Lehman; Another Investment Bank in Dire Straits

From the WSJ tonight:

The outlines of plans to determine the fate of Lehman Brothers Holdings Inc. emerged today even as it became increasingly clear that a clean sale of the entire firm to a big bank would be too difficult to execute.  A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street. Executives from top banks in the U.S. and Europe huddled with federal regulators in an attempt to come up with plans to either buy pieces of Lehman or prepare for an orderly winding down of the firm in a manner that would minimize the collateral damage for the ailing global financial system. After 6 p.m., the formal meeting ended for the day with no resolution

Barclays and Bank of America were named as showing interest in purchasing parts of Lehmnan but neither wants to buy all of Lehman without some form of government help and so far the government has been reluctant to offer any assistance.

There is fear that fire-sale prices of what’s on Lehman’s real estate book could spark a problems for more Wall Street firms as they are forced to admit the street price of their assets.

Here is an actual ad posted on craigslist today, hat tip Dick from the CR comments:

Lehman Brothers (Midtown West)

Reply to: sale-837736866@craigslist.org
Date: 2008-09-12, 10:18AM EDT 

Hey guys — I’m looking to get rid of my investment bank. Nice assets. Slightly beleaguered. Will consider trades. Ask for Richard.

it’s NOT ok to contact this poster with services or other commercial interests

PostingID: 837736866

Sunday and Monday should be interesting. Anyone betting on a emergency rate cut?

150 thoughts on “Lehman; Another Investment Bank in Dire Straits

  1. From the FT. Talks will continue tomorrow:

    “Saturday Sep 13 2008 20:20
    Talks among key players in discussions to rescue Lehman Brothers (NYSE:LEH) , the embattled financial group, adjourned early on Saturday evening but expert groups of Wall Street division chiefs, Fed and Treasury officials continued to work late into the evening, focused on different dimensions of market stability.

    These included basic operations; credit markets; derivatives markets including the credit default swaps market; payment systems; and the repo market. Each group was understood to be examining multiple scenarios, including a takeover of Lehman with or without Wall Street backing for its troubled loan portfolio, a partial sale of Lehman, or no sale at all.

    The principals in the talks were set to resume discussion on Sunday morning.”

    http://us.ft.com/ftgateway/ super…320082127060185

  2. Jillayne, there’s been lots of chatter about WaMU too…I think Blown Mortgage covered them today or yesterday. What times we live in.

    One of my good friends who works for a large mortgage bank (not WaMU) asked if I wouldn’t feel more secure working at a bank…you can guess my answer.

  3. Via CR -JP Morgan and WAMU are having high-level chats about Morgan buying them.

    I don’t think all this pending consolidation will be good for the consumer when all is said and done.

    I’m keeping my WAMU account balance low these days!

  4. biliruben, I am too! I’ve opened a second account at a credit union where I’ve been transfering balances to. When I first went to WAMU to get a cashiers check (several weeks ago) the manager assured me my funds were safe, etc. … I never said anything to the manager on why I was pulling my funds, nor did he ask me. He just assumed.

  5. Biliruben wrote

    “Via CR -JP Morgan and WAMU are having high-level chats about Morgan buying them.”

    That was just rumors. Hedge funds justifying their shorts. JPM was in talks back in June, but they lost out to the JPM deal.

  6. Biliruben wrote

    “Via CR -JP Morgan and WAMU are having high-level chats about Morgan buying them.”

    That was just rumors. Hedge funds justifying their shorts. JPM was in talks back in June, but they lost out to the TPG deal.

  7. Rhonda wrote:

    “biliruben, I am too! I’ve opened a second account at a credit union where I’ve been transfering balances to. When I first went to WAMU to get a cashiers check (several weeks ago) the manager assured me my funds were safe, etc. … I never said anything to the manager on why I was pulling my funds, nor did he ask me. He just assumed.”

    Reassurance just gets people more skittish. WM employees should just go on doing business as usual. Unfortunately, consumers don’t understand the headlines and it’s a lot easier to just take the money and run.

  8. Ultimately, Lehman will be forced to declare bankruptcy and will be liquidated – that of course assumes our socialist government doesn’t step in and bail out Lehman. A Lehman bankruptcy is good for the market in the long term. It reinforces the way the free markets work – make a stupid bet and lose, lose your shirt. This is a lesson greedy Lehman executives, managers, investors and employees need to learn after making out like bandits helping to create the largest credit bubble in history..

  9. Dead dead dead: LEH, WM, AIG, WB, C, JPM, MS, GM, F, CORS, dozens of regional banks, probably GS, BAC, and WFC, too. ALL GONERS, FOLKS.

