Lehman's Fate Remains A Mystery
Friday, September 12, 2008SUSIE GHARIB: What is going to happen to Lehman Brothers? That was still the big question today from Wall Street to Washington. But many investors didn't wait to find out and continued to dump Lehman shares. They tumbled another 17 percent today, losing 80 percent of their value this week. There are rumors that a sale of Lehman could come as soon as Sunday. Tonight we have two reports looking at Lehman's options and whether Uncle Sam will lend a helping hand. We begin with Scott Gurvey in New York.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Will Lehman Brothers be open for business on Monday? That was the question of the day on Wall Street. As investors continued to beat down the value of Lehman common shares, the firm's managers were shopping the company. Talk on the Street suggested a joint bid from Bank of America (BAC), J.C. Flowers, and the China Investment company. Other names mentioned were Barclays (BCS) and HSBC (HBC). While comparisons continue to be drawn between the collapse of Bear Stearns and Lehman's current crisis, most agree Lehman is in better condition. Still, anyone making a bid must first analyze a multi-billion dollar portfolio asset by asset. Thomas Burnett of Wall Street Access says that will be very difficult.
THOMAS BURNETT, DIRECTOR OF RESEARCH, WALL STREET ACCESS: The market is certainly not expecting anything more than like a $5 or a $6 price that was equivalent to what the Countrywide holders got. And maybe you come in with a real lowball bid and then there's litigation and complications like we had with Bear Stearns and JPMorgan (JPM) and you end up with a somewhat higher price. But the book value of Lehman is right around $27 a share, and obviously the market says that's ludicrous.
GURVEY: Lehman earlier this week announced a plan to remain independent, raising capital through asset sales. Analysts say the company's capital markets, investment banking, and asset management businesses could all prove attractive to buyers. Matthew Albrecht of Standard & Poor's says that plan is still viable, but something has to happen soon.
MATTHEW ALBRECHT, BROKERAGE ANALYST, STANDARD & POOR'S: Can the company raise capital somehow without an all-out acquisition? You know, I think there is a lot of value in that franchise. If they can raise some capital and absorb those loses themselves, I think there's a lot of long-term value there for shareholders. So, you know, I think we will get something done this weekend, but there's a few options out there.
GURVEY: Another option for Lehman is, nothing. Unlike Bear, counterparties are still doing business with Lehman and it can borrow from the Fed if it needs cash. As long as its creditors are willing to give it time to reorganize, it could be business almost as usual. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: I'm Darren Gersh in Washington where it's not business as usual at the Treasury. A source familiar with Secretary Henry Paulson's thinking tells NIGHTLY BUSINESS REPORT the secretary is adamant no government funds will be used to backstop any deal to buy Lehman Brothers. In March, when the Federal Reserve stepped in to help finance the takeover of Bear Stearns, world markets had four days to adjust to the failure of a major Wall Street firm. With Lehman, Paulson argues, they've had six months. The Treasury's hard line is the right policy, says economist Adam Posen, the question is whether the secretary is bluffing.
ADAM POSEN, DEPUTY DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: I'm not entirely convinced, and we'll know by Monday, I guess, that he's prepared to walk away from the table if the private sector people say well, we're not going to take this without government money. I hope, I hope he's a very good poker player, I'm not sure it's going to work out that way.
GERSH: Former senior Federal Reserve policymaker Vincent Reinhart says this is the time for Washington to draw the line on taxpayer bailouts for Wall Street.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: Lehman owes money mostly to other investment banks. That is sophisticated parties who are supposed to be able to take care of themselves. Second, how long have they had time to adjust? A while. Lehman has been in the headlines as having balance sheet troubles for most of this financial crisis. It was always one of the weaker antelopes in the herd.
GERSH: By letting the market determine Lehman's future, the Federal Reserve and Treasury hope to send a signal that investors won't be rescued from their bad decisions. Another question is whether Lehman is still such an important part of the financial herd that its demise will damage other institutions that are counting on it to pay up. Reinhart says regulators should know the answer, because they've been scouring Lehman's books ever since Bear Stearns failed.
REINHART: They have people in the building that should have an understanding of their risk positions and how interconnected they are.
GERSH: While taxpayer money is unlikely to back a Lehman deal, Paulson could still offer a sweetener in the form of regulatory forbearance. That's a fancy way of saying Washington would look the other way while any buyer gets its finances in shape after picking up Lehman's pieces. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
