Sunday, September 14, 2008

Lehman: Barclays Bank Walks Away. Bankruptcy?

By 3pm Sunday afternoon the formerly fourth-largest securities firm Lehman Brothers appeared headed for liquidation, one of the biggest bank failures ever.

Bloomberg News reports that a bankruptcy filing could come before Monday:

"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." Read more here.

Barclay's Bank bailed from talks, according to the WSJ. "The situation was rapidly evolving...another bidder could emerge to save Lehman before markets opened Monday. But with the government balking at putting any taxpayer money at risk for Lehman, the likelihood of a transaction was dimming." Read about this here.

(We, the taxpayers, are already 'on the hook' for $29 Billion for the Bear Stearns Bailout last March, and nobody knows how much for the Fan & Fred Takeover....Pride of Ownership for us all, right?)

The NYTimes reports:

"The leading proposal had been to divide Lehman into two entities, a “good bank” and a “bad bank.” Under that 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.

What remained unclear was how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks."

If Lehman has to "mark to market" the value of its current assets--state what they are actually worth--other banks have to follow suit, which leads to huge losses of capital.

Many believe that bankruptcy is likely.

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