Lehman to Declare Bankruptcy with Backstops Insuring "Orderly Liquidation"

Lehman to File for Bankruptcy Protection
September 14, 2008, 5:55 pm
Dealbook

Lehman Brothers will file for bankruptcy protection on Sunday night, according to people briefed on the matter, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

But Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive as a going concern. It will instead liquidate its holdings.

It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation, or how big the financial backstop would be.

Lehman’s broker-deal subsidiaries would not be a part of the bankruptcy filing. Those entities must file under Chapter 7 rules, which are the procedures for liquidation, under the assumption that it is the best way to protect customers. The Securities Investor Protection Corporation would handle the liquidation of such brokerages, and bankruptcy lawyers say that customers are likely to receive their holdings back.

Moreover, changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.

Lehman has retained the law firm Weil, Gotshal & Manges to prepare its bankruptcy filing. The firm’s restructuring head, Harvey Miller, also worked on Drexel’s bankruptcy back in 1990.

Eric Dash, Ben White and Michael J. de la Merced

Circuit Breakers, Curbs, and Down Limits

Circuit Breakers and Other Market Volatility Procedures

The major stock and commodities exchanges have instituted procedures to limit mass or panic selling in times of serious market declines and volatility. These mechanisms are known as Circuit Breakers, the Collar Rule, and Price Limits. Circuit Breakers establish whether trading will be halted temporarily or stopped entirely. The Collar Rule and Price Limits affect the way trading in the securities and futures markets takes place.

Circuit Breakers

The securities and futures markets have circuit breakers that provide for brief, coordinated, cross-market trading halts during a severe market decline as measured by a single day decrease in the Dow Jones Industrial Average (DJIA).




Trading Collars

If the DJIA moves up or down two percent (2%) from the previous closing value, program trading orders to buy or sell the Standard & Poor’s 500 stocks as part of index arbitrage were restricted in response to the Crash of 1987.

On November 2, 2007, the NYSE scrapped this rule. The reason given for the rule's elimination was its ineffectiveness in curbing market volatility.


Price Limits

The futures exchanges set the price limits that aim to lessen sharp price swings in contracts, such as stock index futures. A price limit does not stop trading in the futures, but prohibits trading at prices below the pre-set limit during a price decline.

Intra-day price limits are removed at pre-set times during the trading session, such as ten minutes after the thresholds are reached or at 3:30 p.m. (all times are Eastern), whichever is earlier.

Daily price limits remain in effect for the entire trading session. Specific price limits are set by the exchanges for each stock index futures contract. There are no daily price limits for U.S. stock index options, equity options, or stocks.

Sources: Securities and Exchange Commission, Chicago Mercantile Exchange and NYSE/Euronext

BAC Dumps Lehman, Said to Be Courting Merrill

Are these guys meeting at the NY Fed or Plato's Retreat?

Odd man out can be the towel boy.

Bank of America Said to Walk Away From Lehman Talks
By Margaret Popper and Yalman Onaran

Sept. 14 (Bloomberg) -- Bank of America Corp. abandoned talks to buy Lehman Brothers Holdings Inc., according to a person with knowledge of the matter, less than three hours after Barclays Plc said it wouldn't buy the faltering investment bank.

Bank of America, Merrill Lynch In Merger Talks
By MATTHEW KARNITSCHNIG, SUSANNE CRAIG and DENNIS K. BERMAN
September 14, 2008 4:08 p.m.

Bank of America and Merrill Lynch & Co. Inc. are in merger discussions, according to people familiar with the matter.

The talks come amid a Wall Street scramble to sort out a potential liquidation of Lehman Brothers Holdings Inc.

Bank of America had considered buying Lehman, but when those talks failed to result in a deal, BofA turned its attention to Merrill, which is considered a better fit for the bank.

Much remains uncertain and conditions were fluid.

Wall Street Braces for Lehman Bankruptcy with Special Trading Session

Wall Street Prepares for Potential Lehman Bankruptcy
By Craig Torres
September 14, 2008 15:19 EDT

Sept. 14 (Bloomberg) -- Wall Street prepared for a potential Lehman Brothers Holdings Inc. bankruptcy after Barclays Plc said it pulled out of talks to buy the firm and the government indicated it wouldn't provide funds in a resolution.

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.

``The purpose of this session is to reduce risk associated with a potential Lehman Brothers Inc. bankruptcy filing,'' the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates that Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Treasury Secretary Henry Paulson, who has led the talks with New York Fed President Timothy Geithner, was adamant two days ago against using taxpayer funds in a resolution.

The fourth-largest securities firm until the past week, Lehman has thousands of such trades in credit, equity, commodity, interest rates and currency derivatives.

``ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,'' the ISDA said. ``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.''

The announcement came after Barclays, the U.K.'s third- biggest bank, said it abandoned talks to buy Lehman, contending it couldn't obtain guarantees to protect against potential losses at the U.S. securities firm.