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Monday, 6 October 2008

Lehman's complaint

Lehman Brothers lobbied the US Federal Reserve in July to convert to a traditional bank, but the Fed refused to support the idea! At the same time it asked the Fed to extend credit to include more types of collateral. Again, no! These steps have since been taken by Morgan Stanley and Goldman Sachs. And TARP, and other central bank initiatives, have set up to take wider collateral. It seems Lehmans was sacrificed pour encourager les autres. But then no-one wanted to buy it except BarCAP and they couldn't get a soift deal from the Fed. Lehman met with Bank of America and thought to sell itself to Morgan Stanley, HSBC or Nomura before it filed and BarCap was at the table. Note there was no thought to sell to Citibank whose collateral call had begun Lehmans' slide and steep falls in ABS and CDO prices. Other possible suitors included AIG before it got sick, GE and Abu Dhabi IA, other ME and Asian funds, and private equity firms. Becoming a bank could also have kept Lehman's wholesale funding from collapsing until the bank could metamorphose into a deposit-taking bank. The Fed, was unwilling to change the rules or accept other collateral in exchange for credit, fearing that Lehman could be stigmatised if it converted to a bank. Seems as if individual supervision got confused with the systemic bigger picture. Lehmans rehypothecation of other firms' collateral and a host of other accounting issues and wide-ranging counterparty exposures are so much more difficult to unravel when in the hands of administrators than if in the hands of another bank. This must be a lesson whenever the choice arises again between fees for accountants and lawyers or letting a bigger merged entity work its way through the balance sheet. Maybe this is the lesson that's been learned in the cases of Fortis and HBoS?

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