Forced Sale Of Lehman Brothers Likely; Federal Reserve, Treasury Involved In Talks
Unable to overcome mounting losses on subprime-rated mortgages, one of the oldest and most revered names on Wall Street apparently is on a desperate track to find a buyer. Among the reported suitors for Lehman Brothers Holdings: Bank of America, Deutsche Bank AG, JC Flowers & Co. and Barclays.
The past three months have been brutal for Lehman. The nation’s fourth-largest investment bank has seen its shares fall more than 80 percent, along with a record $3.9 billion third-quarter loss in September and $5.6 billion of write downs.
Lehman’s future outlook took yet another hit on Sept. 11 when Moody’s Investor Service announced plans to downgrade the long-term debt rating on the 158-year-old investment bank if it did not have a “strategic arrangement” in place for a buyer or links with a stronger financial partner. A downgrade not only would increase Lehman’s borrowing costs, but also could cause other institutions and partners to become leery of doing business with the firm.
That’s exactly what occurred in the case of Bear Stearns, which collapsed in March after clients and vendors abandoned the 85-year-old investment firm on the belief it had become financially insolvent. The Federal Reserve eventually stepped in to orchestrate a deal with JPMorgan Chase to buy the company.
Following the Bears Stearns bail out, the Federal Reserve opened up a lending facility that gave Wall Street investment banks access to a quick source of cash. In exchange for 28-day loans of Treasury securities, companies temporarily use certain assets - including mortgage-backed securities, asset-backed securities and collateralized loan obligations - as collateral.
Critics of the Fed’s lending facility say it undermines the incentive for investment firms to maintain liquidity buffers and instead encourages them to take additional risks because of the belief that the government will come to the rescue if things go wrong.
And apparently that may be the case for Lehman Brothers. As reported Sept. 12 in the Washington Post, both the Federal Reserve and the U.S. Treasury Department are actively involved in finding a buyer for the troubled firm and expect a deal to be in place by the end of this weekend. Several potential scenarios reportedly are under consideration, including selling various divisions of Lehman to multiple buyers.
News of the government’s behind-the-scenes involvement with Lehman Brothers comes less than a week after Treasury Secretary Henry Paulson announced the takeover of Fannie Mae and Freddie Mac and five months after federal regulators arranged the sale of Bear Stearns to J.P. Morgan Chase.
Meanwhile, with news of a forced sale of Lehman Brothers becoming a more likely reality, investors are left to watch the value of their stock evaporate by the hour, and employees of Lehman anxiously wait for word on their future fate.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
