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WORLD> America
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Lehman may face failure as Merrill sale reported
(Agencies)
Updated: 2008-09-15 08:46 One of the catalysts for this weekend's events was the stance of US Treasury Secretary Henry Paulson. He was strongly opposed to using government money in any deal aimed at resolving the Lehman crisis. The lack of such government guarantees was the main reason Barclays decided to exit the negotiations to buy Lehman, according to a person familiar with the matter. An emergency trading session was set between dealers with Lehman Brothers counterparty risk involved credit, equity, rates, foreign exchange and commodity derivatives, the International Swaps and Derivatives Association said. "This is an extremely, and I stress extremely, rare event. It also speaks to the more general notion that, in today's highly disrupted financial markets, the unthinkable is thinkable," said Mohamed El-Erian, CEO of Pimco, the world's biggest bond fund. Market sources said the special session was initiated by the Federal Reserve, with the aim of reducing risk associated with a potential bankruptcy filing by Lehman Brothers. "Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time Sunday," said the statement. "If there is no filing, the trades cease to exist." The special session "is a way to offset the risk between the remaining large banks and insurance companies and fund managers prior to the markets opening in Asia," said Mark Grant, managing director of structured finance at Southwest Securities, based in Dallas. Grant is expecting a turbulent session when the US markets reopen for business on Monday. "The market is going to be spooked. People will be fearful and no one outside a very small group of people knows what Lehman going into liquidation will mean." Balancing Act Lehman has been collapsing under the weight of toxic assets, mainly related to real-estate, that are now worth only a fraction of their original prices. The crisis at Lehman presented a delicate balancing act for Paulson and the Federal Reserve, who have urged Wall Street chiefs to come up with their own solution. So far this year, the government has sponsored rescues of Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae. The authorities don't want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank. But they also cannot afford to let a blow-up of Lehman paralyze the financial system and deepen the credit crisis. "Anyone else who has these toxic assets, if they haven't made a full confession, they better do it now," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, Ohio, which has $2.9 billion of assets under management. "These assets may be hard to unwind, but they can unwind your firm. Lehman tried to deny reality until the bitter end." Bankruptcy would mark an ignominious end to a once-proud firm, founded by cotton-trading German immigrants 158 years ago. It would also badly tarnish the reputation of CEO Dick Fuld, who has insisted that his firm could work through its problems to survive as an independent entity. More Failures Former Federal Reserve Chairman Alan Greenspan said on Sunday he suspected "we will see other major financial firms fail," but added that this did not need to be a problem. "It depends on how it is handled and how the liquidations take place," Greenspan told the ABC program "This Week." "And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers." Hundreds of Lehman employees went into the office on Sunday to clear desks and pack personal belongings, according to an employee. Many even opted to say their farewells with one last office soiree. "We are having pizza and beer," said one Lehman employee, who declined to be identified.. The news on Sunday was a huge hit to an already wounded financial jobs market, and a dent to New York's claim to be the pre-eminent world financial center. Headhunters and consultants said the talent-flush US market -- which has shed more than 100,000 financial-sector jobs this year -- must now brace for up to 50,000 more.
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