T Nation

Next in Line: Lehman and Merrill

"By ANDREW ROSS SORKIN, BEN WHITE and JENNY ANDERSON

In one the most extraordinary days in Wall Street�??s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.

The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.

The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.

Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry�??s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.

The weekend�??s once unthinkable outcome came after a series of emergency meetings at the Federal Reserve building in downtown Manhattan in which the fate of Lehman hung in the balance.

In the meeting Federal Reserve officials and the leaders of major financial institutions were trying to complete a plan to rescue the stricken investment bank.

But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.

As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, 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, as its subsidiaries remain solvent while the parent firm liquidates, 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.

Lehman has retained the law firm Weil, Gotshal & Manges. The firm�??s restructuring head, Harvey Miller, also spearheaded Drexel�??s bankruptcy filing in February 1990.

As efforts to acquire Lehman faltered, Bank of America turned to Merrill Lynch and offered at least $38.25 billion in stock for that investment bank, people briefed on the negotiations said.

The deal, valued at $25 to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.

But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.

As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, 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, as its subsidiaries remain solvent while the parent firm liquidates, 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.

Lehman has retained the law firm Weil, Gotshal & Manges. The firm�??s restructuring head, Harvey Miller, also spearheaded Drexel�??s bankruptcy filing in February 1990.

As efforts to acquire Lehman faltered, Bank of America turned to Merrill Lynch and offered at least $38.25 billion in stock for that investment bank, people briefed on the negotiations said.

The deal, valued at $25 to $30 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.

Merrill�??s chief executive, John A. Thain, and Kenneth D. Lewis, Bank of America�??s chief executive, initiated talks on Saturday, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, people briefed on the negotiations said.

Merrill�??s 15,000 brokers will be combined with Bank of America�??s smaller group of wealth advisers. The entity will be run by Robert McCann, the head of Merrill�??s global wealth management business.

Mr. Fleming, Merrill�??s president, will be president of the combined bank�??s corporate and investment bank while Thomas Montag, a former Goldman executive who started at Merrill in August, will head all the merged company�??s all risk, trading and institutional sales.

The leading proposal to rescue Lehman had been to divide the bank into two entities, a �??good bank�?? and a �??bad bank.�??

Under that last scenario, Barclays would have bought 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.

But that plan fell apart on Sunday, all but assuring that Lehman would be forced to liquidate.

The overarching goal of the weekend talks had been 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, which have come under mounting pressure in the markets.

Even as Lehman and Merrill played out, the insurance company, the American International Group, was planning a major reorganization and a sale of its aircraft leasing business and other units to stabilize its finances, a person briefed on the company�??s strategy said on Sunday.

A.I.G. became one of the focuses at an emergency gathering of Wall Street executives over the weekend, and was trying to arrange a capital infusion in the face of possible credit downgrades.

It was unclear whether A.I.G. would succeed in its capital search, but a person briefed on the discussions said it was seeking more than $40 billion even as it tried to sell assets to shore up its financial footing.

Among the businesses likely to be sold is A.I.G.�??s aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet.

Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company�??s shares in recent days. The stock closed Friday at $12.14 a share, a decline of 46 percent for the week."

Over the years there has been too many fingers in the leaks in the dike. Looks like a leak too big opened up.

Yes I said dike

Merrill Lynch is going to be bought up by BOA.

http://www.bloomberg.com/apps/news?pid=20601103&sid=az4ntq7NOJME&refer=news

Lehman is toast I am afraid, and Barclay’s has backed out of buying them.

http://www.mercurynews.com/campbell/ci_10460448

This recession is really looking grim. Alan Greenspan was on the news, saying he’d never seen anything like it.

[quote]AynRandLuvr wrote:
This recession is really looking grim. Alan Greenspan was on the news, saying he’d never seen anything like it. [/quote]

I don’t think of the man as much of an authority, but I found what he said here pretty interesting.

http://www.bloomberg.com/apps/news?pid=20601070&sid=aKZG._gG2NVI&refer=politics

This is interesting. I wonder if any more of the big players are going to go down.

So I wonder if this is a sign the Fed has had its fill of assisting (specifically backing the mortgage portfolios) with bailouts or will it step up again if this continues.

On a related note, it was very wise to leave the derivative markets open late to allow the market to cover some of its risks to Lehman.

Great depression are often caused by banking crises. The last one was Credit-Anstalt in Austria. The Fed was created to counter this very happening, by printing unlimited quantities of money.

The trouble is that no serious nation can indulge in hyperinflation with impunity. The bond market here will collapse, as the Fed replaces junk from all these collapsing banks with fed bonds and notes, and foreigners see that the only way out is inflation.

Can we all say ‘Bancor’ (the replacement proposed by John K. Galbraith, in 1944)?

Let them fail and don’t bail them out when they do.

Socializing failure is not a good idea.

[quote]LIFTICVSMAXIMVS wrote:
Let them fail and don’t bail them out when they do.

Socializing failure is not a good idea.[/quote]

That’s true. But where exactly do you draw the line? I for one thought the Freddie/Fannie bailout was a necessity, given the situation we were/are in.

The question is 1) how do we stop this crisis NOW? and 2) how do we recover and make sure we never bail somebody out again? How do we reform?

[quote]LIFTICVSMAXIMVS wrote:
Let them fail and don’t bail them out when they do.

Socializing failure is not a good idea.[/quote]

Banks, especially the big ones, can’t be allowed to fail. That would bring on a global depression. The populations would call for governments to ‘do something!’ and Fascism would result.

