Lehman's Wind-Down: Systemwide De-leveraging Is Always Chaotic

"While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down plan should have been pursued,” Bryan Marsal, co-CEO of Lehman’s (LEHMQ.PK) bankruptcy advisor, tells the Wall Street Journal in explaining how Lehman blew its filing, “It was an unconscionable waste of value." [Emph. added]

An “unconscionable waste of value.” Hmm. There seems to be a lot of that going on lately. Marsal might have preferred Lehman’s wind-down be “orderly” but he’s kidding himself if he thinks one were actually possible.

Rather, the key feature of a systemwide de-leveraging on the order of the one happening now is that rational liquidations don’t happen. Just remember this fact, and everything will make sense: there are no buyers. For anything. Which is why, during the Christmas season just past, same-store sales dropped by more than they did in any year since the record-keepers started keeping records back in 1969. And why global steel production is set to show its biggest drop in 60 years. And housing starts are running at their lowest rate in half a century.

An orderly wind-down? Please. The orderliest one imaginable has to be the federally financed dissolution of AIG that began back in September. The early plan was that the company would auction off some of its biggest, most profitable businesses in a hurry to finance a quickie repayment of the government’s $85 billion bailout. In the event, the bailout has grown to $150 billion. As for the divestitures, they’ve been slow in coming. The latest was AIG’s sale of its Hartford Steam Boiler unit, thought to be worth perhaps $1.5 billion . . . for $782 million.

You get the picture: the AIG process is no anomaly; it’s emblematic of what’s happening everywhere. Lehman’s bankruptcy advisors might wish that asset sales can occur in a rational, deliberate manner. I wish they could, too. But the main reality of the ongoing chaos in the credit markets is that buyers are nowhere to be found, and rational and deliberate sales aren’t happening. The waste of value that has Marsal so upset wasn’t unconscionable. In this environment, it was inevitable.

Comments

[Larry Walter:]

Great realistic writing. Thank you.

2008 Dec 30 01:16 PM

[Ed M:]

I lost a bundle on Lehman Bros PFDs (real money) and lost a larger anount of paper money on my other prefereds. These PFDs are my retirement retirement income. I am worried that some other PFDs will either stop payments or fold. My wife and I are 80 years old and cannot start over again.

Any sugestions?

Ed M

Feb 18 04:43 PM