Three possibilities.
As suspected, customers are pulling their business, putting Lehman into a death spiral that will not wait until a major asset sale in October. Even the pressure from the Fed to maintain credit lines cannot generate business revenue, and that pressure becomes more difficult to maintain as the need for the lines increases. Once the death spiral starts it takes more than rumours to stop it.
Its also very possible that someone forced the Fed's and Treasury's hand. If one is in negotiations for a sale where price is a serious stumbling block in talks that have been going for many weeks, why set an artificial deadline for a firm deal that is only days way?
It appears that the price of the deal was deteriorating, so it would look like a seller was forcing the issue with a kamikaze negotiating maneuver. The plummeting stock price causes top employees to start leaving, and besides working capital the prime asset of an investment bank is its people.
Or it could be a potential buyer who feels they have nothing to lose trying to force Hank to throw down on a sweetener, threatening to take down either a subsidized deal or deliver a serious hit to the US financial system. Is Lehman speaking seriously with any non-US banks especially the Canary Wharf crowd? Would they-who-must-not-be-named do their own guy Hank this way? Hard to think Ken Lewis would play this card but who can say?
Hardball dealing no matter how one looks at it, but what else would be expected from the 'sell your mother for an eighth' crowd?
Can you imagine what will happen to the financial sector if Monday arrives and there is no tangible backing from the Treasury and no indication of a deal?
Postscript: The insightful and ebullient Yves Smith at Naked Capitalism proffers the idea that a more politically palatable backstop might be crafted through the FHLB. That is worth watching if a deal is announced.
Fortune
Lehman in the red zone
By Roddy Boyd
September 11, 2008: 6:56 PM EDT
...Meanwhile, long-time Lehman customers at four high-profile hedge funds told FORTUNE that they have sharply curtailed their trading with the firm.
One general partner at a $4 billion bond fund said that he is only doing trades that settle "next-day," or overnight, and now has no longer term counter-party risk with Lehman.
Customers' refusing to engage in longer-term derivative trades, if it becomes a trend, is problematic indeed for Lehman since derivative contracts are one of the last high-margin areas of trading. The profits from trading most bonds are measured in basis points and commissions from stock trading are pennies per share.
Among Lehman's many problems is the threat of possible multi-step ratings downgrades from the three major ratings agencies -- and all that entails for the costs of a financing-driven, narrow-margin business.
The fear among traders is best expressed in the rising price of Lehman credit default swaps. Traders at hedge funds and rival investment banks have pushed the price of insuring a $10 million block of Lehman debt to extremely high levels...
