The Man Behind The Curtain

The smoke is clearing, the mirrors are breaking and the lies are spilling over the castle walls; the system might be just about to collapse on itself. For Lehman Brothers, a change has occurred since it last lied to the markets:

“The case in point was when Lehman told the market that it didn’t need to take write-downs and didn’t need to raise equity. The week after this announcement it fired its CFO and raised capital it said it didn’t need, in order to pay for write-downs it said it didn’t have. It shows the company’s inability to assess risk.”

Or more likely the company’s inability to tell the truth. But lies are the only weapon that remains to Lehmann Brothers, so it apes JP Morgan and Bear Sterns in concert with Barclays, only the the rumored buyout is a letdown:

Lehman Brothers Holdings Inc. fell to an eight-year low on speculation the fourth-biggest U.S. securities firm may be sold for less than its market value, traders said.

Lehman lost $2.44, or 11 percent, to $19.81 in New York, the lowest since May 2000. Options traders increased bets that Lehman will continue its retreat. Contracts conveying the right to sell the stock at $17.50 by July 18 more than doubled to $1.89.

The standard buyout rumor isn’t supposed to work out that way, and whether true or false, that activity in the options pits portend ominous things for the bank who’s CEO sits on the FED’s New York board of directors. If Barclay’s does buyout Lehman, it would put the bank in the role of Bear Stearns - proof positive the control is slipping from the clutches of the President’s Working Overtime Group of Plungers:

Richard Fuld, Lehman’s chief executive officer, said June 16 that the company didn’t need to be acquired.

“With this franchise, strength and power, we can go it alone,” Fuld said. “But I have also said that we are a public company and if there is another model, or more importantly someone comes forward that we believe can create more shareholder value than our model can create, I clearly have the obligation to take that to the board.”

Well that’s sweet, Dick, but Lehman’s share price has crashed 70% already this year and that kind of doublespeak isn’t going reassure anyone. Even an amoeba could see that if “you” could hold it up (you can’t) we would not be here in the teens.

If the buyout rumor is true, then how? How does a bank like Barclay’s with murky accounting and capital raising needs of of it’s own rescue the drowning Brothers Lehman? It could happen if the rescue were really of Barclay’s, ala JP Morgan and Bear Stearns. In that case, funds would be secretly slipped to Barclay’s in a manner which makes the taxpayer the ultimate loser. So, is this the rescue of Lehmann or of Barclays? You can answer that question if you know how many 15 to 17.50 July put contracts Richard Fuld and other Lehman brass are holding.

Barclay’s, being pursued by the former British colony Qutar, has takeover concerns of its own:

..,Barclays has secured a commitment from groups including so-called sovereign wealth fund the Qatari Investment Authority (QIA) to buy £4.5 billion worth of shares, with existing investors able to “claw back” up to £4 billion of the stock.

If investor demand is low, Barclays’ will still raise the full amount as it has effectively been underwritten by the shareholders leading the scheme.

If Barclay’s takes down Lehman Brothers, but is itself in the grasp of Qatar, then guess who owns the company who’s CEO sits on the FED of New York’s board of directors? Clue: no one on Wall Street.

Why do these two companies throw themselves in harms so obvious way? Because the alternative is stark, total collapse. The credit crisis is just beginning to harden, with alt-A and option ARMs default set to hit about the same time as the commercial real estate market crashes. The cash calls are getting harder to meet as investors are no longer willing to throw good money after bad. The blind beliefs in the FED and that the worst is behind us are being replaced by what was once unthinkable: investors and the general public are beginning to pay attention to the man behind the curtain.