    A REALTOR® told me that “Real estate only goes up!”

    Also, “Buy now or be priced out forever.” Forever! That’s a long time.

    Thank you, REALTOR®s, for doing your little part to blow this bubble sky high so we all can enjoy sweet systemic risk. You were the foot-soldiers in this mess. You sold the dirt for your lousy six-percent. You looked the other way as people took on leveraged debt. You saw HELOCs as smart money-management. You thought zero-down was a great way to go.

    I hope you at least bought some index puts so you can enjoy the fireworks.

    Bubble. Heads. Win. Told you so, told you so, told you so …

  10. I don’t blame the realtors for this mess. EVERYONE was in on it, from the pension funds looking for high-yielding investments and first-time buyers excited about getting rich as their home appreciates.

    It only stands to reason that we now will ALL pay the price.

    Only 2 of the last big four investment banks now survive (there were 5 before Bear went bust). I completely agree with Roubini’s assessment that none of the IBs will survive. Unfortunately, this won’t stop there. CitiGroup, WaMu, Wachovia, and other lenders are in big trouble too. Heck, even “healthy” banks like Wells Fargo have been playing loose with their books, and have plenty of skeletons in the closet (i.e. Wells has barely written down any of their HUGE HELOC portfolio which is clearly under massive stress).

    My prediction of 80% or better median price drops is looking more realistic all the time.

  11. Just home from seeing “Burn After Reading.”

    Someone in the CR comments said Bob Brinker from MoneyTalk told listeners to get their money out of WaMu. It was pre-empted here due to the SeaHawks game. Can anyone confirm that?


  12. It is pretty much everybody’s fault abandoning sound financial due diligence for failing to understand risk and reward. When the interest rates were very low, investors and brokers failed to include enough risk premium.

    “Do you think this duplex (apartment building, retail, shopping center) is pretty?

  13. What’s somewhat amazing to me is that none of these big corporations had sufficient controls in place to limit risk. When you look at some of the major implosions (e.g. Arthur Anderson, Enron) or financial disasters (e.g. Los Angeles County and one bank I don’t recall with a rouge trader) you’d think they’d realize that big entities sometimes go bust and put systems in place to prevent or reduce the chance of that happening.

    And you could put part of the blame on government too. Mergers are risky transactions, because the acquiring company often doesn’t know what exactly it’s getting. Since the government insures depositors, I don’t think it would be unreasonable to limit or even prohibit mergers of banks, absent perhaps a bank in trouble as part of winding it up. I’m not sure how many banks WAMU has gobbled up in the past 15-20 years, but if they hadn’t done so they wouldn’t be in trouble now, and probably over half the ones they gobbled up wouldn’t be in trouble.

  14. If someone were to ask me last Dec which banks would go first I would never have guessed Lehman or Merrill before “Wam-Mu.”

    Funny how a little known bank from Seattle has been able to outlast the big guns from NY. Who is next? Goldman, Morgan, Citi, Wacho? Any guesses out there?

  15. Q-diddy wrote: “If someone were to ask me last Dec which banks would go first I would never have guessed Lehman or Merrill before “Wam-Mu.

  16. Hi Q-diddy,

    I would have never guessed that it would have been Fannie and Freddie before some of the large commercial banks or state-chartered banks. I guess the accounting problems that we thought were under control at F&F were being stoked along until it was clear that the gov would take control.

  17. I’m in serious WaMu denial. Let’s agree to call it an emotional problem due to the inability to accept the possible loss of a bank where I had my first passbook savings account as a child in downtown Everett. I can still remember my dad walking me in the door of that big building with rounded glass on the front (I’m sure it was only one story but everything seems big when you’re so small.)

    I can remember walking up to the counter with a quarter and having my dad lift me up in order to hand it to the bank teller to make a deposit. I think I still have my passbook somewhere. I have had an account at WaMu ever since and even worked there as a bank teller when I was 19. My daughters both have WaMu school savings accounts

    I’m sure my small little WaMu memory is nothing compared to what some WaMu employees are feeling right now as they watch the value of the stock inside their retirement account slowly dwindle.

    My heart goes out to anyone who is effected by these huge stock haircuts.

    Think about all the retired folks on limited fixed income who might have had Fanne, Freddie and WaMu stock in their portfolio.

    Yes there’s risk, yes we should have a balanced portfolio, but it still hurts.

  18. From the P-I article on Lehman: “There was a plan in place to sell a majority stake in its investment management business, . . ..”

    Wouldn’t that be sort of like the old Yugo car company selling off it’s automobile design unit? 😀

  19. I think Jillayne’s emotional attachement to WaMu highlights one of the biggest contributors to this whole mess. The difficulty to separate emotions from interpreting economic information and make financial decisions that should be based on data and logic. It’s such a good example because what I’ve seen earlier Jillayne is one of the best I’ve seen on this blog to do just that but I guess everyone is susceptible to some degree. With that said, Jillayne please ensure that your accounts in WaMu are within FDIC limits and that you have a backup plan to access money should things go bad.

  20. TJ-

    I agree with what you say, but I think consumers don’t know enough about how things work to make the best decision. All else being equal, the easiest thing to do is take the money and run. Hopefully, the WaMus of the world can do something to curtail that.

    5.00% 12 month CD anyone?

  21. Jillayne wrote:

    “My heart goes out to anyone who is effected by these huge stock haircuts”

    A stock price depreciation is not a haircut in the financial sense. It’s what it is – a loss.

  22. DudeMyCDO Imploded wrote:

    “Ultimately, Lehman will be forced to declare bankruptcy and will be liquidated”

    Lehman filed for Chapter 11. That’s reorganization not liquidation. Chapter 7 is liquidation.

  23. Hi TJ, Thank you for your kind words. My accounts are not over the FDIC limit.

    Moving my accounts to another bank is grounded in emotion as well as logic. I have a merchant account set up with my WaMu business account. I’m not so sure that I want to go through the time and energy to re-establish new banking relationships. I like all the people at the WaMu branches who’ve helped me over the years. If they are taken over by another big bank, then I’ll just use that new bank. I need a bank that I can find in multiple states. This means either, what: Wells Fargo or BOA?

    I think I’ll wait and see what happens. Thanks for the reminder of a backup plan.

  24. Jillayne-

    Ken Lewis said this morning he’s not buying WaMu. He’s still trying to digest Countrywide and Merrill.

    If and when WaMu is acquired, you’ll most likely bank with the same people at the stores. People in the front lines are not usually affected.

  25. Kary said, “What’s somewhat amazing to me is that none of these big corporations had sufficient controls in place to limit risk.”

    That’s not true. Everyone was “hedged”. When they took these positions in CDOs or MBS tranches or other derivatives, they purchased credit-default swaps of one kind or another to protect themselves. CDS are over-the-counter and unregulated — there is no OCC, for example in standardized options, guaranteeing transactions.

    But what happens when your insurer can’t cover the claim? What happens if he’s geared up on leverage, and made the same bet that “RE only goes up!”

    Then you have cascading defaults. You have systemic risk. You have Lehman and AIG, and the rest of the doomed IBs.

    Citibank has $1T+ classified as “level 3” assets, valued according to Citibank’s opinion of their worth. What do you think the haircut on this will be when/if it is marked to market?

    Scared yet?

  26. Jillayne wrote:

    “If not BOA, then who’s left to buy WaMu?

    Here are my guesses:

    Domestic: Wells, JPM

    Foreign: Barclays, HSBC, TD Bank North

    It would be wierd to see any of those names in Seattle except for maybe Wells, so maybe they’re the front runner?

  27. They might be the American frontrunner but Wells already has a footprint in the same cities as WaMu. I’m thinking it would be JPM, but they’ve already said “no,” right?

    So that means perhaps a foreign bank.

    It feels like we’re missing somebody. But maybe that’s my emotions getting in the way of not wanting to bank with a foreign bank. Damn those emotions! Logic! Rationality!

    Thank you for the banking group therapy, guys.

  28. Unfortunately, I don’t think anyone will be interested in buying WaMu if that also means taking on all it’s toxic assets. The ONLY way WaMu will be sold is if the government somehow subsidizes the deal. I just don’t see any other alternative to an FDIC conservatorship.

    After WaMu goes bust, it’s entirely possible that some buyers might emerge for their retail branches, but only as a piece meal purchase.

  29. Jillayne-

    I think you can make a case for any of the above names being an acquirer, but I think any bidder will have problems buying because of the TPG deal. Not to say it’s impossible, but a lot tougher.

    WaMu will just have to ride it out on deposits and the current Capital they got from TPG.

  30. Sniglet wrote:

    “I just don’t see any other alternative to an FDIC conservatorship.”

    What would need to happen for FDIC to do such a thing? Please list them in order of maginitude/risk.


  31. Q-diddy wrote: “What would need to happen for FDIC to do such a thing [i.e. conservatorship]? Please list them in order of maginitude/risk.”

