In light of the Fed’s decision to grant Goldman Sachs and Morgan Stanley banking licenses, and the breathtaking damage of the Lehman bankruptcy, the central bank may have a bit of explaining to do as to why it turned down Lehman’s petition to become a bank in July.
The other side of the coin is that Lehman badly overplayed its hand in all of its efforts to stave off collapse. If they had cut a deal with the Korean Development Bank, their last, best hope of raising hard cash, the Fed might have looked more favorably upon their petition.
From the Financial Times:
Lehman Brothers lobbied the US Federal Reserve this summer to be given access to much-needed liquidity, but was unable to convince the regulators, just two months before the Fed endorsed similar proposals from Goldman Sachs and Morgan Stanley, the Financial Times has learnt.
Lehman held talks with regulators over a plan to convert to a traditional bank holding company in July.
At the same time it asked the Fed to loosen the rules by which it extends credit in order to include more types of collateral, according to sources close to the firm’s discussions with the Fed.
Lehman also held a round of meetings that month with Bank of America over a potential takeover and considered selling itself to other banks including Morgan Stanley, HSBC and Nomura before it eventually filed for bankruptcy.
It held extensive merger talks with AIG in 2006, and solicited potential minority investors ranging from General Electric to the Abu Dhabi Investment Authority, other Middle Eastern and Asian partners and private equity firms.
Yves here. This story is clearly from Lehman insiders, and some details are pretty, um, unconvincing. Considered selling itself to Morgan Stanley? That’s like saying you considered dating Sharon Stone. “Considering” doesn’t get you very far in the money raising game. Ditto soliciting General Electric et. al. So they made calls? Sent out a memo? If they didn’t get beyond a polite meeting to acknowledge the approach, it doesn’t merit a mention, except perhaps to indicate a certain desperation, that they put out so many feelers and were often rebuffed.
According to people involved in Lehman’s efforts, Dick Fuld, Lehman’s former chief executive, quickly embraced the idea of becoming a bank holding company this summer.
“We were working that hard as one of the angles for a while,” said one source close to the matter. “We had an application in front of them.”…
Becoming a bank holding company would have subjected Lehman, which had been an independent investment bank, to regulation by the Fed.
But it could also have helped to keep Lehman’s wholesale funding model from collapsing before the bank was able to metamorphose into a more deposit-based institution.
The Fed, however, was not willing to change the rules over which types of collateral it would accept in exchange for credit, according to sources close to the talks.
No, now it is three months later, and the Treasury has signed up for that role. No, hold on, the Treasury is buying the dreck, not merely lending against it.
It was also concerned that Lehman could be stigmatised if it converted to a bank holding company on its own. Without the Fed’s encouragement, Lehman felt it had to abandon the plan.
Last month, Morgan Stanley and Goldman received quick Fed approval for their own conversions, after Lehman’s collapse reverberated through the markets with unanticipated severity.
The high degree of co-ordination between Morgan Stanley and Goldman helped convince regulators that the proposal could work, people close to those talks said.
Is that code for coordinated lobbying?
To provide Goldman and Morgan Stanley with additional liquidity, the Fed agreed to loosen its collateral arrangements when it approved their conversions.
Goldman and Morgan Stanley have since been able to attract significant capital infusions from billionaire investor Warren Buffett and Mitsubishi UFJ, the Japanese bank, respectively.
While it is far from certain that Lehman could have recruited similar help after converting to a bank holding company, Wall Street’s top minds are now debating whether the bank’s disintegration should have been prevented.
“Rehabilitation, rather than failure, is much more consistent with controlling systemic risk,” said Rodgin Cohen, chairman of law firm Sullivan & Cromwell, who helped advise Lehman in the days leading up to its bankruptcy.
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5 Billion from Buffett at 10% was enough to change their mind? That is what instills confidence these days? Does that mean that the real rate of interest is above that? Banks borrow cheap and lend expensive, in the simplest of terms. Very confused…
I really still don’t see how they can be called banks.
Remember when the SWF’s were still around, they were good for dozens of billions…
I am not certain the Buffett investment made the diference, but it sure didn’t hurt. Morgan Stanley and Goldman were considered to be in better shape than Lehman, so the Fed would be more predisposed to consider them.
But conversely, the failure of Lehman to raise any dough when it had been flailing around for so long would be a red flag. I cannot prove that a KDB investment would have secured approval, but it would have helped the odds, or may have kicked the can down the road until Morgan and Goldman came on bended knee too.
If my bank were issuing debt at 10% I would be worried, and certainly not point to it as proof of solvency, or liquidity.
Lehman knew where it stood in line, behind merrill, which was faced with the same decision. Thain took the only way out that was offered, Fuld did not have any options at that point, and should have recognized that.
I agree that this does not add up, which makes me wonder if this was yet another desperation move by the Fed. Your point re the cost of Goldman’s funding is valid. But it could have been seen differently, or perhaps more accurately, served as useful cover.
This is what happens when one of the key regulators — Paulson — is the former head of Lehman’s chief competitor. Who is to say that it wasn’t Paulson’s personal animus towards Lehman that caused the denial?
It is criminal that these IBs like Goldman can be banks now — utterly retarded, because, IBs like Goldman have tons of derivatives directly linked to unregulated commodity speculation — which obviously is something you do not want your savings account linked to. How fuc-ing stupid is our government, how corrupt?? This is an awful, awful situation made worse by these retarded slobs!