Geithner/Paulson: No Taxpayer $ For LEH?

Discussion in 'Wall St. News' started by Trader5287, Sep 13, 2008.

  1. (New York Times)

    September 13, 2008
    U.S. Gives Banks Urgent Warning to Solve Crisis
    This article was reported by Jenny Anderson, Edmund L. Andrews, Vikas Bajaj and Eric Dash and written by Mr. Dash.

    As Lehman Brothers teetered Friday evening, Federal Reserve officials summoned the heads of major Wall Street firms to a meeting in Lower Manhattan and insisted they rescue the stricken investment bank and develop plans to stabilize the financial markets.

    Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.

    Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.

    Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next.

    A spokesman for the New York Federal Reserve Bank in New York confirmed the meeting but declined to provide details on the discussions. The Wall Street executives included the following chief executives: Lloyd Blankfein of the Goldman Sachs Group, James Dimon of JPMorgan Chase, John Mack of Morgan Stanley, Vikram Pandit of Citigroup and John Thain of Merrill Lynch. Representatives from the Royal Bank of Scotland and the Bank of New York Mellon were also present. Lehman Brothers was noticeably absent from the talks.

    The meeting was reminiscent of the circumstances that preceded the near-collapse 10 years go of Long Term Capital Management. At that time, William J. McDonough, then the president of the New York Fed, summoned the heads of big Wall Street banks to the Fed to stop the failure of L.T.C.M., a hedge fund firm that had made big bets on esoteric securities using borrowed money and which had already lost $4.5 billion.

    The bankers ended up committing $3.65 billion to save L.T.C.M., though Bear Stearns, the hedge fund’s clearing broker, refused to contribute to the investment. Traders from the banks wound down the fund over time, averting what might have been big losses across the financial system. But the fallout from a failure of Lehman Brothers could be even more severe, given the firm’s much larger size and its entanglements with trading partners around the globe.

    Policy makers fear its losses could ripple through the financial industry at a time when banks and securities firms are trying to overcome $500 billion in write-downs.

    One observer briefed on the situation described the session as a “game of chicken” between the government and the heads of the major banks.

    Bank of America and two British firms, Barclays and HSBC, have expressed interest in bidding for Lehman Brothers, according to people briefed on the situation. But they have indicated that their bids are contingent upon receiving support from the government, just as it did with the rescues of Bear Stearns, and the government-sponsored agencies, Fannie Mae and Freddie Mac.

    But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.

    Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets. In this high-stake game, they may also be trying to call the government’s bluff, knowing that if push came to shove, it would provide financial support.

    Mr. Geithner, who led the session, firmly stood his ground. He told the banks that this was about fixing the system and preventing the crisis from worsening.

    By the time Lehman’s shares went into a spiral this week, Fed and Treasury officials were convinced that Lehman posed far fewer real risks than Bear Stearns had back in March. The confidence by Washington officials stemmed from the fact that, after the Bear Stearns collapse, they obtained stronger regulatory powers that gave them the ability to peer into the activities and risk exposures of institutions on Wall Street.

    Fed officials, for example, are now embedded at each of the big Wall Street investment banks and have at least some capacity gauge the firms’ exposure to hedge funds and other big players, as well as their positions in financial derivatives and other opaque markets. Fed and Treasury officials have also been taking the daily pulse of executives and traders on Wall Street for months, and much of that discussion has been about Lehman.

    Officials detected a rising number of defections by Lehman’s institutional customers to other firms, but nothing near the panic that caused Wall Street executives to bombard Mr. Paulson with dire warnings about a Bear Stearns collapse in March.

    Fed officials also saw few signs that fears about the future of the investment bank were spilling over to fears about its customers and trading partners.

    And in practice, taxpayers could still end up on the hook for at least as much money as they were in the case of Bear Stearns. Lehman’s successor will still be able to borrow from the Fed’s new lending program for major investment banks, which the Fed created in response to the collapse of Bear Stearns in March. If Lehman were to borrow money and then default on its loans, the Fed’s losses would reduce the amount of money it turns over to the Treasury.

    For political and economic reasons, both the Federal Reserve and the Treasury Department are loath to save financial institutions from their own folly.

