Is the economic collapse just bad timing or a planned event to prevent history from being made?
Lehman Brothers Files for Chapter 11 Bankruptcy
Lehman Brothers filed for bankruptcy protection, but the Chapter 11 filing does not include its broker-dealer operations and other units, including Neuberger Berman.
Lehman is looking at selling its broker-dealer operations, and is still in advanced discussions with a number of potential buyers of its investment management division.
Bankruptcy represents the end of a 158-year old company that survived world wars and the collapse of Long-Term Capital Management but could not survive the global credit crunch.
Investors in recent weeks had grown increasingly jittery about Lehman's $46 billion of mortgages and asset-backed securities, as well as its credit rating and its ability to raise capital.
Officials at the Federal Reserve and U.S. Treasury are taking steps to mitigate risk to the system and assure the orderly functioning of the U.S. markets when they open Monday. And the Federal Reserve has also agreed to accept lower-quality assets in return for loans from the government.
Banks Set up $70 Billion Borrowing Facility
Additionally, ten Wall Street banks have agreed to set up a collateralized borrowing facility, and committed to fund for $7 billion each.
* Federal Reserve Statement on Lehman Brothers
* Bank Deposits: What's Insured, What's Not
The banks are Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS. These banks have said they are committed to fund $7 billion each for a $70 billion collateralized borrowing facility.
The banks add that they are working together to assist in maximizing market liquidity through ongoing trading relationships, dealer credit terms and capital committed to markets. This will also facilitate the orderly resolution of OTC derivatives exposures between Lehman and its counterparties.
All ten banks say they intend to use expanded federal reserve primary dealers credit facility this week. The banks say their actions reflect "extraordinary market environment".
Wall Street Prepares for Grim Monday
Wall Street traders headed back to their offices Sunday afternoon to prepare for the market impact of a pre-package bankruptcy and the unwinding of Lehman's balance sheet of approximately $700 million.
One Wall Street trader involved in the discussions with officials from the Federal Reserve said every firm had determined their exposure to Lehman by Sunday morning, and were preparing for some Federal assistance in unwinding the trades.
But officials from the Fed said they won't be involved in any such unwind — they told the Wall Street firms to work among themselves to determine how best to settle trades with Lehman. (For more discussion of the Lehman situation, see video).
Bank of America sent a note to derivatives traders Sunday saying "Banks, brokers started netting Lehman trades from 2 p.m. today … trades netted are contingent on Lehman bankruptcy by midnight." The note continued "If no Lehman bankruptcy, netting of trades to be cancelled," meaning Bank of America's assumption of Lehman’s side of trades would end.
"It’s a way of lessening the pressure before Wall Street opens up tomorrow. The more they can reduce the total brokerage book for Lehman, the less heart-ache there will be for counterparties if Lehman files," Carlos Mendez, senior managing director of ICP Capital in New York.
The International Swaps and Derivatives Association called a special session from 2 p.m. to 4 p.m. but traders said that was purely symbolic. They intended to trade through the night.
The cost of insuring the bonds of investment bankers blew out in trading on Sunday.
Barclays Pulls Out
Earlier in the day, the United Kingdom's Barclays Bank pulled out of talks to buy Lehman. Barclays, which was considered the lead candidate to buy Lehman, reportedly was unable to agree on credit guarantees to shield them from potential losses.
The Fall of Lehman Brothers
* Fed Braces Markets for Financial Storm
* POLL: What Should the Fed Do?
* Lehman's Asia Staff Sit and Wait
* Lehman CEO's Star Fades
* Fed's Statement on Lehman
* BofA Buys Merrill for $29 a Share
* AIG Reaches Out to Fed
* Farrell: Parsing the Faltering Financials
* Paulson's Statement on Markets
Top Wall Street executives arrived Sunday morning for another round of talks to resolve the Lehman crisis, and sources said the group continued to work on how to handle the possibility of a deal not getting done before Monday.
By mid-morning, Federal Reserve Chairman Ben Bernanke was said to have been involved in several conversations by phone from Washington with officials meeting at the New York Federal Reserve. In addition, Bernanke was said to have made several calls already to foreign central bankers who are monitoring the proceedings carefully.
New York Federal Reserve President Tim Geithner and Treasury Secretary Hank Paulson were already at the New York Fed by the time executives from top Wall Street firms began to arrive.
Work went on through the night on a deal drafted Saturday to have a consortium of banks backstop Lehman's bad assets and sell off the rest of the bank to Bank of America and Barclays. But sources said key parts of the deal remained controversial Sunday morning. As reported, the banks backstopping the bad loans were said to be balking at the amount of capital required of the banks and the sense that they were supporting a good deal for Barclays and Bank of America.
The larger group has been broken up into several working groups to devise responses to different possible outcomes. Among those, how markets can prepare for the possibility that Lehman might not find a buyer before Monday.