    – a run on WaMu, with a signficant number of depositors removing their money
    – a large downgrade by the major credit rating agencies, which would prompt many other institutions to cease doing business with WaMu and sell any WaMu bonds they hold (e.g. there are laws forbidding pension funds from owning non-investment grade bonds)
    – further write-downs (i.e. because this would require raising more capital, and WaMu clearly has no access to the markets right now), but this scenario is just another spin on the downgrade since more write-downs would lead to a dowgrade

    More than likely an FDIC seizure of WaMu would be precipitated by a combination of all the factors listed above. Things tend to snowball towards the end.

  32. I thought this was an informative article on WAMU’s troubles.


    Not piling on, and I sure don’t want to see them fail, but I think it’s coming, despite their impessive deposits.

    No insider reason for it, but I think HSBC is a very good candidate to take them over. Instant branch presence, deep pockets!

    Cannot see any benefit for BOA, WELLS, USB, or anyone else to take them over.

  33. wamu is not going to be sold to anyone. the new branches of the federal bank of washington mutual will be opening in a neighborhood near you soon.

  34. Sniglet-

    1. Deposits: I agree, not too many ways for WaMu to stop significant run-off, but the short sellers, rating agencies and the media ain’t helping on this front. Percipating fear causes more people to take their money and run.

    2. Write downs: Why does more write down automatically trigger more needed capital? How much more in writedowns will trigger capital needs? You have a number in mind?

    3. Counter party risk: Which counter parties are doing business with WaMu? I was under the impression they have all deserted WaMu already. That WaMu only has deposits, FHLB and Fed window, all of which doesn’t rely on outside counter parties. How will a rating agency action affect this?

  35. Roger Ingalls:

    Do you know how much or what percent of Option ARMS that have resetted or scheduled to reset will default?

    That will tell us how much reserves and therefore how much capital hit WaMu will take?

  36. Q-

    I’m flattered that you’d think I would know! 🙂

    The article had some great stats!

    I know that the average WAMU Option ARM was designed to hit the reset (when the borrower has to pay the fully amortized rate, upon hitting the neg am cap) between years 4 and 5, and by contract at the end of year 5. The minimum payment approximately doubles from what the first year minimum payment was.

    The peak of originations was in 2006. WAMU was the 2nd largest originator of POAs.

    Not many people can, or will, tolerate a doubling of their payment, unless they see a powerful positive incentive to do so (higher future value).

    Unless property values begin a rapid upward movement in CA, when these begin to reset, there will be a slew of defaults.

  37. Got Popcorn?

    I drained most of my cash out of WM a few weeks ago. Kept a little in just to say that I lost some (or had to wait 12 months for the bankrupt FDIC to pay me off).

    Who in their right mind would have any money in an american financial institution right now? I know I don’t.

  38. Q-

    “I just wanted to know one stat: How much will default?’

    That the $52.9B question, isn’t it?

    Certainly more than ANYONE planned for.

    Unlike Wachovia (who unilaterally waived ALL prepays on existing POA loans), I’ve seen no evidence that WAMU is aggressively trying to refi the POA’s into fixed rates, BEFORE the problem hits the peak.

  39. Q-

    I cannot imagine anyone at WAMU planned to have these loans default.

    It seems unlikely that most borrowers planned to default.

    There may be someone waiting for these to default, but they probably were not in the planning phase.

    Possibly my imaginition is too paltry…

  40. Q-diddy asks, Roger, “Who are you talking about?”

    Probably the people at wamu who were in charge of buying the subprime lender LongBeach Mortgage during the bubble upswing. Wamu underpriced the risk of purchasing this company and of originating all these subprime loans on the retail side, and also from their wholesale and correspondent channels.

    I’m wondering about the future of wamu wholesale right at this particular moment.

  41. Jillayne:

    WAMU pulled out of wholesale and correspondent in the spring of 2008. Too bad, they had a good prime operation, never used Long Beach.

    I don’t have their sub-prime stats, but that problem likely pales in comparison to their POA problem.

  42. Roger-

    So, what you’re saying is, a significant chunk of Option ARMS will most likely default when they reset and you have no evidence that WaMu is doing anything about it? That WaMu is not planning for these loans to be at risk of default?

  43. Jillayne wrote:

    “Sept. 15 (Bloomberg) — Washington Mutual Inc., the biggest U.S. savings and loan, had its credit rating cut to junk by Standard & Poor’s because of the deteriorating housing market.”

    Moody’s also downgraded 26 classes of notes from WaMu credit cards trusts. One AAA class they downgraded is maturing in Nov of this year.

    Now really, the risk of default has shot up from now until Nov? Give me a break! If I were an investor who hold these bonds and is forced to sell because of the downgrade I’d be pissed!

