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NEW
YORK—Lehman Brothers Holdings Inc., once the
fourth-largest US investment bank, will file for
bankruptcy after potential buyers abandoned talks and
the US government declined to fund a takeover of the
crippled firm.
Lehman
plans to file a Chapter 11 petition in the US Bankruptcy
Court for the Southern District of New York, the firm in
a statement Monday. The filing will be by the holding
company and won’t include any of its subsidiaries,
Lehman said.
Barclays
Plc., which had emerged as a leading candidate to
acquire Lehman, pulled out first Sunday, contending it
couldn’t obtain guarantees from the government or other
Wall Street firms to protect against potential losses on
Lehman’s assets.
Bank of
America Corp. withdrew about three hours later, before
announcing that it would acquire Merrill Lynch & Co.
Banks and brokers sought to consolidate trades linked to
Lehman to minimize the impact of a bankruptcy filing.
“In the
short term, there will regrettably be losers including
creditors, investors and the capital markets,” said
Martin J. Bienenstock, a New York bankruptcy lawyer
representing several Lehman creditors.
Founded
in 1850 by three Jewish immigrants from Germany, Lehman
has managed to avert previous potential disasters and
was among the handful of US financial firms that had
endured for more than a century.
Chief
executive Richard Fuld, who joined Lehman in 1969 and is
the longest-serving CEO on Wall Street, attempted to
shore up the firm’s finances in the second quarter by
raising $14 billion of capital, selling $147 billion of
assets, increasing cash holdings and reducing reliance
on short-term funding to create a buffer against a bank
run.
Lehman
last week reported the biggest loss in its history and
said it planned to sell a majority stake in its asset-
management unit, spin off real-estate holdings and cut
the dividend in an effort to shore up capital and regain
investor confidence. The efforts failed to stem
speculation that the firm’s mortgage holdings would lead
to more losses. Lehman fell 77 percent last week in New
York trading.
The US
Treasury and the Federal Reserve negotiated with Wall
Street executives for the past three days in New York
try to strike an agreement that would prevent the
investment bank from failing before markets opened
yesterday. Treasury Secretary Henry Paulson indicated
that he didn’t want to use US taxpayer funds to ease a
sale of the company.
Fuld is
exploring the sale of its broker-dealer operation and
continues to hold talks on the sale of its
asset-management unit, including fund manager Neuberger
Berman, the company said in the statement.
The US
Securities and Exchange Commission (SEC) said customer
accounts at Lehman are protected and agency staff will
remain at the brokerage firm in the coming weeks.
Securities rules require segregation of Lehman’s
securities and cash, and accounts are covered by
insurance provided by the Securities Investor Protection
Corp. (SIPC), the Washington-based agency said Sunday
night. SEC employees working inside the broker’s office
will continue that assignment, the agency said.
“We are
committed to using our regulatory and supervisory
authorities to reduce the potential for dislocations
from recent events, and to maintain the smooth
functioning of the financial markets,” said SEC chairman
Christopher Cox in a statement.
Brokerage units that fail usually are handled by the
SIPC, which appoints a trustee to liquidate the business
and protect its customers. Lehman’s customer accounts
may also be farmed out to other firms that could protect
cash and securities, on the model of the failed
junk-bond firm Drexel Burnham Lambert, which filed for
bankruptcy in 1990.
Lehman’s
trades in commodities, derivatives and other financial
instruments could be unwound by the bank’s
counterparties, said Andrew Rahl, cohead of bankruptcy
in New York at law firm Reed Smith LLP and a specialist
in financial companies.
A
liquidation of the brokerage unit might be “a big mess”
if Lehman used customer accounts to raise cash, and sale
and repurchase agreements had to be unwound, Rahl said.
The
trigger for SIPC to take over the Lehman brokerage would
be a freezing of customer accounts, or a Chapter 11
filing that implied the unit was insolvent and its
customers might not be able to access their property,
the official said.
“First
there will be chaos and then an adjustment process as
losses distribute themselves through the market,” said
Gilbert Schwartz, a former Federal Reserve attorney and
now a partner at Schwartz & Ballen LLP in Washington.
“There won’t be any lasting turmoil. Treasury and the
Fed have determined that markets have adjusted to the
situation since Bear Stearns. If every time a big
institution went bust the markets expected the
government to step in, no one would ever adapt.”
Ladenburg Thalmann & Co. analyst Richard Bove wasn’t as
sanguine. “We will be entering uncharted territory. The
company has $600 billion in assets and $550 billion in
debt outstanding. Forcing liquidation will set off
problems in other companies and markets everywhere.”
(Bloomberg) |
