Reply #8: ... the room fell silent... [View All]

[Ghost Dog]

... As New York Fed president Tim Geithner addressed those present (Friday night), flanked by Federal Reserve chairman Ben Bernanke, US Treasury Secretary Hank Paulson, and Securities and Exchange Commission chairman Christopher Cox, the room fell silent.

Mr Geithner's message - that Wall Street had to either help save Lehman or face the consequences - was eerily reminiscent of the message that his predecessor William McDonough had given to a similar gathering 10 years previously.

When Mr McDonough asked the assembled bankers to bail out troubled hedge fund Long Term Capital Management in 1998, the banks largely did so - ironically bar Bear Stearns, the investment bank that collapsed in the spring. Although the repercussions of the LTCM collapse were not insignificant, this, said Mr Geithner, could be a whole lot worse.

As he outlined a doomsday scenario that involved the problems at Lehman quickly enveloping other banks - as was the case on Friday afternoon as the likes of Washington Mutual, AIG and Merrill Lynch all saw their shares take a hefty tumble on capital adequacy concerns - it became abundantly clear to all gathered that this was a crisis of confidence and not simply one of liquidity, as was the case with LTCM.

But as well as a lack of confidence in Lehman, the US government was also suffering from a lack of confidence of its own. After the $29bn (£16bn) bail out of Bear Stearns, and the $200bn-plus bail out of Fannie Mae and Freddie Mac, the American taxpayer, already feeling the pain of US mortgage crisis and the nation's continuing economic downturn, had little more to give.

Ahead of the meeting, Mr Paulson had already let it be known that he was adamant Lehman would not be saved with government money - and that, this time, it was up to Wall Street to take some of the rap.

And so a solution had to be reached that would, on the one hand, prevent Lehman from collapsing altogether, with the ramifications for the world's financial system, and, on the other, would draw a line under the perception that the Fed would be on standby to bail out a financial institution every time one came close to the edge.

The solution Geithner put forward on Friday evening was an interesting one - allow a buyer to take on the good assets of Lehman, with the rest of Wall Street stumping up to somehow allow the separation by providing enough funding for Lehman's $41.8bn property portfolio and up to a further $40bn or so of other toxic assets.

Although not ideal, given the fact that the majority of those present had already taken substantial write-downs to their own balance sheets as a result of the sub-prime crisis, this was the only solution that seemed workable in Mr Geithner's eyes.

The meeting ended and those present left for the night to mull over the proposal.

By first light Saturday morning, there were more than 100 bankers and regulators at the New York Fed, discussing whether the plan would work.

It became obvious that even those banks which could afford to help out did not want to do so for the benefit of either main bidder - Bank of America and Barclays, which subsequently walked away - concerned that they would somehow be taking the rap while one of the two would be getting some prized assets on the cheap.

The talks continued, and other suggestions emerged. But as the majority focused on solutions for solving Lehman, others began to talk about solutions for saving themselves.

The credit trading heads of most of the big Wall Street banks gathered in a separate room to discuss the effects of the unwinding of credit default swaps held with Lehman - even contemplating showing each other their respective exposures to the troubled bank.

/more... http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/14/bcnlehman115.xml


And then ...

Lehman Brothers teeters on verge of collapse as Barclays pulls out
Last Updated: 10:36pm BST 14/09/2008

The departure of Barclays left US Treasury Secretary Hank Paulson and Tim Geithner, the head of the Federal Reserve Bank of New York, spearheading desperate last-ditch attempts to put in place some form of a workable rescue package.

Traders fear that the collapse of Lehman would send shockwaves around the world and spark a global sell-off of shares.

Lehman which employs 4,000 staff in London and 24,00 around the world, could be placed into liquidation as soon as Monday. The bank would be the single largest casualty of the current credit crisis and its collapse one of the biggest failures in Wall Street history.

In one of the most traumatic days in the history of Wall Street, Bank of America is reported to be on the verge of buying Merrill Lynch for $38bn.

...

Banks and brokers - led by the International Swaps and Derivatives Association - began preparing the ground for a bankruptcy filing by settling trades that Lehman has outstanding across the credit, stock, currency and fixed-income markets in an extraordinary special trading session.

If the bank does collapse, it will only heighten fears about the prospects for other financial institutions, not least American International Group (AIG), the world's biggest insurer which was last night racing to raise up to $20bn with the help of bankers from JP Morgan Chase amid concerns over its own capital adequacy.

Other banks, including Washington Mutual and Merrill Lynch, have also come under intense scrutiny in recent days as Lehman moved closer to collapse.

...

However Mr Geithner and Mr Paulson - in tandem with the heads of all the major investment banks including Citigroup chief executive Vikram Pandit and JP Morgan Chase chairman Jamie Dimon - were last night frantically working on plans to ensure that if Lehman does have to be liquidated, it can be done so in such a way that it does not severly impact other institutions.

One possibility being discussed was for all institutions to agree to continue to trade with Lehman as the process of the bank being wound-up took place over the next few months.

...

One source suggested that the withdrawal could be merely a negotiating tactic by Barclays to force Mr Paulson into offering a guarantee, but it is thought that such a situation is unlikely given Mr Paulson's insistance that the US taxpayer could not be seen as a continual haven of last resort.

It was Mr Paulson who called on Barclays to put together an offer for Lehman at the end of last week, urging Mr Varley to see if a deal could be done for the sake of the wider markets.

...

However even the prospects for the funding of the "lifeboat" seemed in question, with a number of major banks unwilling to have to allocate capital to such a venture while Barclays or Bank of America simply walked away with the "good bank" at a discount price.

/... http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/14/bcnlehman215.xml