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Lehman: insolvency looms

Robert Peston | 20:07 UK time, Sunday, 14 September 2008

Preparations have been made for Lehman Brothers, the substantial US investment bank, to obtain protection from its creditors under US Chapter 11 insolvency procedures.

Lehman Brothers building, TokyoI have also learned that PWC, the leading accountancy firm, has been lined up to run the UK operations of Lehman in the event that it is put into administration under our insolvency arrangements.

The preparations for insolvency protection have been made because the US authorities have become gloomy that Lehman can be rescued.

"The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers' money" said a banker close to the rescue negotiation. "Hank Paulson [the US Treasury Secretary] has made it clear he doesn't want to do that."

If Lehman is put into Chapter 11 tonight, the impact on global markets tomorrow could be very significant.

The withdrawal of Barclays from negotiations to buy most of Lehman - which I reported earlier - left only Bank of America as a potential rescuer.

And Bank of America is - according to bankers - not persuaded that acquiring Lehman is in the iterests of its owners.

The stumbling block is that no bank or other financial institution wishes to take on Lehman's massive liabilities without some kind of protection or guarantees from the US government.

But the US Treasury is reluctant to commit taxpayers' cash to a bailout of Lehman.

It believes that the markets can cope with the shock of Lehman's collapse - though this is disputed by senior bankers.

If Lehman collapses, this would mark a dramatic change in approach to coping with the credit crunch by the US government and the US central bank, the Federal Reserve.

They committed taxpayers' cash to rescuing Fannie Mae, Freddie Mac and Bear Stearns when they ran into serious difficulties. But Hank Paulson has apparently decided that enough is enough, and that taxpayers' cash should not be committed on this occasion.

However, whether he will continue to hold his nerve and will continue to sit on his hands as the deadline for Lehman to be put into Chapter 11 approaches, we shall see.

UPDATE 10.45PM: Sometime before midnight US time, Lehman is expected to file for Chapter 11 and go into administration over here.

I have been told that its executives are seeing the New York Fed right now to investigate whether it can borrow several billion dollars so that it can go into an orderly liquidation as an alternative to formal insolvency.

But Lehman executives do not expect the Fed to give them the funding that would be required, so they assume their business will formally collapse.

The implications will be huge. If the new controllers of the business in insolvency feel obliged to sell assets, that could do severe damage to other banks, because there would be a sharp fall in the market value of those assets.

In the round, the collapse of Lehman would knock bankers' already enfeebled confidence. They will become even more reluctant to lend to most of us. The credit crunch would take a turn for the worse.

Even in terms of the impact on unemployment, the damage will be considerable - in that Lehman employs around 25,000 worldwide, including 5000 in the UK.

I am hearing that the US Treasury and the Fed hope however that the contagion to other banks shouldn't be too appalling - in that Bank of America appears to be close to buying the next most vulnerable investment bank, Merrill Lynch

In respect of shocks to Wall Street, there hasn't been a weekend like it for something like 80 years.


  • Comment number 1.

    I'm betting that the US treasury will pick up the tab in the end- it will be interesting if I'm wrong, though! A nice game of poker, but glad I'm not a US taxpayer- how much more can they take?

  • Comment number 2.

    Here's hoping Paulson sticks to his guns.

    It's totally unacceptable to privatize profits and socialize losses, and governments need to underline that businesses cannot be expected to be bailed out by the taxpayer if they fail.

    Freddie and Fanny required intervention due to their pre-existing relationship to the Fed and US government, Lehmans doesn't.

    It's time to underline the fact that "you pays you money, you takes you chances" in the market, and just as success reaps rewards, so failure brings chastisement.

    It'll have an impact on the market, a fairly detrimental one, but one that needs to happen.

    We're undergoing a period of correction, and we can either accept that, try to delay it - which will mean just a worse correction in the future - or move to a more socialist model.

    Only the first can be considered acceptable, as the second would lead to another Depression and the third is just the road to hell paved with good intentions.

  • Comment number 3.

    They should let Lehman brothers go to wall (just like they should have done with Northern Rock). The reason given to save it is that it will cause a run on other banks if Lehman fails. That is nonsense. If the other banks are coerced into buying a load of crap, they will adversally affect their own balance sheets weakening their own position. If they don't save Lehman's, they are demonstrating prudence and this should give investors in them confidence. Once Lehman's fails, the other banks can simply buy the profitable bits. Tough on staff I know, but that's life.


