The Marmot’s Hole

Linkd

ft.com:

Exodus of employees told to ‘move on’

Published: September 15 2008 21:42

The message delivered to shocked Lehman Brothers staff on Monday was simple and direct.

“It’s over,” announced Christian Meissner to a morning staff gathering just a week after being appointed to run Lehman Brothers in Europe. He told the staff to look for new work and “move on”.

Staff had little choice but to follow suit in Lehman’s offices around the globe as they came to terms with the reality of the vertiginous collapse of the 158-year-old institution, leaving workplaces with belongings hastily collected and their savings depleted.

The mantra of Lehman Brothers was to pay its staff in stock – some 30 per cent of the bank’s equity was held by employees and many bonuses were paid in shares. Now those holdings are all but worthless.

Some staff were also told not to expect a paycheck at the end of the month and that they might even be liable for expenses on their corporate credit cards.

In Lehman’s London office, the bridgehead for the Wall Street firm’s international expansion, many were evidently determined to minimise their status as creditors to the firm.

“Some have more than £100 on their pre-pay canteen cards, [so] they’re buying hundreds of bars of chocolate, bags of roasted coffee and anything that’s non-perishable,” said one employee.

Linkd

ft.com comment:

Lehman had to fall to save the financial system

By Avinash Persaud

Published: September 15 2008 11:48 | Last updated: September 15 2008 11:48

It was a brave decision. By abandoning Lehman Brothers, a 158-year-old piece of Wall Street furniture, and refusing to remove their hands from their pockets when Merrill Lynch came calling, US Treasury Secretary Hank Paulson and New York Fed Governor Tim Geithner had one of the busiest weekends of dispassion on record. There will be much fall-out in financial markets over the next few weeks and even more uncertainty.

Two questions come immediately to mind. Why give guarantees to JPMorgan to help it to buy Bear Stearns in March 2008 but decline to do so six months later for Lehman Brothers, a larger institution? Second, will Lehman’s bankruptcy make financial conditions better or worse? There is rhyme to the reasoning behind saying no to Lehman Brothers and while things will get worse over the short-term, the alternative may have been the same pain, drawn out for longer.

There were reasons for saying no to Lehman that were not there for Bear. First, there is the distinction between solvency and liquidity. The liquidity arrangements the Fed put in place after the Bear Stearns collapse means that institutions that fail now are more likely to have a solvency problem than a temporary liquidity issue. The policy mistake that contributed to a decade of missing growth in Japan in the 1990s was allowing insolvent institutions to limp along, while praying for a revival in market prices that never came.

Second, there is the issue of moral hazard. While central banks have been offering liquidity on generous terms and stopping institutions from going bankrupt, some banks were not engaged in hard restructuring, but gaming the system. They were busy hoarding liquidity and pushing risky instruments into the hands of the authorities. Why did it take the edge of bankruptcy for Lehman to draw up plans to hold $30bn of hard-to-sell commercial property assets into a separate entity? The situation was complex and changing but bankers will recognise today that the game is not about luring sovereign wealth funds to invest before markets recover, but how to restructure for a brave new world in which the financial sector is smaller.

Third, there was a new and alarming factor not present at the time of Bear that argued strongly against new government guarantees. Since the August rescue of Freddie Mac and Fannie Mae, credit markets have begun to price in the possibility of a default by the US government – the implied probability remains a fraction of 1 per cent but it is an unprecedented development.

Finally, there is the systemic risk. Bankers always argue that if they are not redeemed of their sins that hell and damnation will fall upon the rest of us. This normally works. When Bear Stearns was tottering on the edge, it was argued that as it was the leading investment bank in the mortgage business, letting it fail would spread woe from the cloisters of banking to Main Street. The mortgage market still fell apart and a large chunk of it – Freddie and Fannie – has in effect been nationalised. Officials may have felt that the failure today of Lehman, an institution not heavily involved in residential mortgage lending, was not going to make much difference.

There will be systemic fall-out from the Lehman bankruptcy, however. The avenues through which systemic risk will flow will be new uncertainties about the functioning of the credit default market, rumours over insurance companies that sold insurance against corporate defaults and the cycle of accounting write-downs. Lehman’s commercial property portfolio was proving hard to sell, but it was only marked down to 85 cents in the dollar. Now that these assets will be sold off, there will be a transparent pricing point that other institutions will either incorporate into their valuations of assets, or the market will do it for them. Fresh write-downs will reduce the ability of banks to lend, which will crimp investment and slow economic growth. The optimists will argue that the sooner prices are marked down in a transparent way, the sooner the recovery may begin.

It is hard to argue against that now, but the real lesson from grappling with the fog of war is not to blow the fog away, but to avoid wars. We must redouble our efforts to moderate the booms that cause the crashes and stop discouraging long-term investors, through accounting and regulatory rules, from acting in a long-term manner.

The writer is chairman of Intelligence Capital Limited, a financial advisory firm, and Emeritus Professor of Gresham College

Linkd

I’m interesting. You’re a schmuk.

Linkd

I’m sure. But it’s being done in the closed sessions eujin spoke of, no? (Lehman wrote a default swap against some bond that a bank owns, and sold it to an insurance company. So Paulson invites the bank and the insurance company to just settle it themselves) Isn’t this what’s going on now, rather than dumping the swap onto some ‘market’ where the price would become public knowledge?