  44. Q-

    Yes, but that is just one LO’s opinion.

    If they ARE doing something about them, I have not seen the news.

    Wachovia (Pick a Pay, World Savings) announced the elimination of all existing prepays June 30, I believe, along with notice of intent to aggressively attempt to refi their borrowers into fixed rates.


    I commented and linked on that a long time ago, but it is not possible to search the comments on RCG, a glaring weakness IMHOP, as many of the comments here are as informative and detailed as the articles that spawn them.

    I don’t know what WAMU is planning to do.

    What options do they have, regarding POAs?

    If the loans are still in place in 5 years, and appreciation has not resumed, my best guess says the lender allows them to continue making the minimum payments, rather than add to their already bulging REO portfolio.

  45. Jillayne:

    They exited correspondent in the Fall of 2007, which did not affect me. I don’t know how big a player they were correspondent.

    After that, there were many assurances that they were utterly commited to continue the brokered business, but when they got the infusion of capital from the Texas group, the condition was that they close wholesale too.

  46. AIG’s situation sure is scary…the largest insurance company possibly going down. This will impact everyone (car, life, auto insurance, etc). Does anyone have an extra $75 billion to help them out?

  47. Did anyone see the graphic in today’s Seattle Times, pg E-3, showing relative size of troubled financial companies?

    It’s like one of those planetary exhibits, truly awe-ful in it’s scope.

    AIG scabbling for footing is a truly disturbing development.

    Also, I just saw the best musical reference headline, even if a little dated:

    “Take a Load Off Fannie”

  48. Nat City next to fall behind WM.

    Who else does what Red Fin does? I have a Skyline Realtor who will give me back 1/2. Anyone giving more. I already located the property.

  49. Hi scott,

    Have you considered just working directly with the listing agent, and getting him/her to cut the full commission down to whatever it would be for only the listing side, and then hiring an attorney to counsel you from this point and on through escrow?

    There’s an attorney here on RCG named Craig who does just that. Give him a call.

  50. Man, Jillayne. I love you, but you look to be trying to seriously piss-off the 6%-ers. Ok, maybe that’s why I love you.

    Out on lopez and finally caught a signal at a bar – interesting times!

    I’ve been trying to figure out how this tiny island can carry these crazy house valuations. It is finally dawning on me that every one here is ultra dependant on real estate. It’s created an unsustainable liberal utopia, and I find it kind of sad seeing it end badly.

    Sorry about any typos- new iphone and a few beers aren’t a good combo.

    Beautiful island at any rate!

  51. Hi biliruben,

    What are you doing out on Lopez Island when the world is ending? Oh, maybe that’s actually a good place to be.

    Well if scott has already found the house and is looking for ideas, he can take mine or continue to hunt for an agent who will give more back. I’m just thinking I wonder how good of representation he will be getting for that small of a fee. I’m not sure. Maybe his money will be better spent buying X number of hours with his own attorney.

    So what’s going on out there when you say “everyone here is ultra dependant on RE?” You mean many work in the real estate industry?

  52. Hi Rhonda,

    I use to have a Pocket PC running Windows Mobile but I didn’t like having to use the face of the phone as a keypad. I much prefer being able to touch real buttons. I now have a Treo running Win Mobile and I love it. I can keep up with all these news stories while I’m out and about.

  53. Scott 61.

    I have a closing on Thursday and the lender just disallowed the credit from the Buyer’s Agent (I represent the seller). Be careful about taking a credit in excess of what lenders will allow, and they are getting tough. I represent the seller on this one. The buyer credit was only $5,500, but “allowable” closing costs was only $4,200.

    When lenders get tight, they won’t let the credit cover the prepaids like interest and Insurance costs or RE tax pro-rates. By the time it is disallowed, it can be too late to take it as a credit against price as the loan docs are already in.

    Sometimes it’s better to balance the credit between purchase price and true and actual costs. If you are really good at keeping the costs down on the loan, you may end up losing the credit amount in excess of closing costs. Be careful out there, lenders are not as lenient as they used to be.

  54. Ardell, I recently had a situation come up on a transaction regarding closing costs…I’ll work on post for what’s allowed and what’s not (currently…watch…I’ll write it, publish it and everything will change).

  55. I absolutely love my Iphone. My wife was given a moto Q, and it’s like using a rock as a screwdriver. Ughh. The Iphone is intuitive, fast, and easy. It’s like a second little mobile computer. I can store spreadsheets, music, movies, email, calendar, GPS with simple mapping which drops you right into a live traffic map. Directions blah blah blah. I can’t say enough good things.

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