  • Comment number 4.

    I suppose we should be sad, but I think I can bear the shock of seeing those bankers getting it up 'em,

    The markets will probably tank tomorrow. Also it could be the start of a domino effect -any bets on who is next to go?

  • Comment number 5.

    Doesn't Chapter 11 mean that in the short term Lehman's creditors get hung out to dry?
    That could be worse in the long term than having the taxpayers dig into their collective pockets.

  • Comment number 6.

    This is serious isn't it? Barclays is in a parlous state itself and may be playing a double or quits game here; betting the ranch on the US government underwriting the deal and so, in turn, making Barclays itself "too big to fail" if it takes Lehman Brothers? The banks have created one unholy screaming mess over the last 10 years or so and now there is going to be one almighty reckoning over the next 10 years. I'm naturally pessimistic, but I think we ain't seen nothing yet when it comes to the unravelling of our so-called "developed economies" in the coming years and with that the unravelling of our way of life - engendered by the mirage of cheap energy, the debt bubble and the reckless printing of money that has underpinned it. Hold on to your hats guys.

  • Comment number 7.

    I am sure this will have a "happy ending". The government of the USA will not let it go bust. Lehman will simply be added to the growing mountain of national debt... ...which will never ever be repaid!

  • Comment number 8.

    Whoops. Looks like Robert won't be getting any sleep tonight.
    In fact I wonder if he will be getting any sleep at all this week. That I suppose is the downside of London being in a timezone ahead of New York.

  • Comment number 9.

    As a Lehman employee, I'm wondering whether the doors will be locked when I arrive tomorrow morning.
    I guess people that work 'in the City' don't generate a lot of sympathy, but I've got a mortgage and family to look after like everybody else. I'm not even sure if I'd get a redundancy payment at the moment.

  • Comment number 10.

    So those of us who have mortgages with SPML, a subsidiary of Lehman, will be getting a letter from PWC?

    Elsewhere on the web it is being reported that Bank of America and Merrill Lynch are discussing merging with one another. Some people seem to think that if Bank of America doesn't do something like this is will go down the Swanny, too.

  • Comment number 11.

    American banknotes will be amended to read, In God we trust, everybody else cash.

  • Comment number 12.

    More money printed by the US treasury at this time will cause hyperinflation. They can't bail out every bank. At last we will find out the true horror/or not of the credit crunch.

    The correction will really hurt though. I think Barclay's dodged a bullet with Bob Diamond being denied his ego prize, for the moment.

  • Comment number 13.

    Wall Street, the global banking community, central banks, governments, the markets and the media must unite and act in concert to prevent a drama turning into a crisis and spilling over into the real economy.

    Lehmans problems must be ring fenced as were the US Savings and Loan institutions by the creation of an institution like the Resolution Trust Corporation in 1989.

    Wall Street must hang together or it will hang separately!

    It's no time to desert Lehmans now.

  • Comment number 14.

    Given the UK property market decline is 6-12 months behind the USA. I wonder how long it is before bad structured debt investments have a similar effect upon one or more major UK financial institutions?

  • Comment number 15.

    There is absolutely no way Lehman's will be allowed to go under. The banking industry, the Federal Reserve and the US Government wil cook something up between them.

    If it's allowed to go under then virtually every CDS on the planet is going to have to be (oublicly) unravelled so that in bits of Lehman's stuff can be identified and pulled out. That is simply not going to happen , the damage it would so to the world banking system would be irrepairable and probably bring down a host of other institutions and pension funds.

    Expect Lehman's to be split, with all the debts put into a seperate company and underwritten by the Fed. The then newly solvent Lehman's will be sold on no problem.

  • Comment number 16.

    I have an idea. Why don't the Americans sell a pile of their gold, (their constitution forbids I know).

    The gold price would collapse,the dollar would .. well I'm not sure what the dollar would do .. but I'm sure they would find many eager buyers of cheap gold.

    That way they would have the funds to let the financial system deflate slowly. Yes it would be like burning money, but it might give us all time to come up with a whole new system .. one that doesn't rob us all every few years.

    Anyway I may be totally misguided here but what is the point of having an emergency fund (in the form of piles and piles of gold) if you can't use it in an emergency?

