On Sunday Barclays Plc. (NYSE:BCS), the U.K.’s third-biggest bank and the only remaining bidder in “club rescue” of Lehman Brothers, told federal regulators that it was walking away from a potential transaction based on the government’s indications that it wouldn’t provide any taxpayer money to prevent a collapse. Bank of America Corp. (NYSE:BAC), another potential bidder, also withdrew from the talks by Sunday morning, stating that it wasn’t interested in a transaction without government support. Both, Barclays and Bank of America Corp., wanted a safety net put in place by the Treasury Dept. similar to the one when JP Morgan Chase & Co. (NYSE:JPM) bailed out Bear Stearns. U.S. regulators however, are insisting on Wall Street’s big banks to resolve their own problems and they have expressed their believe that the financial system will be able to withstand the failure of a large institution.
As Barclays news hit the wires, The International Swaps and Derivatives Association [ISDA], which includes more than 200 banks, brokerages, insurance companies and other financial institutions, called on Sunday an emergency trading session that would run between 2 p.m. to 4 p.m., involving credit, equity, rates, foreign exchange and commodity derivatives aimed at reducing the risk of a potential bankruptcy filing by Lehman.
ISDA also issued a statement where it said:
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.
The steps taken by ISDA prompted credit default swaps of investment banks such as Goldman Sachs (NYSE:GS) and others sharply higher. ISDA’s actions also underline the fact that Wall Street seems to have lost confidence in the efforts orchestrated by federal regulators for a successful purchase or bailout of the 158-year-old investment firm.
Lehman Brothers, which has come under tremendous financial pressure because of significant losses tied to the collapse of the U.S. housing market and subsequent credit crunch, has hired law firm Weil, Gotshal & Manges LLP to prepare a potential bankruptcy filing.
Update: DealBook now is reporting that as of Sunday night Lehman Brothers will file for bankruptcy protection.
Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings.