It’s been widely reported that Timothy Geithner (the President of the New York Fed) summoned a group of Wall St. and banking CEOs to a pow-wow in lower Manhattan on Friday evening, with Treasury Secretary Paulson in attendance.
The subject: Lehman Brothers, the 158-year-old investment bank which is in dire need of new capital, partly because of losses in its large portfolio of commercial (not residential) real-estate investments.
Reports have it that Geithner essentially told the assembled CEOs that they would have to find some way to resolve the situation, possibly by hammering out a plan to buy up Lehman’s assets. You may recall that Geithner’s predecessor Bill McDonough did something very similar, almost ten years ago to the day, resulting in a partnership that took over the Long-Term Capital Management hedge fund.
In 1998, the only thing the Fed paid for was coffee and sandwiches. (They hosted the meetings so they would be held on neutral turf.)
Today, given both the precedent of the Bear Stearns collapse, and the fact that Fed discount-window lending is now available to Wall St. firms, it’s by no means certain that the Fed and/or the Treasury won’t be partners in whatever deal emerges for Lehman Brothers this weekend. As with Bear Stearns, any government participation would most likely involve the guarantee of investments or derivatives that are illiquid, hard-to-understand, of questionable credit quality, or all of the above.
Several times in the last few days, Secretary Paulson got out his daddy face (which is darned intimidating, let me tell you) and said that the government will not commit any public funds to guarantee any part of Lehman Brothers.
That’s a very good position to take, because we’ve been bailing out one thing after another this year, and it has to stop sometime.
Right here would be a great place to draw a line in the sand. We don’t really need Lehman Brothers to survive in its current form, 158 years of history or not.
The biggest problem with Paulson and Geithner’s position is that they don’t have a lot of leverage. Lehman’s competitors would be perfectly happy to see Lehman (and their CEO, Richard Fuld, who has been faulted for not addressing the problems long ago) go the way of Bear Stearns.
Unfortunately, I think Paulson is going to blink. It’s going to be yet another interesting weekend in finance-land.
-Francis Cianfrocca
Moe Lane
Steve Maley
Dan McLaughlin
Neil Stevens
Daniel Horowitz
Where's the signup
tvjohn2 Saturday, September 13th at 2:25PM EST (link)I have a lot of student loans I just don’t feel like paying anymore. Where’s the list for a government bailout?
I hope Hank takes the weekend off.
MrSandman (Diary) Saturday, September 13th at 3:01PM EST (link)This FT article really sums it quite nicely I think. The British are adept at “twisting the knife” when appropriate.
http://www.ft.com/cms/s/0/591cec72-7f54-11dd-a3da-000077b07658.html
The line has to be drawn with Lehman.
Did anyone else see Nourini on Bloomberg yesterday?
“At least a trillion dollars.”??!!
It’s all fun and games until the FDIC needs to get bailed out.
http://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Says%20U.S.%20at%20Start%20of%20%60Very%20Severe%27%20Bank%20Crisis&clipSRC=mms://media2.bloomberg.com/cache/vmUV7PR4JGX8.asf
“Americans can no longer trust the economic information they are getting from this Administration.”
— Republican Senator Jim DeMint
Gah...
MrSandman (Diary) Saturday, September 13th at 3:02PM EST (link)Roubini…
“Americans can no longer trust the economic information they are getting from this Administration.”
— Republican Senator Jim DeMint
Duh....
MrSandman (Diary) Saturday, September 13th at 3:03PM EST (link)Roubini…
“Americans can no longer trust the economic information they are getting from this Administration.”
— Republican Senator Jim DeMint
I don't see the Fed inevitability on this one Blackie
Marcus_Traianus (Diary) Saturday, September 13th at 3:06PM EST (link)As characterized this is a poker match. You have BOA and Barcap on one side, Fed on the other; Lehman’s just watching the game. Remember, it’s our money in the pot and I am not certain most folks don’t want to just fold at this point.
No doubt, Lehman plays a critical market role but I don’t see Bear type stakes here.
BoA and Barcap could really use Lehman, in part or whole, it would be an excellent complement to existing business lines. But it comes saddled with some of their portfolio which, like most others, has very questionable value. In my mind, that is the risk of the ride; I say take it and turn it. The rest of Lehman has so much inherint value when the market returns, it is well worth it.
I have said before, perdurable growth in MBS probably starts in late spring. THe market probably starts getting more liquidity next fall. They wouldn’t even have those Lehman businesses integrated by then. At the right price, if I am BoA or Barcap, I am buying.
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
And then comes GM & Ford.
mbecker908 (Diary) Saturday, September 13th at 3:09PM EST (link):>(-
Pelosi loves the idea of bailing out the car/motors industry.
Rod_Patrick (Diary) Saturday, September 13th at 3:11PM EST (link)Paulson likes birds but he loves snakes
Francis Cianfrocca (Diary) Saturday, September 13th at 4:22PM EST (link)And don’t take Nouriel Roubini at face value.
Policymakers must understand
Adjoran (Diary) Saturday, September 13th at 4:26PM EST (link)that in most cases, this one included, the best course of action is none at all. Coffee and sandwiches would be acceptable, though.
In the longer run, this is how the markets correct themselves. Those who go crazy during the booms with irresponsible commitments get sold for parts when things tighten up. This squeezes out not only the bad business, but many of the bad businessmen.
Intervention to “save” failed enterprises with taxpayer money not only leaves their inefficiencies dragging down the overall economy, but encourages others similarly situated to take unwise risks (by holding out the possibility of a bailout for them, too, when it all blows up in their faces).
Let Lehmann die, if Lehmann must die, and leave the rotting carcass in the middle of Wall Street as a warning to others.