Combine a fascist regime with the power of the US military…that would be truly horrible. (Then, Lixy, you’d see real cruelty and REAL destruction in the ME.)

[quote]Aragorn wrote:
LIFTICVSMAXIMVS wrote:
Let them fail and don’t bail them out when they do.

Socializing failure is not a good idea.

That’s true. But where exactly do you draw the line? I for one thought the Freddie/Fannie bailout was a necessity, given the situation we were/are in.

The question is 1) how do we stop this crisis NOW? and 2) how do we recover and make sure we never bail somebody out again? How do we reform?[/quote]

Freddie and Fannie were the creation of the Fed. They probably should have been bailed out.

Lehman needs to crumble, as does AIG, and all the rest of the troubled banks if they can’t stay solvent on their own.

[quote]Aragorn wrote:
LIFTICVSMAXIMVS wrote:
Let them fail and don’t bail them out when they do.

Socializing failure is not a good idea.

That’s true. But where exactly do you draw the line? I for one thought the Freddie/Fannie bailout was a necessity, given the situation we were/are in.

The question is 1) how do we stop this crisis NOW? and 2) how do we recover and make sure we never bail somebody out again? How do we reform?[/quote]

Are you kidding me? Why should taxpayers pay for the million dollar pensions of failures? When the government rewards failure they just get more of it. Also the only way to pay for it is thru inflation because the taxpayers cannot be taxed anymore. People on fixed incomes are fucked.

The road to recovery is painful and it involves liquidation and getting out of the way for actual successful business. The government is only going to make the depression worse.

THIS IS A DEPRESSION.

Hope no one had their retirement nest egg here.

[quote]Ruggerlife wrote:
This is interesting. I wonder if any more of the big players are going to go down.

So I wonder if this is a sign the Fed has had its fill of assisting (specifically backing the mortgage portfolios) with bailouts or will it step up again if this continues.

On a related note, it was very wise to leave the derivative markets open late to allow the market to cover some of its risks to Lehman.[/quote]

Sure as shit, we would’ve been in a depression if the Fed had let Fannie and Freddie fail. They owned 70% of the country’s mortgages. But the Fed can’t bail out EVERY financial power player that fails. An economic downturn is unavoidable, and it will make things worse in the longterm if the Fed tries to save everyone.

Who exactly did the F/F bailout help?

Wow, am I glad I just left the Wall Street headhunting business! Going to be a SLOOOOOOW year, if not two, for my former colleagues.

The weird thing is I know so many of the players at these firms that are probably going to be either left on the street, or made redundant or whatever. I’ve got to imagine that my old office line is ringing quite a bit these days. But I don’t miss it one bit. :slight_smile:

I’d be surprised – shocked, actually – if the Fed just lets Lehman (or AIG, or anyone else) just eviscerate. There’s a reason they worked out a deal for Bear to be bought out, and it wasn’t to help “the fat cats at Bear Stearns.” It’s because if they had let it collapse it would’ve sent shockwaves – more like massive rogue waves, really – through the entire financial markets system, and that wouldn’t just affect bigwigs. It would affect every single person who’s got securities investments of any sort: If you have a 401K, an IRA, any stock, bond or mutual fund holdings, or even potentially if you have large cash or money market accounts at ANY any firm. In short, just about EVERYBODY IN THE COUNTRY would get hit. Hard.

It’ll be an interesting week, that’s for sure.

Detroit is already in line with their hat in hand and Congressman Dingall is talking about a cash infusion. You can bet that both canidates will make some noise about this, Michigan is too valuable to both of them.

I just saw a commentary on BBC that the CEO of Lehman turned down various offers that could have saved the bank from bankruptcy.

If this indeed the case,it borders on the criminal.Here’s a link discussing it.

http://www.guardian.co.uk/business/feedarticle/7797708

[quote]Headhunter wrote:
Banks, especially the big ones, can’t be allowed to fail. That would bring on a global depression. The populations would call for governments to ‘do something!’ and Fascism would result.
[/quote]
If banks aren’t allowed to fail now everyone fails later. There are consequences that must be faced. Propping up failure is not the road to recovery.

The American economy is like a strung-out junkie. He can only heal if he is locked away and not allowed to continue to put poison in his blood. In the this case the poison is more credit. Our dealer is going to cut us off soon and the pain is going to hurt that much worse. Better that we should be in charge of our own fate in that regard.

[quote]Damici wrote:
I’d be surprised – shocked, actually – if the Fed just lets Lehman (or AIG, or anyone else) just eviscerate. There’s a reason they worked out a deal for Bear to be bought out, and it wasn’t to help “the fat cats at Bear Stearns.” It’s because if they had let it collapse it would’ve sent shockwaves – more like massive rogue waves, really – through the entire financial markets system, and that wouldn’t just affect bigwigs. It would affect every single person who’s got securities investments of any sort: If you have a 401K, an IRA, any stock, bond or mutual fund holdings, or even potentially if you have large cash or money market accounts at ANY any firm. In short, just about EVERYBODY IN THE COUNTRY would get hit. Hard.

It’ll be an interesting week, that’s for sure.[/quote]

Can you explain this a bit? I don’t understand the financial markets as well as some. I thought a lot of those investments were secured/insured for like $250,000? I know banks are insured up to 100k, but if you have a lot of money can’t you just split up the CD accounts into a lot of under 100k accounts? Thanks.

ryanjm-- yes, but what if the insurer says they may not have enough capital on hand to insure your 250k, or 100k?? Then what? I heard a report (have yet to double check it yet) that the FDIC says they may not have enough capital on hand.