Reuters reports that derivatives traders have opened an emergency trading session this afternoon to settle a variety of derivatives trades involving Lehman Brothers Holdings Inc. (NYSE: LEH). As I posted earlier today, I think the most likely option for Lehman is a bankruptcy filing by the end of the day today. And these derivatives trades are intended to minimize the losses to a bankruptcy filing. To that end, the trades conducted this afternoon will expire if Lehman has not filed for bankruptcy by midnight tonight.
The emergency trading session will last for two hours this afternoon. Reuters writes, "The session will run from 2 p.m. to 4 p.m. and will involve credit, equity, rates, foreign exchange and commodity derivatives. The aim is to reduce risk associated with a potential bankruptcy filing by Lehman. Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time Sunday. If there is no filing, the trades cease to exist."
I endorse this idea because it looks to me like a prudent move that would minimize the damage of a Lehman bankruptcy filing. I wish I knew how much such a filing would cost Lehman's stakeholders or how much this emergency session will limit its damage. Unfortunately, I don't know. Even if Lehman does not file for bankruptcy, this emergency session looks worthwhile because it won't cost much to conduct and if there is no need for it, the trades will expire worthless.
And if Lehman does file for bankruptcy, this session might limit the collateral damage on other players in the industry.
Update. Reuters reports that Bank of America (NYSE: BAC), which had been considered the prime bidder for Lehman, has withdrawn its bid. "I've just heard from a person familiar with the negotiations that Bank of America is no longer in the bidding for Lehman Brothers," a Bloomberg TV reporter said, according to Reuters. I think this makes a Lehman bankruptcy filing more likely unless the Treasury decides to finance a Lehman takeover as it did with Bear Stearns, Fannie and Freddie.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
9-14-2008 @ 4:04PM
william lindblad said...
It's a big litter box and there is more than Lehman in it. I note that UBS is doing another 5B write down and this is on top of what they already wrote off plus the slight of hand with Blackstone. There are so many scampering around looking for daylight that one can not keep track.
Let us assume that Lehman goes under and files for protection. What effect will this have on world markets? To date, bad news has been taken in stride. How long can this continue? I predicted this scenario back in Nov. 07 and expected it to culminate between the 3rd week in July and mid August 08. Appears that I am off a bit on dates, but I think that the outcome is going to be about what I expected. I do believe that we can look forward to a depression.
I hope that the U.S. public joins me in putting the blame square on the Congressional finance committees. They failed us all in such monumental terms that they should all hang their heads in shame, resign and stay out of political leadership roles for the rest of their lives.
They control the banks and finance and did nothing.
Barney Franks first blamed the short sellers and now it is Greenspan. It is high time that Barney starts to act like a man and accept the blame that is due him and the rest of his committee.
9-14-2008 @ 4:07PM
Manu said...
Band-Aid to Surgery
This is what the US Govt. and the Fed should be acting on! The sub-prime fallout is no longer an isolated disease but an empidemic and already having a crushing global fallout. It is suggested The Fed and US Govt. explore floating international Treasuries in the range of $ 500 - $ 1 trillion issued to Central Banks of the interested countries (Germany, UK, Japan, China etc..) to fund the bad loan company with a tenure of 10 years. The BLC will take over all the bad assets and the companies contributing those bad loans will have to provide 10% installments of their contribution every year to cover the interest costs and write downs.
This will bolster the shattered confidence in the financial markets, capital inflows will strengthen the $ and push oil lower, provide time for clean-up, some bad assets may turn out to be good over time.
One time surgery is better than a band-aid!
Manu
9-14-2008 @ 4:31PM
Big Al said...
CAN ANYBODY EXPLAIN TO ME WHY WOULDN"T LEHMAN DRAW ALL THE MONEY IT NEEDS FROM THE FED THROUGH THE OPEN WINDOW ESTABLISHED BY BERNANKE FEW MONTHS AGO WHEN HE BAILED OUT BEAR STEARNS ?
9-14-2008 @ 4:54PM
william lindblad said...
Big Al - Lehman is NOT part of the commercial banking system, it's and investment house. Further the discount window open to the commercial operations comes with a rather high interest rate and that's why IndyMac, et al are going to the FDIC.
That is why Bear Stearns was a "special case".
Northern Rock (U.K) had the same problem back in Nov. 07 and the Bank of England (the gov't) had to step in - similar circumstances - prevent economic chaos.
(They are similar to our Countywide)
These "special" deals can be made, but they need Congressional approval
Do you want to pay for anymore?
9-14-2008 @ 5:02PM
dtrader said...
Big Al...
At this time even if Lehman Bros drew money from the Fed to stay liquid the problem would be that no institutions would do trades with Lehman for fear Lehman might fold at any time and they could stand to lose billions with any positions Lehman was holding of theirs as a counterparty.
9-14-2008 @ 8:18PM
JD said...
I'm luvin' it!!! As a short seller of LEH since the $40s, I know this company deserves bankruptcy. Their speculative bets on the real estate market have hurt millions of Americans by helping to inflate prices. Their cocky CEO, Tricky Dick Fuld, will come out well, I'm sure. Now we just need to take down AIG, MER and C. America can thank the short sellers like me for doing the dirty work the federal government's securities police needed to do and never did. They were eating doughnuts.
9-29-2008 @ 2:25AM
Frank Miller said...
This is unfortunate, but it should serve as a wake up call to all American investors. If you want to protect your money, you need to diversify and invest at least some of it overseas. These are hard times for American investing firms. I personally use offshore bank accounts and they have helped me with diversification and asset protection. If you want to read more on why offshore investing is smarter, feel free to visit my website.
Best,
Frank Miller
http://www.theoffshorebankaccount.com