Why the Sudden Imperative to Promote a Deal for Lehman?

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...

Central Banking Joke

Ben Bernanke, Alan Greenspan, and Jean-Claude Trichet are in the duck blind and a bird flies overhead.

Bernanke looks at it and says, "Looks like a duck, flies like a duck... it's probably a duck," shoots at it but misses and the bird flies away.

The next bird flies overhead, and Monsieur Trichet looks at it, then looks through the pages of a bird manual, and says, "Hmmmm...green wings, yellow bill, quacking sound...might be a duck." He raises his gun to shoot it, but the bird is long gone.

A third bird flies over. Greenspan raises his gun and shoots suddenly, brings it down, and turns and says, "Can someone go see if that was a duck?"

Yikes Its Ike!

"The latest track models are converging on the Houston area, between Freeport and High Island. That's bad news from a refinery perspective. The question is increasingly shifting from "where" to "how strong", and with Ike that's a tough question to answer.

The threshold to watch for as the storm approaches landfall is 100 knots (115mph). For every 5 knots less than that the damage drops off rapidly, and more importantly the recovery times improve. If the storm landfall intensity is over 100 knots, we start to see damage that requires major structural work and therefore recovery times start to skyrocket."

Chuck Watson in a report to The Oil Drum

...and this time put some stank on it.

To Serve the Public

Now here's something with some traction. If you can't trust the Washington Post who can you trust?

The Fed and Treasury are reported to be weighing in on the sale of Lehman and are cobbling together a deal 'before Asian markets open on Sunday.'

Sounds hauntingly familiar, like the Bear Stearns bail out. Probably won't cost the a dime as well.

Little Lehman, happy at last? Let's hope so.

Who's next? Plenty for everybody (on the list).

Hank and Ben are going to serve the public. Medium well.


U.S. Government Assisting in Sale of Lehman Brothers
By David Cho and Heather Landy
Washington Post
Thursday, September 11, 2008; 5:40 PM

The Treasury Department and the Federal Reserve are helping Lehman Brothers put itself up for sale. The details are not finalized, but sources familiar with the matter say the purchase is expected to be completed and announced this weekend before Asian markets open Monday morning.

The Fed and Treasury are talking to a wide range of firms and examining multiple scenarios for the sale of the venerable investment brokerage. (Give us a "B", give us an "A", give us a "C", give us a "K".... BACKSTOP! What do we want? BACKSTOP!)

Lehman Brothers, which had been anxious to show it could weather the credit crisis that contributed to the firm's $3.9 billion third-quarter loss, said Wednesday that it would sell a majority stake in its investment-management division, slash its dividend and spin off about $30 billion of real estate assets.

The announcement did little to calm investors' concerns that Lehman, the smallest of the four major Wall Street investment banks, might suffer the same fate as former rival Bear Stearns, which was acquired by J.P. Morgan Chase in a deal regulators brokered in March after a bank run that shook the securities industry.

Lehman's share price fell nearly 40 percent to $4.22 at the end of trading today, continuing a precipitous fall from more than $60 a share as of February.

Goldman Sachs Group reduced its rating on the company, with one analyst saying that the restructuring "fell short of what was necessary," the Bloomberg news service reported, while Moody's Investor Services argued that the firm faced a cut in its credit rating unless it quickly enters a "strategic arrangement" with a stronger partner.

During a conference call with Lehman executives yesterday, analysts pressed for assurances that the $5.6 billion of write-downs that the firm disclosed for the quarter ended Aug. 31 -- primarily for declines in the value of assets tied to residential mortgages -- sufficiently reflected the severity of the troubles in the real estate market. The concern demonstrated the skepticism that remains even after last weekend's federal bailout of government-sponsored enterprises Fannie Mae and Freddie Mac, which play a vital role in supporting the mortgage and housing markets.

"There's still an element of doubt in terms of confidence of the financial players, and that's not going to go away just with the bailing out of Bear Stearns and the bailing out of the GSEs," said Michael Kastner, managing director of fixed income at Sterling Stamos Capital Management in New York. "What we're going to need to see is at least one quarter where the financial institutions don't show write-downs and do show profits and an ability to grow their business."