Lehman Goes Bankrupt; Wall Street Swoons

Lehman Brothers Holdings Inc. (LEH) filed for bankruptcy late Sunday night, the largest corporate bankruptcy in U.S. history — dwarfing WorldCom Inc.’s insolvency in 2002. The Wall Street firm was done in by the very mortgages that helped it climb to new heights in recent years. The global financial crisis now clearly has no comparison, even if last week’s bailout of Fannie Mae (FNM) and Freddie Mac (FRE) clearly served notice; Lehman had survived the Great Depression of the 1930s and numerous other financial crises in decades past, but could not survive the subprime mortgage crisis and its now-broader credit impact. Lehman’s fate was sealed after both Barclays Plc and Bank of America Corp. (BAC) balked at takeover negotiations and federal officials made it clear late last week that they would not provide funding to the deal in the mold of an earlier bailout of Bear Stearns Cos. this past March. Last week, Lehman moved up its third quarter earnings announcement in an attempt to assuage investor unease. The firm said it would lose $3.9 billion in the third quarter, a loss of $5.92 per share, the largest quarterly loss in company history; $5.6 billion in net write-downs on residential mortgage and commercial real estate positions largely drove expected losses. Obviously, the early Q3 results did little to change the end game for the Wall Street investment bank. Analysts at CreditSights Inc. estimated Monday that bondholders would get roughly 60 cents on the dollar should Lehman liquidate; Lehman listed $639 billion of assets in its bankruptcy filing. The firm listed $155 billion in unsecured bond debt among its largest unsecured claims; among unsecured lenders, Tokyo-based AOZORA Bank Ltd. is owed $463 million, while Mizuho Corporate Bank, Ltd is owed $289 million. A Hong Kong affiliate of Citibank N.A. is listed as well as owed $275 million, according to a review of the filing. See the full bankruptcy filing, and court pleading. The Wall Street firm said none of the broker-dealer subsidiaries or other subsidiaries of Lehman Brothers will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, the firm said. “The onset of instability in the financial and credit markets over the past several months created significant liquidity problems for Lehman Brothers,” Lehman CFO Ian Lowitt said in the court filings. “The uncertainty, particularly among the banks through which the Company clears securities trades, ultimately made it impossible for the Company to continue to operate its business.” U.S. equities plunged on the market unrest, which included a purchase of Merrill Lynch & Co, Inc. (MER) by Bank of America, and word of a request for emergency capital from insurer The American International Group (AIG). The Down Jones Industrial Average was at 11,170.73, off 2.20 percent or 251.26 points, when this story was published. See coverage of AIG. For those wondering when the bottom of this crisis will come, it’s still tough to say. Wall Street had roughly halved its early losses by mid-afternoon, and some analysts were already suggesting that the time to buy was now. But other troubled institutions are still out there — Washington Mutual (WM) chief among them. More than a few analysts suggested to HW privately on Monday that “taking care of the WaMu problem” would be critical to restoring market confidence after the shake-up on the rest of Wall Street. Any failure of WaMu, were it to happen, would put the Federal Deposit Insurance Corp.‘s deposit insurance fund into a ‘stress test’ scenario: the Seattle-based had $143 billion in insured deposits on June 30, roughly three times the size of the deposit insurance fund. Related links: Lehman statement Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.