It appears that Lehman is headed for a bankruptcy filing and it is sad that a 158 year old institution is going out of business, but what does it really mean?
I don’t find it surprising that they weren’t able to put together a deal behind the closed doors of the NY Fed. Paulson was trying to make a deal that was nonsense. Why would Merrill, Goldman or Morgan Stanley take on the bad assets and let Barclay’s or Bank America get away with the crown jewels? Why pay now when you can likely get an even better price out of the bankruptcy court? And get the opportunity to bid on the good parts too?
So, Lehman liquidates. What does that mean for the US economy? I think the indirect impact is unknown at this point, but the direct impact should be negligible. What does Lehman do that Goldman doesn’t? Or Morgan? Nothing. The problem is with the bad assets and how those are disposed of is what will determine the indirect impact. If they are sold at fire sale prices soon, which I find unlikely, other banks and brokers may be forced to write down similar assets. Or do they? Mark to market accounting rules do make provisions for sales that are distressed so the other banks may be able to avoid immediate writedowns. We’ll see how that plays out in the next few days, but my guess is there will be a long and orderly unwind of these assets so the survivors have time to heal.
What are the bad assets worth? I don’t know and neither does anyone else but I find it significant that there were bidders for these assets. Goldman, KKR and JC Flowers were apparently willing to bid at least on some of the “bad” assets. But again, why not wait for bankruptcy? There will be plenty of buyers for these assets at some price and my prediction is that a few years from now, everyone will be talking about how much money was made from this. Someone will make the cover of Fortune or Forbes for cleaning up on this mess.
As for the economy, well that is hard to judge right now. It helps that corporate balance sheets are in pretty good shape. While banks may not be willing to lend right now, the need for financing is also not as great. Yes consumers will find getting a mortgage harder, but that needed to happen one way or the other. Credit cards and auto financing may also be harder to come by, but again, this is something that needed to happen and is already well under way.
The market is apprently going to open down hard tomorrow morning. The futures in Asia are down about 300 Dow points right now, but it’s a long way to the market close tomorrow.