The Lehman Debacle

The WSJ has a 4,800-word tick-tock on the weekend of Lehman's demise. The main takeaways, for me, are (a) that if John Thain really thought he deserved a $10 million bonus for his decision to sell to Bank of America (BAC) that weekend, he must have been delusional; (b) that if Hank Paulson and Ben Bernanke really want us to believe that they tried their hardest to save Lehman but that their hands were tied, they're equally delusional; and (c) that not enough blame has been laid upon a certain large body of water.

Thain first. Here is his first meeting with Ken Lewis, on the Saturday afternoon:

Later that afternoon, Merrill's chief executive met Bank of America's CEO, Mr. Lewis, in the bank's corporate apartment in the Time Warner Center. In a one-on-one meeting overlooking Central Park, the two men agreed that it looked like Lehman would be forced into bankruptcy.

Mr. Thain made his opening offer. "How about buying a 9.9% stake" in Merrill, he proposed.

Mr. Lewis said the bank doesn't tend to buy minority stakes. He suggested Bank of America could buy the whole firm.

"I am not here to sell Merrill Lynch," Mr. Thain responded.

The deal was finally done on Sunday evening, but it was negotiated by Merrill president Gregory Fleming, not by John Thain:

Mr. Fleming and Bank of America's lead negotiator, Mr. Curl, hammered out a price. Bank of America would buy Merrill for $29 a share.

Mr. Fleming informed Mr. Thain. At 6 p.m., Merrill's top managers and directors gathered in person and by phone.

"When I took this job this was not the outcome I intended," Mr. Thain told directors. After the board meeting broke up after 8 p.m., Mr. Thain called the chief of Bank of America. "The decision was unanimous," Mr. Thain told Mr. Lewis. "You have a deal."

The general impression of John Thain is that his main claim to fame was the absence of the stubborn streak which ultimately brought down not only Dick Fuld but his entire bank behind him. Fuld was always behind the game; Thain too, but not nearly as far, and he had an ability to accept the inevitable which Fuld -- to this day -- lacks.

As for the Lehman revisionism, the story doesn't seem to support the new stories from Paulson and Bernanke wherein they try their darndest to do what they can but find their hands tied by the Fed's inability to bail out the bank. Instead, the no-bailout decision had already been made at the beginning of the marathon weekend, at a key meeting at the New York Fed on Friday afternoon. From that point on, Paulson is curiously absent from the story:

Mr. Thain gathered along with Morgan's Mr. Mack and Goldman's Mr. Blankfein at the New York Federal Reserve in downtown Manhattan... The three men were greeted by the masters of the world's biggest economy -- Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, New York Fed Chief Timothy Geithner and Securities and Exchange Commission chief Christopher Cox...

The federal officials told the Wall Street chiefs to return in the morning. If the mess at Lehman could be fixed, it would be the job of the Wall Street bosses. There would be no public bailout.

There is nothing in this story about the Fed looking carefully at Lehman's books prior to this announcement, and making a determination that the quality of Lehman's assets was so low that there was no way the Fed could legally lend bailout funds to the bank. Instead, this conforms much more with the initial story, that Paulson was drawing a line in the sand and saying "no more bailouts".

By the end of the weekend, a Barclays deal was still a real possibility. But:

One hurdle remained: To ink a Lehman deal, Barclays needed a shareholder vote. There was no way to get one on a Sunday. Barclays would need the U.S. or British government to back Lehman's trading balances until a vote could be held.

Government approval never came, though there are diverging views on why. Some blame the U.S. government for refusing to commit resources. Others say the British government refused to entertain a deal they worried would expose England to unnecessary risk.

This is helpful, but not very: It's hobbled enormously by the problems of anonymous sourcing, and I look forward to the point at which US and British government officials start going on the record about exactly what happened. But it seems to me that the Brits were understandably reluctant to step in where the Feds refused to tread, and that the Feds offered zero support to their counterparts across the pond.

We're left with the question of how Barclays (BCS) feels, now, about the failure of the deal to go through. On the one hand, it essentially ended up with all of the Lehman assets it wanted, unencumbered by any debt at all. On the other hand, Barclays itself was hardly immune from the financial devastation wrought globally by Lehman's collapse.

With hindsight, I still think that a cobbled-together deal between Barclays, Lehman, Treasury, the Fed, the FSA, the Bank of England, and the British Treasury would have been a much better option to what eventually transpired. But the key negotiants were too far apart, and these kind of deals really have to be hammered out in person. Maybe we should all blame the Atlantic Ocean for Lehman's failure. At least it never got a bonus.

Comments

[Crocodilian:]

Gotta disagree with "With hindsight, I still think that a cobbled-together deal between Barclays, Lehman, Treasury, the Fed, the FSA, the Bank of England, and the British Treasury would have been a much better option to what eventually transpired."

The system needed the reality that certain kinds of activities themselves threatened system extinction. By papering over those risks, as occurred at LTCM, the necessary incentive would not have existed.

A "cobbled together deal" is what we've had plenty of: Bear Stearns, Countrywide Financial, the entire Japanese financial system since oh, 1991 . . .

Getting "back to business" must mean taking our losses, and going forward with a healthy fear of sloppy finance. The Lehman failure serves both those purposes.

2008 Dec 29 07:33 PM

[Anthony Alfidi:]

Revisionism on Lehman will last as long as this Depression. One developing strain of thought is that its failure was necessary to shock other bank execs into fixing their firms.

2008 Dec 30 02:25 AM

[john s. gordon:]

so LEH was the sacrificial goat.
> jack

2008 Dec 30 08:45 AM

[N.John Joseph:]

The present global financial crisis was precipitated by the failure to bail
out Lehman Brothers. Lehman Brothers should withdraw bankruptcy
petition and pass their bad paper to the TARP. This will restore the investor
confidence and stabilize the markets. Implement new regulatory
measures to secure financial growth.

An investor and a father of two about to lose job.

Jan 01 12:10 PM

[Pinkybrain:]

Where were all these "SMART" men, seasoned professionals, that could not foresee what was an obvious outcome with the Lehman failure. I realized it, didn't you?

Jan 04 12:01 PM

[Mad Hedge F...:]

Here’s another one for the unintended consequences file. The bankruptcy of Lehman Brothers could lead to up to 50 of London’s better restaurants going under. The defunct investment bank was a profligate spender of expense accounts, corporate events, and bonus payments, racking up huge bills. Restaurateurs are coping by cutting staff costs, offering cheaper cuts of meat and more chicken dishes, bargain wines like Argentinean malbec and Spanish rioja, and great value for money prix fix menus.

Feb 21 08:45 AM