Transcripts

The Who's & How's Of Selling Lehman Brothers

SUSIE GHARIB: It looks like Uncle Sam is getting involved in determining the future of Lehman Brothers. Late today, The Washington Post reported the U.S. Treasury and the Federal Reserve are engineering a sale of the investment bank. Lehman had no comment and the Treasury would only say that it's in regular contact with market participants. Earlier today The Wall Street Journal said Lehman had put itself up for sale. The paper said a deal could hinge on whether the government provides financial backing as it did for Bear Stearns. Well, takeover talks are being spurred by Lehman's plummeting stock price, as investors fear the firm can't raise money and stay independent, shares of Lehman tumbled 42 percent today to $4.22 and are trading even lower after hours. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sources say Lehman is looking for potential buyers and that bankers from other firms are reviewing Lehman's books. Possible suitors are said to include HSBC (HBC), Bank of America (BAC), and Nomura (NMR). Lehman's share price plunged again today as investors digested those reports and a statement from Moody's Investor Services, placing the firm on negative credit watch. In that note Moody's said: "A strategic transaction with a stronger financial partner would likely add support to the ratings." The price of Lehman's credit default swaps also rose today. Credit swaps are a derivative sold as insurance against the default of a company's debt. The price action reflects increased perceived risk of a Lehman default. But Stephen Wood of Russell Investments says the problem with credit swaps is that they can be sold several times.

STEPHEN WOOD, SENIOR PORTFOLIO STRATEGIST, RUSSELL INVESTMENTS: So the issue right now is who currently hold the responsibility for that bond default? And it may take some investigation to find out who actually is the person that is responsible for it and do they have the financial wherewithal to make good on that?

GURVEY: Default swaps are a highly profitable product for Wall Street. The market is not regulated. And while the arcane pricing formula for swaps includes probabilities the underlying debt issuer will default, it does not consider the ability of the swap seller to pay off. Bill Hornbarger of Wachovia Securities says swaps are adding to a general loss of confidence across the markets.

BILL HORNBARGER, CHIEF FIXED INCOME STRATEGIST, WACHOVIA SECURITIES: So many things that people took on faith for so many years, municipal bond insurers, the government-sponsored enterprises, now maybe are not as steady as they thought. And so I think in the fixed income markets you have Treasuries and you have basically everything else, and everything else has some type of risk associated with it.

GURVEY: In the entire market, there were roughly $45 trillion worth of swaps outstanding last year. That's twice the value of all the stocks listed on U.S. stock exchanges. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.