    But as the housing crisis has deepened, they have abandoned free-market orthodoxy, fearing that the collapse of institutions like Bear Stearns or either Fannie Mae or Freddie Mac could cripple the financial markets, and perhaps the economy itself.

    One of the biggest differences between the challenge facing Lehman and the one that faced Bear Stearns is the availability of the Fed’s emergency lending program for investment banks.

    When confidence evaporated in Bear, with major hedge funds pulling their prime brokerage accounts, Bear’s financing ran out almost overnight, creating a panic situation. Lehman has had the power to plug any cash shortfalls by borrowing from the Fed, though it has not actually borrowed any money from the program since March.

    Edmund L. Andrews reported from Washington, and Jenny Anderson, Vikas Bajaj and Eric Dash reported from New York.
  2. Daal


    It could be a bluff. they are not allowing a chapter 11 on lehman, a run on broker dealers would be devastating. they better find a moron in asia or middle east to sell LEH to or they will have to became real estate ABS buyers of last resort
  3. Their bluff will be called. LEH would be better to go chapter 11.
  4. zdreg


    under what circumstances can lehman be seized by the gov't?
    at a low enough price buffett will buy the entire kaboodle
  5. Latest From Bloom-
    Treasury Said to Call on Wall Street to Back Lehman (Update1)

    By Bradley Keoun and Jesse Westbrook

    Sept. 13 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner urged the heads of Wall Street's biggest firms to find a solution to the plight of Lehman Brothers Holdings Inc., signaling their reluctance to use government funds to bail out the investment bank, two people familiar with the talks said.

    Chief executive officers who attended the meeting at the New York Fed late yesterday afternoon included Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, Merrill Lynch & Co.'s John Thain and Bank of New York Mellon Corp.'s Robert Kelly, the people said, declining to be identified because the meeting wasn't public. Christopher Cox, chairman of the U.S. Securities and Exchange Commission, also participated.

    Kendrick Wilson, a former Goldman Sachs executive whom Paulson tapped last month as an adviser, helped lead the discussions, which ended without a specific plan, one of the people said. Bank of America Corp. CEO Kenneth Lewis didn't attend because his company is a potential bidder for Lehman, the person said.

    Bank of America, the biggest U.S. consumer bank, and Barclays Plc, the U.K.'s third-biggest bank, are among the firms weighing acquisition of some or all of the 158-year-old investment bank after it reported its worst quarterly loss this week and the shares plummeted 77 percent in the past five days, according to people familiar with the situation who declined to be identified because the negotiations are confidential.


    HSBC Holdings Plc, Europe's largest bank by market value, is also considering a bid, the Wall Street Journal reported today, without saying where it got the information. Goldman Sachs, the largest securities firm, is interested in Lehman's real-estate portfolio, the Journal said. HSBC spokesman Richard Lindsay said in an interview from London that the company doesn't comment on market speculation.

    Spokesmen for the New York Fed and the SEC confirmed that the meeting took place with ``senior representatives of major financial institutions,'' and declined to comment further. Treasury is ``in regular contact'' with market participants, spokeswoman Jennifer Zuccarelli said earlier yesterday.

    Without Backing

    An analysis of Lehman's distressed mortgage assets shows that a sale may be possible without U.S. backing. In a worst- case scenario -- with the assets discounted more deeply than in recent distressed sales -- a buyer could write off almost half of Lehman's $50 billion in mortgage holdings and still have $7 billion of equity left in company, based on figures the investment bank disclosed when it reported third-quarter financial results this week.

    ``The firm should be worth something even after the troubled assets are taken out at a massive discount because Lehman has a good franchise,'' said Corne Biemans, a Boston- based senior portfolio manager at Fortis Investments, which oversees about $200 billion. ``There are distressed asset buyers who should be interested in this stuff at such serious haircuts.''

    Lehman had $50 billion of mortgage-related assets at the end of August, marked down to between 29 cents and 85 cents on the dollar. Reducing valuations further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages would result in $21 billion of further writedowns. The shareholders' equity was $28 billion at the end of firm's fiscal quarter in August.

