of Lehman Brothers Inc., the ailing investment bank.


Now it is to the couple Paulsson (former financial manager) – Bernanke to act.

We bet it will be another move toward  Financial Socialism (but WHICH move, this time?), although some contradictions might arise within and between the two, Paulsson:

– on the one hand more willing to invest the taxpayer money he doesn’t actually have – JUST STRONGER DEBTS REPLACING WEAKER DEBTS, financial entitlements’ circulation -,

– on the other hand with public relations problems in the “societe’ du spectacle” political scene. In fact, the Naked Capitalism blog (fully quoted below), as well as other observers, think that THIS TIME Paulsson needs to show he is not a Trojan Horse of Wall St. at Washington (WHAT HE ACTUALLY IS, of course: By definition), and therefore he will not play the full bail-out as with Bear Stearns.


deal journal, wsj: http://blogs.wsj.com/deals/2008/09/09/should-the-fed-step-in-to-help-lehman-can-it/

When it comes to banks and thrifts, the Federal Reserve and Treasury have a wealth of legally approved options, including taking over and liquidating assets or creating a “bridge bank.” When it comes to broker-dealers like Lehman, federal regulators have only a hammer, a plumb line and a wrench. They can force a shotgun marriage, arrange a line of credit or put their authority–often referred to as “moral suasion”–behind an industry-led bailout of Lehman.

the deal jo. suggests these potential buyers, BUT (opposite to such optimism) TIME SEEM OVER  for such a market-lead bailout (see again Naked Capitalism, among other observers): 

rge monitor, sept. 10


How Would Authorities Deal With Another Run On A Broker Dealer?           

  • Naked capitalism: Would Paulson let Lehman fail? “The short answer is yes: Unlike Bear, Lehman is not a big credit default swaps protection writer
  • Paulson Chatham House speech, July 2: “We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm” –> For the long term, Hank Paulson envisages separate resolution processes for deposit institutions and investment banks. Bernanke and FDIC’s Sheila Bair also advocate separate resolution processes
  • Paulson at Committee Hearings, July 10: There are however systemically important institutions that need government intervention in case of a run.“Looking beyond immediate market challenges, the trigger for invoking government’s emergency authorities should be very high – such as filing for bankruptcy”


naked capitalism’s LEHMAN DEATH WATCH

today, sept. 11:


The market’s reaction to Lehman’s way worse than expected earnings announcement of $3.9 billion in loses due to $5.6 billion in writedowns was ugly, but even uglier is the lack of much (any?) progress towards getting the firm out of its fix. Yes, dividends are being cut, but the other two key elements, spinning off much of the troubled commercial real estate portfolio to shareholders and selling (well, sort of, as we will discuss) its asset management business.

But what would be left? A firm shorn of its best asset, now even more heavily skewed toward fixed income, which by all appearances is suffering not only a cyclical but also a secular decline. The private securitization market is much smaller than it used to be and does not appear likely to return to its former size for a very long time. if ever.

The new (or rather, more openly discussed theme) was can and should Fuld survive? Both the Wall Street Journal and the New York Times have reports on that topic, never a good sign. However, who would take his job? 


The Journal story has some good reporting on how Fuld’s pushing for the best deal and impatience undid some possible deals.

Bloomberg tells us Lehman’s fate hinges on the sale of a stake its asset management unit, But the story contends Fuld is overplaying his hand:

“Fuld doesn’t want to let it go,” said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. “He went out of his way to buy it and he knows it’s a good asset.”…

Even a successful sale may not be enough to satisfy credit- rating companies.

sept. 10

Lehman Death Watch: Will Paulson Let Lehman Fail?

The short answer is yes, but we need to define fail. (…)

Even though Bear and Lehman are similar in size, their business mix differs in ways that make Lehman dispensable. In fact, Paulson almost needs to let a financial player fail to prove that he is not a toady of the industry.

Reuters labels it “an insolvent firm”.

sept. 9

Merrill. Lehman Trading Operations Valued at Zero by Market

We had noted earlier that the price discussions around the possible sale by Lehman of a stake in its asset management operations valued the rest of the firm at close to zero. A story at Bloomberg has taken this line of thinking one step further.


From Bloomberg:


    Lehman’s market capitalization of $11.2 billion is almost equal to the value of its asset-management arm, which includes Neuberger Berman Inc. That leaves its main business of trading stocks and bonds as having little worth. The numbers are similar for Merrill Lynch & Co.: Take out its retail-brokerage and asset- management businesses, and the investors’ valuation of the rest of the third-biggest U.S. securities firm is zero.

    After being the most profitable business on Wall Street, generating more than $65 billion in pretax profits for the four largest U.S. securities firms between 2002 and 2006, trading has become a black hole. It still accounts for about half of the revenue at the Wall Street firms. Yet Lehman Chief Executive Officer Richard Fuld and Merrill CEO John Thain have been unable to convince shareholders to attach a value to the businesses.

Sept. 7


We were willing to be proven wrong in our skepticism of Korea Development Bank’s pursuit acquiring a stake in Lehman. We had no doubts about the interest; the KDB CEO was the former Seoul branch manager for Lehman and full bore behind a deal. But the reception of the Korean government, which had to approve the deal, was lukewarm at best. It’s rare for an individual to overcome official indifference and inertia. We had noted that the Korean bureaucrats could simply study the deal to death, that would put an end to it with every having to official turn the KDB or Lehman down.

And the rumors about other possible suitors have been simply bizarre.

 (…) so the firm is on to Plan B, discussed earlier in the week, to spin off problematic mortgages into a separate entity. From Times on line: (…)


If the Korean deal falls through, Lehman will press ahead with a sale of its Neuberger Berman investment-management business, estimated to be worth up to $10 billion – roughly equivalent to the entire company’s current market capitalisation.



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