Bankruptcy

Should Lehman have been saved?

Jim Kim — Mon, 27 Oct 2008 15:11:32 -0400

We'll be debating this for a long time: Would it have made any difference if Lehman Brothers had been "saved" by regulators the way they saved Bear Stearns? Would it have prevented additional carnage? It's tempting to say the regulators got it wrong by letting it fail. The extent to which Lehman was involved in the CDS market, which has rippled far and wide, would suggest that the company was "too important to fail," as was Bear Stearns. But one could easily argue that the CDS market machinery has absorbed the bankruptcy as well as it could have, and the government had to take a stand. It had to let someone fail. This is still capitalism, after all. Morgan Stanley, most likely, would have run into issues at some point, and Goldman Sachs would have converted anyway.

For more:
- here's an interesting look at the issue from Portfolio

Big winner in Lehman mess: attorneys

Jim Kim — Fri, 10 Oct 2008 13:15:41 -0400

For the attorneys lucky enough to have a piece of the Lehman Brothers bankruptcy pie, these are good times. Law firm Weil, Gotshal & Manges is seeking up to $950 an hour to represent Lehman while restructuring specialist Alvarez & Marsal is seeking hourly payments of up to $850, the Financial Times reports. This is by far the largest bankruptcy filing--and likely the most complex--in U.S. history. Lehman Brothers filed for Chapter 11 protection last month, with assets of $639 billion and liabilities of $613 billion. By one estimate, total fees for lawyers will hit $900 million. That compares with $760 million for the Enron case and $630 million for WorldCom, the FT notes. It will no doubt drag on, as Lehman Brothers transacted with more 8,000 parties.

For more:
- here's the article

Related Articles:
The Death of Lehman Brothers

A disaster: Unwinding Lehman Brothers derivatives deals

Jim Kim — Fri, 10 Oct 2008 13:15:12 -0400

Perhaps the government should have saved Lehman Brothers. Business Week reports a stunning fact: Lehman Brothers' bankruptcy "threw into jeopardy derivative deals with a staggering 8,000 different firms that had paid Lehman billions of dollars in collateral." Now the court battles begin. The affected parties can be surprising. The list of affected parties includes big hedge funds like Harbinger Capital Partners and various Goldman Sachs funds. Big banks like Bank of America and small banks like the Federal Home Loan Bank of Atlanta were also affected. The basic issue is collateral. Companies put up collateral, which Lehman apparently used in ways that are still unclear. It seems to have disappeared. What's really scary is that this was standard industry practice.

For more:
- here's the article

Related Articles:
The Death of Lehman Brothers

On tap: Pain for cities

Jim Kim — Tue, 30 Sep 2008 17:41:26 -0400

In this credit crunch, corporations and consumers have gotten all the attention. But the credit crisis is also a really worrisome event for cities and municipalities. Consider Jefferson County, AL. It is on the verge of defaulting on an $84 million interest payment on its $3.2 billion in bond debt, reports the AP. Bankruptcy seems assured. This will rank right up there with the Orange County, CA, fiasco in 1994. I'm not sure we'll see a rush of similar defaults, but the costs of borrowing has soared. There are some definite short-term funding issues cropping up. In fact, many local and state projects are now threatened. Certainly, this suggests the far-reaching nature of the credit crunch. So much of the world runs on credit, and the spigots are off.

For more:
- here's the article
- here's a New York Times article

Barclays interested in Lehman's investment banking unit

Jim Kim — Tue, 16 Sep 2008 10:10:13 -0400

Barclays walked away from a deal to buy the whole of Lehman Brothers, but it is still interested in the investment banking unit, according to the Financial Times. Apparently, Barclays execs were later approached about an alternative deal for units that are not part of the bankruptcy proceeding. In a sense, this is a historic opportunity to buy a solid property at a rock bottom price. This is assuming that no one else will be interested. This might be the best "out" for Lehman. Bankers will remain employed, which can't be said of many others on Wall Street. Would the Lehman brand survive? I doubt it, but who knows.

For more:
- here's the article

Credit rating agencies again lagging events?