If I'm BofA, I'm still digesting Countrywide.
Francis Cianfrocca (Diary) Saturday, September 13th at 4:27PM EST (link)If I’m either BofA or Barclay’s (or Deutsche, or Nomura, or any of the others that have been mentioned), I’m very interested in buying the asset-management business. And I’m also very interested in spinning the commercial real-estate out into a separate entity (the “bad bank” that Fuld’s people have been talking about), and sticking someone else with it.
Whether Paulson ends up taking this trade obviously depends on how bad he wants the mess to be cleaned up. I’m still betting that he will fold, but it’s not a bad bet that he won’t.
Perdurable growth in MBS with liquidity to follow six months later? I’m not following that. Are you thinking that there will be a recovery of MBS issuance because of pent-up demand? Or are you thinking about prices in the secondary market?
MBS, Blackie
Marcus_Traianus (Diary) Saturday, September 13th at 5:10PM EST (link)I still see significant MBS trading in the secondary market. Most of that was flight to quality but now seems to be some folks making bets on better future valuations.
That makes me suspect that some traders are at least thinking about potential, sustained (but slow) growth. Real estate appears to be at bottom and by spring rates will be attractive. That could be a good spark for some new issuance and help improve overall value. Their is some thirst for new issues since the current feeling is quality will be good and valuation more accurate.
The credit guys I speak to are already looking for limited, high quality ways to achieve growth. Three months ago that was not even a thought in their minds.
If jobs stabilize and the dollar continues to slowly rise I think the end is in reach.
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
I'm actually hearing a lot of the same stuff
Francis Cianfrocca (Diary) Saturday, September 13th at 5:42PM EST (link)I was really kind of surprised by how quickly the bloom came off the rose last Tuesday, however, after the big rally in MBS over the weekend. I think the interbank lending market still needs to do a lot of healing. I also think that so many financial institutions out there have to do so much balance sheet repair that they’ll be very slow to come back into demanding new credits.
I also think that official demand for MBS may soften a lot, and that has been a lot of the demand.
The real bottom line, however, is in the real-world economy. And as long as credit remains tight (even if it is in a long-term uptrend), growth will remain anemic.
After Bear Stearns (aptly, BS), I don't believe anything coming out of Wall Street anymore,
streetwise (Diary) Saturday, September 13th at 10:10PM EST (link)so Lehman being on the precipice after claiming they were making progress on their liquidity does not surprise.
BTW, I was reading an article on Paulson in Bloomberg today which says he really likes to wheel and deal on the weekend becuase many people in NY and DC are out of town and it lessens resistance!
ahem [clears throat]...
Bill S (Diary) Saturday, September 13th at 10:55PM EST (link)“It’s such a fine line between stupid, and clever.” – David St. Hubbins
Small potatoes
Palin_Dealundecided_undecided Saturday, September 13th at 11:56PM EST (link)Wait till Washington Mutual hits the fan.
I used to be a proud republican. I’m not sure what they stand for anymore.
This is worthy of at least a brief response
Francis Cianfrocca (Diary) Sunday, September 14th at 4:51AM EST (link)We’ve been struggling through an extraordinary time. The dynamics of financial crises are as well-known from history as rainfall, but the specifics of this one are quite unusual. (It would be an interesting, but long, conversation to tell you why I think so.)
What the Federal Reserve and the Treasury are trying to avoid at all costs, is systemic disruptions to the payments system that underlies all economic activity. To put it baldly, if they take a misstep in handling any of the crises that have rumbled through the system like hurricanes, your paycheck might not get cashed, and I’m not exaggerating.
One of the things that make the job complicated is that the payments system (which, to oversimplify greatly, consists of the procedures and data-infrastructure through which depository institutions settle their accounts with each other every night) has become deeply intertwined with the rest of the financial world.
That’s why Bear Stearns, which like Lehman Brothers, was an investment bank and not a depository institution at all, couldn’t be allowed to fail.
It has nothing to do with being a Republican or a Democrat.
whoops :>) didn't think about that! nt
streetwise (Diary) Sunday, September 14th at 12:19PM EST (link)I'm too big to fail
enrique Sunday, September 14th at 2:22PM EST (link)Without a doubt, with my car loan, student loans, and two mortgages a disruption in my credit would cause potentially cataclysmic repercussions throughout the financial markets.
I have become leveraged to the hilt because of low interest rates and interest only mortgages. I have seen a stock market that has been virtually flat for eight years and with inflation I see no reason to save. Therefore I spend.
I have become too big to fail. Please bail me out. Heck, what company isn’t too big to fail? Everyone says we’re walking on egg shells and one false move will bring the whole thing to a grinding stop.
If so, then it was meant to fail and we are just leveraging my children’s future away for some even bigger collapse ten, twenty years from now.
“There are a thousand hacking at the branches of evil to one striking at the root.” Henry David Thoreau
How about if we took this a step further?
bk (Diary) Sunday, September 14th at 2:32PM EST (link)We have a ton of debt to China. Let’s just tell them we can’t afford it and they need to forgive it, since we refuse to pay up.
It looks like Barclay's and BOA walked...
MrSandman (Diary) Sunday, September 14th at 6:51PM EST (link)…and Lehman is going down.
http://dealbook.blogs.nytimes.com/2008/09/14/lehman-to-file-for-bankruptcy-protection/
BOA+Merrill = Shotgun marriage??
http://online.wsj.com/article/SB122142278543033525.html
$29!! Somebody is getting juicy juiced at that price. If I were a BOA shareholder I’d be SCREAMING.
“Americans can no longer trust the economic information they are getting from this Administration.”
— Republican Senator Jim DeMint