So what can be said about the Lehman Brothers failure and the other dramatic events of the weekend?
Well, the system worked, as it was supposed to, at last.
When the US Government removed itself as buyer of last resort, no one in the financial world was prepared to extend a lifeline to Lehman, so it filed for Chapter 11 bankruptcy protection overnight for the parent.
The company said its largest unsecured creditors were Citibank N.A. and The Bank of New York Mellon Corp. in their roles as trustee on $US138 billion of bond debt.
The filing is by Lehman’s holding company and won’t include any of its subsidiaries. The bank listed $US639 billion of assets.
The Fed the Securities and Exchange Commission and regulators like our Reserve Bank moved to provide some sort of financial certainty that funds would be provided, liquidity maintained and to the best of their ability, life in the markets would continue as close to normal as possible, after taking into account the shock of Lehman’s failure.
All up nearly $US130 billion was pumped into financial markets in the US, Europe, britain and Australia. Our $1.3 billion was as a precuation, the $US43 billion by the ECB a precaution as well; the $US70 billion by the Fed a necessity to drive down the cost of money as liquidity evaporated for a time.
And it worked, shares were down, bond yields were down, but the system survived a very rough day.
As dramatic as the crash of 1987 was, the events of last weekend have seen the world financial system, and the most important part, the US, lurch towards the edge, but not fall over.
The US finance industry has been reshaped, as has stockbroking, with possibly more dramatic changes to come.
America’s huge advantage in the efficient recycling of capital has been mortally wounded, perhaps for decades to come unless new businesses arise from the ashes of Lehman Bros and in years to come.
A leviathan of US finance has been created in Bank of America, but it has to be said for how long, seeing how its bought a crippled investment bank in Merrill Lynch and earlier had purchased a dodgy mortgage operator in Countrywide Financial Services.
US regulators made sure the trading arm for securities and other deals was separated from the bankruptcy, a point Lehman made in its announcement, just after Midnight Sunday, New York time.
"None of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings, LLC, may continue to trade or take other actions with respect to their accounts.
"The Board of Directors of LBHI authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value. In conjunction with the filing, LBHI intends to file a variety of first day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.
LBHI is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division ("IMD"). LBHI intends to pursue those discussions as well as a number of other strategic alternatives.
"Neuberger Berman, LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of its parent, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and are not subject to the claims of Lehman Brothers Holdings’ creditors."
That might be well and good, but for all intents and purposes, Lehman is busted and the customers are free to sell, get their cash and or securities and go elsewhere, which they will and which should happen in a free enterprise system.
Lehman made it clear it was still trying to sell parts of itself, even though mooted buyers vanished over the weekend, with the Bank of America opting to snaffle troubled Merrill Lynch for a reported $US50 billion worth of shares (It was $US100 billion a year ago).
That was a huge premium to Friday’s close, but you can be generous when it’s shareholders paper you are using, not cold hard cash!
Bank of America’s bid for Merrill smacked of opportunism, but as the old cliché goes, fortune favours the bold.
The Fed changed the rules on just what security it will accept for loans to primary dealers (investment banks) which effectively means any bit of investment grade debt or preferred type security. Not shares, though.
A group of 10 big banks, including Merrill Lynch pledged $US50 billion ($US70 billion) in a liquidity pool to support other vulnerable institutions, such as Washington Mutual perhaps. The big US Savings and Loan is under pressure to survive.
But what we can be assured is that the face of world financial markets has changed.
At the start of the year there were five independent US investment banks, and Fannie Mae and Freddie Mac were operating in the netherworld of neither being fully government owned, but fully private.
Now only Goldman Sachs and Morgan Stanley are independent investment banks. They report this week.
Bear Stearns and Lehman are gone, Merrill Lynch rescued, Fannie and Freddie in the arm