    Subprime CDOs

    Merrill Lynch sold subprime CDOs for 22 percent of their value in July. UBS AG sold bonds backed by subprime and Alt-A mortgages for 68 cents on the dollar in May. Alt-A loans are made to people with better credit scores than subprime borrowers, though they're not considered as high quality as prime.

    Paulson doesn't want to put up money to help fund any Lehman acquisition, a person familiar with his thinking said yesterday. Unlike when the Fed committed $29 billion to help JPMorgan Chase take over Bear Stearns Cos. in March, Lehman now has access to a lending facility for brokers that would permit an orderly process for unwinding the firm, the person said.

    At the meeting yesterday, Paulson indicated he wants to avoid putting taxpayer money behind New York-based Lehman the way the government stepped in to guarantee the debt and mortgage-backed securities of home-loan financing companies Fannie Mae and Freddie Mac, said the people, who declined to be identified because the meeting was private. The government also wants to avoid a collapse of Lehman, which might disrupt U.S. financial markets.

    Echoes of LTCM

    The banks and brokers called into the meeting may be asked to contribute money to back Lehman long enough to unwind its trades, the people with knowledge of the discussion said. No agreement was reached and the discussion was preliminary, one person said.

    Such an arrangement would be similar to the rescue of hedge fund Long-Term Capital Management LP, which failed in 1998 as Russia defaulted on its debt, roiling global markets. Spurred by the New York Fed, Wall Street firms including Lehman contributed cash to prop up LTCM.

    Lehman CEO Richard Fuld, who participated in the LTCM talks and built his firm into the biggest U.S. underwriter of mortgage securities during his four decades at the investment bank, was pushed toward a forced sale this past week after talks about a cash infusion from Korea Development Bank ended, eroding investor confidence and the company's market value.

    Government Protection

    Potential buyers demanded some sort of government protection in the Bear Stearns case because of the mortgage- related assets the firm owned, which had plummeted in value. Since the collapse of the subprime mortgage market last year, banks have reported more than $510 billion of writedowns and credit losses on such assets.

    If the government's resistance to fund the purchase lowers the price offered for Lehman, Fuld could balk as well, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

    ``We might have a Mexican standoff, with two guys holding guns to each others' heads but nobody firing,'' said Hintz.

    Lehman said Sept. 10 it would sell 55 percent of the investment unit as part of Fuld's plan to keep the firm independent. The company received bids for the unit yesterday from private-equity firms including Bain Capital LLC and Clayton Dubilier & Rice Inc., people familiar with the situation said.

    Investment-Unit Bids

    The bids value the unit, which includes the Neuberger Berman fund business, private-equity funds and a brokerage firm serving wealthy individuals, at about $5 billion, said the people, who asked not to be named because the auction is private. KKR & Co. LP, which was weighing an offer, hadn't made a bid by a 5 p.m. deadline in New York yesterday, the buyout firm told people involved in the process.

    Bank of America is considering a joint bid for the company with J.C. Flowers & Co. and China Investment Corp., the Financial Times reported yesterday, citing people it didn't identify.

    Bankers from several firms were reviewing Lehman's books this week, according to people with knowledge of the situation, and a deal may be announced before Asian markets open Sept. 15, one of the people said. The investment bank announced the biggest loss in its 158-year history on Sept. 10, as devalued real estate assets led to $5.6 billion of writedowns in the third quarter.

    Bank of America

    Lehman dropped 14 percent to $3.65 in New York Stock Exchange composite trading yesterday. The shares have lost almost 95 percent of their value this year. Bank of America rose 68 cents, or 2 percent, to $33.74.

    ``Fuld decided to take execution risk and demand more than the marketplace was willing to bear,'' Charles Peabody, an analyst at Portales Partners LLC, said in a Bloomberg Radio interview. ``And he presented that plan to the investor community, which said, `We don't have faith in your ability to bring about the plan.'''

    Ladenburg Thalmann & Co. analyst Richard Bove said in a note to clients this week that Bank of America is the most likely buyer for Lehman. The Charlotte, North Carolina-based company would gain ``one of the best'' fixed-income desks in the U.S. and boost its research and capital markets businesses, Bove said.

    Bank of America may team up with Barclays Plc and private equity firms to make an offer for Lehman, analysts at MF Global Securities Ltd. said.

