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Friday, September 12, 2008

Lehman: Will Get Sacrificed, No Bailout

“We've learned that no dealer's going to fail.” –Julian Mann, First Pacific Advisors

Lehman doesn’t stand a chance here.

These guys are going to get sacrificed…

When you’re not big and bad enough, you don’t get taxpayer money…

Paulson and Bernanke will no doubt use Lehman (LEH) as an example. Somebody has to die to “manage the expectations” of the rest of the rabble. It’s the whole moral hazard thing. Somebody’s has to get whacked here or the market might as well assume everybody gets a free pass.

Lehman No Bear Stearns as Money Markets Show No Panic (Update1): “Rising speculation that Lehman Brothers Holdings Inc. may fail is generating less concern among investors than when Bear Stearns Cos. imploded in March.

Unlike the days leading up to the forced sale of Bear Stearns to JPMorgan Chase & Co., volatility in the money markets remains relatively muted. The difference between what the U.S. government and banks pay to borrow in dollars for three months, the so-called TED spread, rose 13 points in the past two weeks to 123 basis points, compared with an increase of 38 basis points to 160 basis points in the period leading up to Bear's failure.

Investors are showing less fear after the Fed set up special lending facilities following the Bear Stearns bailout, giving securities firms the same access to its cash as commercial banks. The ability to tap the Fed for funds means financial troubles at one investment bank are unlikely to bring down others.”

Lehman's Fuld Races to Sell Firm as Fed Balks at Deal (Update2): “Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld is seeking buyers for the investment bank amid signs that the U.S. government may balk at providing the funding that enabled Bear Stearns Cos. to sell itself and avoid bankruptcy.

Fuld, who built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the firm, was pushed toward a forced sale after talks about a cash infusion from Korea Development Bank ended, sparking a 70 percent drop in the firm's market value during the past three days. Unlike when JPMorgan Chase & Co. took over Bear Stearns, the Federal Reserve and Treasury aren't likely to put up money for a purchase of Lehman, people briefed on the matter said yesterday.

Bankers from other firms were reviewing Lehman's books yesterday, according to people with knowledge of the situation, and a deal may be announced before Asian markets open Sept. 15, one of the people said. The New York-based investment bank announced the biggest loss in its 158-year history on Sept. 10, as devalued real estate assets led to $5.6 billion of writedowns in the third quarter.”

Yesterday, equities started to rally BEFORE the “Bank of America is in talks to buy Lehman” rumor hit the tape. Macroman, in a A Damned Shame noticed the same damn thing: “Per the usual, someone got wind of it beforehand, leading to the by-now de rigeur spike in the SPX before the news hits the tape.”

It is actually quite improbable that Bank of America (BAC) would touch LEH. Think about it. BAC is still trying to digest their really really poorly timed and priced acquisition of Countrywide Financial. BAC also has seriously dangerous exposure to all the same things LEH is exposed to. They won’t double up on them. They can’t.

I sold ES DEC08 (S&P 500 futures contract) after the close. In Korea to Buy Lehman I shorted ES then too. Worked then. Should work again now.

I’d put up a chart of LEH, but what’s the point?

I said Bear Stearns is Dead, Lehman is Probably Next. That was in March.I took a closer look at LEH in Lehman Put Open Interest: Just Like Bear Stearns on June 2nd. I knew then that LEH was dead for sure. The Wall Street Journal (WSJ) ended up quoting me on that post: Following the Bear’s Tracks.

The Lehman Story:
Desperate Lehman Turns to South Korean Military Fund
Lehman To Be Acquired by Tooth Fairy
Korea to Buy Lehman
Sallie Mae: Suspicious Put Open Interest
Lehman: Will Slowly Sell Itself Off
Lehman: Death Spiral?
Banks, Lehman: Busy Lying and Raising Funds
Lehman Put Open Interest: Just Like Bear Stearns
Bear Stearns is Dead, Lehman is Probably Next


Anonymous said...

Dumb question. So your saying that the gov't will let Lehman die/fail/go bankrupt!! What is the CDS exposure?! I agree no one will touch them but can they just fail? What happens after- do assets get MTM in a firesale? What is the domino affect afterwards? SOOO many questions. It seems like the market has become complacent in its assumption that everyone will get a free pass and your saying that the government WILL let the dominos fall here? Hard to believe with precedent being what it is but it seems that if your right the dominos are going to start falling faster from here on out!

Doug said...

The big investment banks are basically operating like a ponzi scheme.

They borrow money from the Fed in order to sure up their books from writedowns on bad loans.

The Fed is literally burning money because eventually the banks will fail and all that money the Fed lent them will be wasted.

Unknown said...

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