Lehman (LEH) Liquidation Puts Wall Street In Crisis Mode
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Lehman Brothers (NYSE: LEH) is on the verge of liquidation following unsuccessful efforts to sell itself over the weekend, as buyers walked away after the U.S. government refused to give guarantees on Lehman's mountain of souring assets.
The Fed took a hard line on Lehman following last week's bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and the bailout of Bear Stearns in March. Fed officials knew there would be major backlash if any more bailouts were paid for with the taxpayers dime.
Without the government back-stops, Barclays PLC (NYSE: BCS) and Bank of America (NYSE: BAC), the two most interested buyers, walked away from deals with Lehman. In fact, after balking at a Lehman deal, Bank of America turned its eyes toward Merrill Lynch (NYSE: MER) and is close to buying Merrill for $44 billion, a significant premium to Friday's close.
Lehman employees could be seen at the company's New York headquarters Sunday night emptying out their desks. Many of Lehman's 25,000 employees could be out of work come Monday.
Wall Street is set-up for a bloodbath come Monday morning, with futures already pointing much lower. The unwinding of a major investment bank is an event never before seen, and with that comes much fear.
To prepare for Lehman's fall, the International Swaps and Derivatives Association held a "netting trading session" Sunday between 2-6 p.m. to allow Lehman's counterparties to offset their derivatives positions against each other.
In addition, ten banks (Bank of America (NYSE: BAC), Barclays (NYSE: BCS), Citibank (NYSE: C), Credit Suisse (NYSE: CS), Deutsche Bank (NYSE: DB), Goldman Sachs (NYSE: GS), JP Morgan (NYSE: JPM), Merrill Lynch (NYSE: MER), Morgan Stanley (NYSE: MS), and UBS (NYSE: UBS)) have establish a collateralized borrowing facility, which they have committed to fund for $7 billion each ($70 billion in total).
The Federal Reserve also took steps to ease potential market vulnerabilities. The Fed said collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities. The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
News about the Bank of America/Merrill Lynch deal, and news that the Federal Reserve has put several new initiatives in place, should soften the blow to stocks in the morning, but all signs are pointing to at least an initial 2-5% sell-off.
The Fed took a hard line on Lehman following last week's bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and the bailout of Bear Stearns in March. Fed officials knew there would be major backlash if any more bailouts were paid for with the taxpayers dime.
Without the government back-stops, Barclays PLC (NYSE: BCS) and Bank of America (NYSE: BAC), the two most interested buyers, walked away from deals with Lehman. In fact, after balking at a Lehman deal, Bank of America turned its eyes toward Merrill Lynch (NYSE: MER) and is close to buying Merrill for $44 billion, a significant premium to Friday's close.
Lehman employees could be seen at the company's New York headquarters Sunday night emptying out their desks. Many of Lehman's 25,000 employees could be out of work come Monday.
Wall Street is set-up for a bloodbath come Monday morning, with futures already pointing much lower. The unwinding of a major investment bank is an event never before seen, and with that comes much fear.
To prepare for Lehman's fall, the International Swaps and Derivatives Association held a "netting trading session" Sunday between 2-6 p.m. to allow Lehman's counterparties to offset their derivatives positions against each other.
In addition, ten banks (Bank of America (NYSE: BAC), Barclays (NYSE: BCS), Citibank (NYSE: C), Credit Suisse (NYSE: CS), Deutsche Bank (NYSE: DB), Goldman Sachs (NYSE: GS), JP Morgan (NYSE: JPM), Merrill Lynch (NYSE: MER), Morgan Stanley (NYSE: MS), and UBS (NYSE: UBS)) have establish a collateralized borrowing facility, which they have committed to fund for $7 billion each ($70 billion in total).
The Federal Reserve also took steps to ease potential market vulnerabilities. The Fed said collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities. The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
News about the Bank of America/Merrill Lynch deal, and news that the Federal Reserve has put several new initiatives in place, should soften the blow to stocks in the morning, but all signs are pointing to at least an initial 2-5% sell-off.
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