Lehman Rescue Failed on Trading Guarantees, NY Fed Counsel Says
By Jennifer Ryan
Jan. 19 (Bloomberg) -- Lehman Brothers Holdings Inc.’s rescue failed when U.S. officials couldn’t find a bank to provide the same trading guarantees that Bear Stearns Cos. received, the New York Federal Reserve’s general counsel said.
“Plan A was to prepare a Bear Stearns-style rescue, plan B was the alternative case,” Thomas Baxter, who attended the discussions to save the bank, told a conference in London today. “The problem with plan A was the problem with guarantees” and “if you don’t have that guarantee and a strong hand, market confidence in a weaker member is going to continue to erode.”
Lehman’s failure in September led to the biggest bankruptcy filing in history and prompted an escalation in the financial crisis which threatened to undermine banks around the world. Barclays Plc, a contender to acquire Lehman before the collapse, then bought its North American trading and investment banking division.
“The facts are often that people conclude that we let Lehman fail, and that factual predicate is not accurate, that the government let Lehman fail,” Baxter said. “The problem we encountered on Sunday, Sept. 14, is Barclays wasn’t in a position to give a similar guarantee of the trading obligations of Lehman” as JPMorgan Chase & Co. gave to Bear.
Bank of America Corp and Barclays were the only two potential suitors for Lehman when officials met before the bankruptcy filing on Sept. 15., said Baxter, speaking at a conference organized by the Financial Markets Group of the London School of Economics.
‘Cast of Characters’
“When we started into Lehman weekend on Friday, Sept. 12, we gathered at the New York Fed,” he said. “The cast of characters were the secretary of the Treasury, Hank Paulson, my president, Tim Geithner, the chairman of the SEC,” Christopher Cox, and the heads of as many as 14 financial institutions. “It soon became clear that Bank of America was not so much interested in Lehman, but something else. That was Merrill.” Baxter said. “So we lost Bank of America. That left Barclays.”
- This is in contradiction to other news report that said BoA wasn't interested in Merill but was forced into
The group of bankers and officials was trying to repeat the Bear rescue on Lehman, except that this time officials told lenders that “unlike with Bear, you all are going to finance the assets that are taken to facilitate the acquisition. That was plan A,” Baxter said.
“The problem with plan A was not an absence of financing” because the bankers in the room did agree on a deal, Baxter said. “They had the money and they were willing to put it out.”
The hitch was “much more technical,” Baxter said.
“The problem for plan A relates to, what do you do in the period between the announcement of a merger and the actual closing of the merger?” Baxter said. He said plan A failed because Barclays couldn’t guarantee the trading obligations. Barclays agreed to acquire Lehman after a syndicate of banks consented to backstop a new entity that would take over $55 billion to $60 billion of Lehman’s troubled assets, according to people familiar with the negotiations. The deal fell apart when the U.K.’s Financial Services Authority refused to sign off on the Barclays purchase that day and U.S. officials refused to take further steps to save the deal.
- Interesting perspective into what goes on between London/NY/W.DC
The New York Fed meeting then turned to discuss plan B, Baxter said.
“The best option was to put the parent of Lehman into bankruptcy, to continue an operation as broker-dealer at least in the U.S., and to continue a broker-dealer operation through Federal Reserve liquidity,” Baxter said. “That happened.” In the week after the bankruptcy filing, the Fed loaned “big time” to keep the broker-dealer in business, with funds totaling as much as $50 billion, he said. Barclays then returned to the table and bought the division.
“If you go back and study the way we did Bear Stearns, you’ll see the importance of the guarantees,” Baxter said.