Jim Kim — Tue, 16 Sep 2008 10:08:27 -0400

Credit rating agencies have been beaten up pretty thoroughly in the credit crunch. Many would say they have been discredited. If only they hadn't rated all those subprime-backed CDOs AAA! In the wake of the Lehman Brothers bankruptcy, Advisor Perspectives notes that on Friday, just before the pyrotechnics began, Standard & Poor's had Lehman's operating groups rated A+. At an event, Standard & Poor's analyst Scott Sprinzen said that "we don't expect Lehman to fail." And: "The underlying business at Lehman is doing pretty well." And: Its "basic business franchise is not impaired." It also had Merrill Lynch rated similarly high, just a notch below Morgan Stanley, and two notches below Goldman Sachs. They did not anticipate the possibility of extraordinary events, or "accidents."

For more:
- here's the article

Lehman Brothers, RIP

Jim Kim — Sun, 14 Sep 2008 21:48:16 -0400

Wow! What else is there to say? In an extraordinary weekend, Wall Street has been remade. We've written recently that Lehman Brothers was another Bear Stearns. But it's even worse. It was forced into bankruptcy despite a frantic weekend of negotiating among top regulators and Wall Street execs. In the end, the government sealed Lehman's fate--and indirectly Merrill Lynch's. You cannot argue with Henry Paulson's decision not to extend the same backing for a potential Lehman deal that the government did to JPMorgan's deal for Bear Stearns (some $30 billion in assurances). At some point, someone had to end the moral hazard. At the same time, without such assurances, you can't blame Barclays and Bank of America for walking away, which left death as the only option for storied Lehman Brothers. Incredible.

For more:
- here's the AP overview
- Lehman employees already in a Bear Stearns-like situation. Article
- Bank of America, Lehman, could it have been a natural fit? Article
- Lehman has decided not to provide coffee for camped-out reporters
- the last minute options. Article

Related Article:
Lehman Brothers, another Bear Stearns after all

Tough year for activist hedge funds; Icahn struggling

Jim Kim — Mon, 11 Aug 2008 09:42:41 -0400

We've noted that activist hedge fund managers are struggling this year. The best example is Carl Icahn. The New York Post reports his hedge funds are suffering their first losses since starting up in 2004. They're currently down roughly 6 percent for the year. Of course, a lot of hedge funds are suffering right now. Shares of Icahn Enterprises, which will report earnings this week, are down nearly 50 percent this year. His biggest loss has been on his Motorola investment, which is down nearly 30 percent since February. Yahoo has been a big loser as well. Icahn got a seat on the board, but has lost nearly $300 million on his investment. Some financial firms have really stuck it to him. Guaranty Financial Group's shares are down about 70 percent since Icahn began his agitating. And homebuilder WCI Communities has filed for bankruptcy, which could wipe out most of his stake.

For more:
- here's the New York Post article

Related Article:
Just desserts? Carl Icahn to face Sarbanes-Oxley

Is another shoe about to drop in crisis?

Jim Kim — Sun, 29 Jun 2008 08:32:29 -0400

Not too long ago, bank executives and regulators were suggesting that the worst of the credit crisis was over. Once Bear Stearns effectively went belly-up, people thought, 'OK, we've had the big failure. The nadir has been reached.' But then along came the Lehman Brothers situation, followed by the bond insurer situation. Now, all the optimism seems to have evaporated. All of a sudden, we're hearing about a possible wave of bankruptcies that could take the crisis to a new depths. The Financial Times suggests more companies will be pressured by the economy and banks that can't afford to extend any credit. It notes the case of Progressive Moulded Products, one of several motor parts company to file for Chapter 11 protection. Losses include Thomas H. Lee Partners, and lenders like Goldman Sachs. We'll undoubtedly see more of this, but how much more?

For more:
- here's the Financial Times article

The real reason JP Morgan Chase bought Bear Stearns?

Tue, 06 May 2008 06:59:55 -0400

Here's an intriguing thought on why JP Morgan Chase bought Bear Stearns: because it had to. Seeking Alpha notes that the idea make sense when you consider that JP Morgan Chase's credit exposure to capital ratio hovers around 50 percent (a lot of which is in derivatives), which is quite high compared to its peers. For some, it follows that Bear Stearns likely was a big counterparty to all this exposure. "They would have had to step in to avoid a Bear bankruptcy so that they would not be forced to take toxic assets back onto their own balance sheet and avoid massive writedowns. Were JP's exposure to Bear large enough, then JP Morgan itself could have been left significantly impaired." Interesting theory.

For more:
- here's the Seeking Alpha item