  • Comment number 17.

    This probably explains why the Fed acted
    to shore up Freddie and Fanny. As far as Lehman
    goes, however, they may not feel so compelled
    to act.

  • Comment number 18.

    That is also how I understand chapter 11 Prudboy:

    [#5. prudeboy wrote:
    Doesn't Chapter 11 mean that in the short term Lehman's creditors get hung out to dry?]

    I wonder who the unfortunate creditors are - UK banks? American banks? Pension funds? The Federal reserve?

  • Comment number 19.

    Is this it, the point at which the biggest crisis of confidence ever to occur in the financial markets is reached?

    Everyone in the market will be thinking ahead, trying to spot who is next to go. Almost every financial institution could come under pressure tomorrow. This is all making the 1930s collapse look like a picnic. The Fed cant do anything, it is like a grass hut trying to hold back a mega-tsunami.

    I guess that there will be a rush to gold now, I can think of anywhere else to run.

  • Comment number 20.

    This could be the straw that finally breaks the camel's back. It does seem to me that the reality of what is happening in the financial markets has yet not sunk in with many thinking that everything will all get back to normal shortly.

    It won't because it can't.

    I think people are confusing symptoms with underlying causes, and so believe that things can't be that bad because unlike the 1970s there is no 3-day week, low unemployment etc., but unlike then or indeed the 1990s recession, the whole financial system is on the verge of collapse because the entire growth of the last 10 years was entirely illusionary. As a result business, government and individuals have spent money that never existed. The luck had to run out sometime - and sadly, that time is now.

    There will be a domino effect, i.e. when the penny finally drops - the world's stock markets will collapse - and the fall out will begin.

    We are on the edge of a precipice, I only hope that when all this is finally over - and we have a long while to go yet, that the world will come to its senses and create a more effective way of doing things. That may be the silver lining behind this pretty dark cloud.

  • Comment number 21.

    If Lehman or parts of it goes into administration (UK), chapter 7 (liquidation - US) or Chapter 11 (protection from creditors - US), Barclays, Bank of America and Goldman Sachs could pick up the parts they want without the large scale risks that they would incur by buying it today. So why bother buying it today if the US treasury or Fed isn't going to take away the risk for you? They will probably ending up paying slightly more for sanitised chunks but the extra cost will be a lot lower than the potential risks that they couldn't quantify today.

  • Comment number 22.

    Let Lehman go bust.

    How can bailing them out stop further collapses?

    At least when NR went under there was, and perhaps still remains, a prospect that the taxpayer will get their money back but can the same be said of Lehmans?

    The collpase of Lehman will serve as a warning to banks that they should stick to traditional banking or face very dire consequences.

  • Comment number 23.

    Greenspan (an ex Chairman of the Fed) said today that the current financial crisis is "probably a once in a century event" and that more firms will fail.

    If Lehman is not bailed out then there is no longer a lender of last resort (the Fed). Other banks and financial institutions will inevitably go under (and not just in the US).

    Consequently, everyone (bankers, investors, hedge funds, etc) will again be trying to avoid the next failure which will only exacerbate the current financial crisis.

    Although there is no imminent prospect of a resolution to this crisis, if Greenspan is right and this is a once in a century event, then there will eventually be an amazing buying opportunity for the brave.

  • Comment number 24.

    This was bound to happen...the banks were happy to apply interest to Joe Public all these years and making huge sums of money. Well I'm not sorry one bit, this just shows how weak transactions purely based on interest have no real underpinning. Why the heck could we not stick to traditional reserves such as Gold and Silver? Instead countries around the world, sold their gold reserves and due to this we are all in this awful mess.

    Sorry Lehmans you had your card marked...ages ago the worst is still to come.

  • Comment number 25.

    Well, as I have commented in previous blogs, this latest event is becoming more of a concern for the western financial markets and economies as a whole.

    Tomorrow (Monday) could really be a very Black Monday for the global financial markets on a par with 1929. Sounds sensastionalist and gloomy, but I think with some good reason.

    The problem is that now the credit crunch iceberg is showing more above the surface. The clear problem will be how much, how long and how complex the liquidation of Lehman Bros, if this is what happens will take and cost.

    It has been bad enough for banks to raise capital to cover their impairment (bad debts) charges to date. However, this is now going to get a whole lot worse. The entire global banking system is under real threat. Unless cash holders (sovereign funds, Middle East and Far Eastern funds) support their trading partners in the West, their main sales markets, then we are in for a rocky ride.