    Lending Facility

    When Bear Stearns collapsed in March, the Fed opened a lending facility for brokerages, including Lehman. The decision, along with the funding provided to facilitate the sale, prompted warnings from current and former regulators, who said the central bank was creating a so-called moral hazard by encouraging firms to take on excessive risk in anticipation of government aid in the event their bets fail.

    ``What would be best is to alter the precedent with Bear Stearns,'' said former Fed governor Laurence Meyer, who is now vice chairman of Washington-based Macroeconomic Advisers LLC.

    Lehman had advanced discussions about a deal with state- owned Korea Development Bank, which offered as much as $6 billion for a 25 percent stake in the firm, or about $26 a share, people briefed on the talks said last week. Goldman Sachs, the biggest U.S. securities firm, has no plan to buy Lehman without financial backing from the Fed or Treasury, a person briefed on the matter said Sept. 10.

    To contact the reporters on this story: Bradley Keoun in New York at; Jesse Westbrook in Washington at

    Last Updated: September 13, 2008 11:56 EDT
  6. Daal


    If that's all what happens, then we will see the mother of all rallies. but they still have the confidence issue and the moodys downgrade threat. they would need a fire sale of the portfolio AND a bid from a bank of america/barclays. this is such a complex situation that I shouldn't have gotten involved in the first place. now we will just have to see
  7. Why would anyone buy this firm

    Lehman screwed themselves because they were trying to screw everyone else

    No way would I trust any presenation of the books

    They were thowing together boxes of junk mortgage debt, and trying to pass it off on widows

    The deserve to go out period. I dont give a f-ck about the consequences - bailing out slime does more damage in the long run, than letting them reap what they've sown
  8. That sure got my attention too Daal.

    They've got their books wide open too so suitors can do their dd.

    I would think the trade is long.
  9. Daal


    'buyer could write off almost half of Lehman's $50 billion in mortgage holdings and still have $7 billion of equity left in company, based on figures the investment bank disclosed when it reported third- quarter financial results this week'

    if this figures are right and all they do is a action off lehman pieces, the stock should go to the moon. they were pricing in a wipe out or take under. break up value is many times over the market cap. so the r/r looks nice for longs, but its easy to say that now
  10. Day 3

    New York Times
    September 14, 2008
    Leading Plan for Rescue Would Split Up Lehman
    The fate of Lehman Brothers, the beleaguered investment bank, hung in the balance on Sunday as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings trying to complete a plan to rescue the stricken bank.

    The talks took on even greater urgency on Sunday as government officials push for a deal before the Asian markets open on Monday morning. Some sort of announcement was expected Sunday afternoon.

    Several possible plans emerged from the talks, held at the Federal Reserve Bank of New York and led by Timothy R. Geithner, the president of the New York Fed, and Treasury Secretary Henry M. Paulson Jr.

    The leading proposal would divide Lehman into two entities, a “good bank” and a “bad bank.” Barclays of Britain would buy the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.

    Under that plan, the Wall Street banks would agree to provide up to $30 billion of support to absorb the losses of the bad bank. That is roughly the same amount of money that the government agreed to commit to support JPMorgan Chase’s emergency takeover of Bear Stearns in March.

    The assets of the bad bank would be sold over time as the market for mortgage-related assets recovers and buyers emerge. If the assets appreciate, the bank consortium would share in the profits. But they would also be responsible for any losses.

    None of the banks involved, however, have committed to any rescue plan, and talks could still fall apart.

    The banks could also pursue other options. One that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.

    The overarching goal was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, notably Merrill Lynch and the American International Group, both of which have come under mounting pressure in the markets.

    A.I.G., one of the world’s largest insurers, may need to raise $30 billion to $40 billion to avoid a severe downgrade to its credit rating, according to people briefed on the situation. An A.I.G. spokesman, Nicholas J. Ashooh, called that estimate speculative and declined to comment further.

    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 prospects of a deal involving Bank of America appeared to fade as talks progressed Saturday and it became clear that the government would not stray from its position.

    Jenny Anderson, Michael J. de la Merced, Louise Story and Landon Thomas Jr. contributed reporting.
    #10     Sep 14, 2008