As the big game of chicken continues in lower Manhattan this morning, the favoured plan to deal with Lehman appears to be a “Bad Bank” strategy: Sell Lehman’s “Good” businesses (equities) to Barclays, then put all of Lehman’s balance-sheet crap in a “Bad Bank” bag and get the rest of Wall Street to add some equity.
The other Wall Street firms are said to be resisting this solution…and who can blame them? Why should they throw money down the Lehman balance-sheet rat hole, while Barclays runs off with the good parts? Especially when they need every dollar they have.
The answer is a threat: If you don’t do it, Lehman will dump all this stuff on the market on Monday morning, and you’ll all be hosed, too. Given the alternatives, this logic makes no sense.
There are two sensible solutions to this mess:
1. Sell Lehman to a bank or consortia of banks, which can then do what Lehman itself failed to do over the past 7 months: keep the good parts and ditch the bad assets at pennies on the dollar. Some people still think that, when all is said and done, Lehman is worth something (the market did on Friday, for example). If this is the case, then someone–Bank or America, Barclays, HSBC, China, et al–should step up and buy the company. If they don’t, move to solution 2…
2. File for bankruptcy. It is in the interest of BOTH the rest of Wall Street AND Lehman’s creditors to avoid dumping Lehman’s balance sheet crap on the market all at once (the big fear being used to bludgeon Wall Street into contribution to a Lehman Crap Capital Fund). A bankruptcy filing would put the company in the hands of a court appointed liquidator, which would take years to sell off everything. This would wipe out Lehman’s equity and hit its debt, but the liquidation sale would happen in an “orderly” fashion. It might take so long, in fact, that some of the assets might start appreciating in value before the end of the process.
Neither of these solutions would force the rest of Wall Street to come up with money it doesn’t have. The solutions don’t require a government bailout, and they would prevent all the assets from hitting the market at once. So it’s no wonder Merrill (MER), Citi (C), et al, are standing their ground.
The Fed should intervene here, but not with taxpayer money. Ken Wilson, the former Goldman banker who is now Hank Paulson’s right-hand man at Treasury should send the following simple message to all possible Lehman bidders:
- All bids due at 3PM
- If no bids, Lehman will file for bankruptcy.
Either way, the world won’t come to an end.
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