    If any bank's commitments with Lehman Brothers is not observed after tomorrow, then this puts the entire banking system worldwide at risk. If trust goes between banks, then funds flows around the globe just stop. Banks will retrench in the short term, and keep hold of what they have and do business in more familiar and often more narrow areas (local and product wise).

    The US and UK Governments along with others around the Western World have been battling to keep things stable. In fact the miracle of the past 12 months has been the incredible "dead cat bounce" of the markets, and the resiliance of the quoted raw materials producers, that have kept equity prices as high as they have been. Standby for a massive correction and a flight to cash and stable government bonds and commodities across the globe until Xmas 08.

    After that, who knows?

  • Comment number 26.


    Like everyone else I can't see anything other than widespread carnage to banking sector tomorrow, the shockwave will be ferocious. It isn't hard to imagine at least one major UK bank turning up it's toes, exposure to Lehman's may well be crippling when heaped on top of their already weakened state. It's certainly going to make a few tour operators going to the wall seem fairly trivial.

    How quickly things change. Excessive optimism was about the only thing for which Alistair Darling wasn't derided the other week, when he told The Guardian that the economic climate was arguably the most challenging for 60 years. Looks like Robert has raised him all the way back to the Great Depression, I wish I could say I thought he was wrong.

    There's only one problem with running to gold, you can't eat it.

  • Comment number 27.

    This is high stakes poker being played between the banks and the regulator.

    The UK High Street banks are in a relatively healthy position with a recent history of big profits and rights issues. The key question is who has exposure to Lehman Bros and how much?

    The difficulties in answering this question are:
    1. The exposure might be difficult to calculate given the nature of the financial products involved.
    2. The value of the underlying security for securitised assets are difficult to value anyway at the moment (difficult = painful)
    3. Bank stocks will plunge
    4. Given 3 any mark back to market will be painful
    5. Is the banking system a house of cards? Or to mix metaphors, is there a domino effect?

    I would suggest that a series of statements need to be issued to quantify the exposures to Lehmen by all the major players. The problem is silence will be taken as bad news.

    Forget particle accelerators the end of the world as we know it will come not with a big bang, but a banker's whimper.

  • Comment number 28.

    The US government has to back Lehman Brothers because no one can know the knock-on consequences of not backing it. The losses will be socialised one way or another and the debate about that should be held at another time. I've got little sympathy for bankers with huge bonuses but there's more at stake now.

    There is no reason why many companies will not have their loans called in as Lehman's black hole spreads and there is no reason why we won't see runs on banks starting. Who is going to risk lending to save them? Billions of dollars are going to disappear from the economy today! That is going to effect us all in a major way. This means jobs being lost overnight, more expensive mortgages and re-mortgaging, cut backs in public spending and retraction at a more rapid speed.

    Now it will happen anyway, but isn't it far better to have more time to prepare?

  • Comment number 29.

    The words "dominoes" and "ninepins" keep coming to mind.
    Who's next?
    All shareholders will need their valium tomorrow.
    See you all down the dole office?

  • Comment number 30.

    Peston's blog, Sept. 10th 2008:

    "But, for the avoidance of doubt, this firm (Lehman Bros.) is not bust nor seems in imminent danger of collapse."

    The old crystal ball looking a bit murky, Robert?

    Perhaps this merely highlights some of the problems that we face at the moment:

    1) Genuine financial crisis exacerbated by frantic newsmen seeking the next big 'scoop' while ignoring the effects that such speculation has on markets themselves.

    2) This leads to increased paranoia in the markets thus restricting confidence and increasing the likelihood of more failures such as this one.


    In the end, who pays? Not those at the top of Lehmans or Northern Rock who took fat bonuses while mismanaging companies. It is those who work at those companies at anything under senior management level, people with mortgages they wont't be able to pay now they're out of a job.

    And of course, the taxpayer - not the higher end taxpayer, just him or her who used to pay the 10p starting rate.

    And of course, those who have mortgages affected by this, or those who stood outside Northern Rock branches while Robert Peston was on BBC News telling us how satisfying it was to have broken the story.

  • Comment number 31.

    I've just had a look at the last quarters financial results for Lehmans and although woeful the stupid thing is they are well within their Basel II requirements for tier 1 capital. Which goes to prove that
    1. It's hard to value the assets of a bank properly with the result that you can make an insolvent bank look solvent. (I am not alleging Lehman's did this, just that it is easy to do both deliberately or by accident)
    2. The regulations are woefully inadequate because they address the "look of things" and not the substance.

    There have been banking collapses before and capitalism has survived. The difference is that in the past news and reaction took time. Instant information and reaction make this a more dangerous time to have a run on a banking system.

  • Comment number 32.

    What happened to the comment I posted twenty minutes ago? Is it being moderated?

  • Comment number 33.

    #2: 'Here's hoping Paulson sticks to his guns.

    It's totally unacceptable to privatize profits and socialize losses, and governments need to underline that businesses cannot be expected to be bailed out by the taxpayer if they fail.'

    Very true, and hopefully Paulson, the White House, and Congress(!!) will not lose their collective nerve.

    That being said, Lehman and company are not entirely at fault: Think of many legislative and regulatory twists and turns of the past thirty years, 'oversight' this and 'oversight' that...Congress, Fed, Treasury, SEC, the courts, etc., all need to 'fess up' to their role in this mess. I'm not holding my breath!

    We are owed as much of the bad news as can be published BEFORE the election, since whoever takes office, from the statehouse to the White House will have to govern in the most challenging economic environment since the late 1970's/early 1980's.

  • Comment number 34.

    It's so true that Lehman should not be subsidised. The finance industry has potrayed itself as masters of the universe with massive salaries (and smaller tax payments).

    It might have implications for the global banking system, but a shakedown is needed. Further bailouts encourage greed.

    Where was all the bailouts for manufacturing ? Their failures have profound impacts on local economies.

  • Comment number 35.

    Interesting that nobody has mentioned the culpability of the US Treasury and the Fed in creating the credit crisis - low interest rates and slack regulation of mortgages sold on the retail end is what has created a housing bubble and allowed non-creditworthy individuals to get mortgages.

    As a former Bear Stearns employee my heart goes out to all the Lehman staff. Especially the rank and file support staff like myself who don't have millions salted away somewhere.

  • Comment number 36.


    "At least when NR went under there was, and perhaps still remains, a prospect that the taxpayer will get their money back".

    I think that was true while it was simply repaying it's £27bn loan by agressively redeeming it's mortgage customwers, but I think its safe to say the additional £3bn, which is not repayable unless the companys value exceeds this amount at point of sale, if gone for ever.

    The value of NR, once all of the low risk borrowers have left will be considerably less that £3bn and riddled with default and negative equity. Also, from the looks of things, no other banks will have any money with which to buy whats left!

    Hindsight is a wonderful thing, but realistically, this bank should have been allowed to fail.

  • Comment number 37.

    Oi! Leave Canute out of it. He was actually a very wise ruler who was fed up with sycophants. The whole point of the tide thing was that he was demonstrating to them that he COULDN'T tell it to stop. He is a classic example of a good man who has been damaged by sloppy journalism. Who cares about the truth...


  • Comment number 38.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 39.

    It's about time your mug became 'Half FULL rather than Half EMPTY'.
    With all your talk of doom and gloom and despondency, which we have had to listen to for the past 12 months, YOU are talking us into recession, causing panic reactions by traders and misery for many.
    You have a responsibility to at least be positive at some point. Don't you realise how much influence the media, in particular the BBC have. Is your strategy one of job maintenance - the worse you can paint the picture the more air time you'll get ?
    For goodness sake be honest, admit that the last 10 years of Labour Government of low interest rates, over-inflated house prices created by people's greediness could never be sustained.
    BE POSITIVE now though. TALK things UP.

  • Comment number 40.

    Do we really need to have any sympathy for these banks? For years they have made huge profits and paid themselves massive bonuses. While at the same time thinking up new ways of making even more money. Yes if the banks and other financial institutions go bust it will effect us all. But perhaps that would be a good thing, we would rid ourselves of this over indulgent must have everything attitude. Perhaps the banks et al would then become a little more careful about what they did. If anything, this has shown us that the banks et al are completely unable to opperate with any degree of care and responsibility and that the regulators are just as hopeless.

  • Comment number 41.

    If you think this is the New World Order - you aint seen nothin' yet.



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