Losing Lehman

Surely Richard Dick Flud never thought it would end this way when he took control of Lehman Brothers, more than 40 years ago. Men who believe they deserve to tell roughly 24,000 people what to do for their living don't usually possess such fatalistic visions. And so, what a shock to the core beliefs and hard wired psychology, the past frantic weekend must have been.

The weekend, which was to be Lehman Brothers last began shortly after the market closed on Friday night at the Federal Reserve building in New York were Dick Flud holds a seat. But for a government populated by business leaders anxious to polish their badly tarnished public image, it was the one time Dick Fulds connections worked to his detriment at the one time he needed them most.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.
The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

As if running from predators, Lehman Brothers began the frantic search for a buyer. Acting now as Both predator and prey, Lehman focused first on Barclays, then Bank of America, even as Merrill Lynch did the same. Could Richard have been shocked to find that no one wanted the grade AAA junk that Lehman had overnight become? Bank of America wanted no part, but the repercussions were still significant. The Lehman Brothers overture was the one thing it took to break Merrill's will.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

Thain probably calculated correctly, as Lehman Brothers opened in the pennies, it's almost sure that Merrill's stock would have traded down to single digits. So, Lehmans overture forced Merrill's hand, which John Thain, played brilliantly, but it didn't help Lehman Brothers a bit. By Sunday, the writing was on the wall, Barclays, citing all the polite, appropriate reasons, pulled out and Lehman Brothers went down like a ship slipping under the waves.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman’s fate with government officials.

The truth is that no one besides perhaps the Fed's The Primary Dealer Credit Facility (PDCF) window would want the junk the was now revealed to be Lehman Brothers. So, when the turmoil subsided, Merrill belonged to Bank of America and Lehman Brothers the history books.

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.
The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

Humbling, ironic and perhaps justified. If you can remember the crisis arose from defaulting debt which Lehman Brothers expected to be able to remove from their own balance sheet onto someone else’s. So, in thinking they were poisoning others, they gorged themselves on the toxic fruit of their own just desserts. But on Wall Street where a scam is always in the heart the hustle never ends, so even as treasury secretary Paulson said there would be no government bail out, the Fed opened windows wide.

The Primary Dealer Credit Facility (PDCF) is the lie.

The PDCF is a government sponsored swap of funding for crappy collateral that broker dealers are holding. If and when the Fed swaps cash or treasuries for crappy not marked to market collateral, the Fed is at risk. While it is true that the Fed may be able to cover its loan by selling the assets, the odds are long against it.

The reality is that the Fed is acting as pawn broker with one huge difference. A normal pawnbroker does not pay out at fair value and especially does not pay out at above fair value. The Fed does. And this puts the Fed at risk.

When the Fed is at risk, the taxpayer is at risk.

But for Lehman Brothers it never could never have made a difference. Where sharks swim, they swarm and since the take down of Bear Stearns they have swarmed all over Lehman Brothers. With the body of Bear Stearns still warm the hunt was on for Lehman Brothers. They never got the bailouts that Goldman Sachs and Morgan did, Paulson probably made sure of that.

It’s deja vu all over again as again the bears are all over the scent of Lehman Brothers’ blood. Back in March, just after Bear Stearns was gutted, it was Lehman Brothers who saw the deadly volatility spike on their puts

The world-wide Ponzi scheme is coming apart at the seams. Lehman Brothers was walking the Green Mile in March only to have that mile lengthened, but they are still a dead man walking nonetheless. We have yet to see how much farther it has to go, but it will certainly end.

It certainly did! The crash coming like a hurtful shock, like the news that someone you know, drove at full speed into a wall. In this sub prime the good times the company made billions and Fuld's options came into the money as his bonuses skyrocketed. Even the rank-and-file employees prospered beyond all reasonable expectation. They never expected this!

Distraught Lehman Brothers workers - some carrying boxes filled with personal possessions - continued to abandon ship after the famed investment filed for bankruptcy.
"We thought we'd come here Monday morning with jobs and a new owner," said 39-year-old Leslee Gelber. "This is a complete shock. I have absolutely no job prospects. This is horrible."

To Flud losing Lehman meant losing his job, his position, worst of all his power, but not his riches. The  rest of us watching Lehman's fall over the long weekend night can see it as a microcosm of the credit crisis in general, that our economy is worst off, and always will be, that together we have lost something that can never be replaced .

Lehman's employees just as the rank and file rest of us worked hard, dedicated they sacrificed much for their pay scale. Many considered their jobs careers, were loyal and had their retirement tied up in the company stock, for a time their loyalty and service were both highly rewarded with them becoming acclimated to vigorous service and leisure and living well, even if off the scraps of Lehman's elites. They would have never thought to plan for the overnight collapse of their company, their way of life, they were trapped. Lehman Brothers collapsed at the onset of the credit crisis, careers and jobs lost there will likely not be replaced in a lifetime. So as upper management and upper middle management move into the unemployment lines they do so knowing they have lost far more than just a job or career, they have lost their lifestyles and they will never have those ones again. It would be as if you lived in the Emerald City and going out to play in the enchanted forest, you forgot your key. Now the life you loved is locked behind a door slammed shut and you know that you will never hold that key again.