Lehman Readies for Bankruptcy

In a whirlwind weekend of deal-making discussions, it appeared Sunday evening that Lehman Brothers (LEH) was headed toward bankruptcy.

The struggling firm’s two possible “white knights” – Barclays Bank plc and Bank of America (BAC) – pulled out of negotiations after both banks found it impossible to absorb the firm without taking on too much of Lehman’s bad assets.

Both Dow Jones Newswires and The NewYork Times reported Lehman would file for bankruptcy tonight, citing sources familiar with the matter.

Meanwhile, The Wall Street Journal is reported Bank of America has agreed to purchase Merrill Lynch (MER) for $44 billion, or close to $29 per share. Click here to read more about that deal.

If Lehman does file for bankruptcy liquidation it would mark the first bankruptcy of a Wall Street firm since Drexel Burnham and Lambert in 1990.

In preparation for a possible bankruptcy filing by Lehman Brothers, the International Swaps and Derivatives Association opened an emergency trading session between dealers who hold Lehman counterparty risk products from 2 p.m. to 6 p.m.EDT on Sunday.

The ISDA said the trades are to give anyone holding those products a chance to shore up their positions in the wake of a Lehman bankruptcy. If Lehman does not file for bankruptcy before midnight Sunday New York time, the ISDA said those trades would be void.

The Journal reported Lehman has hired law firm Weil, Gotschal & Manges LLP to prepare a potential bankruptcy filing, citing a person familiar with the matter.

If Lehman enters into bankruptcy protection, the brokerage units would enter Chapter 7 liquidation, the Journal said, and a court-appointed trustee would liquidate the firm's assets and give customers back their money.

The Securities & Exchange Commission said in a statement that investors who own securities held by Lehman would not have their stocks or bonds seized in the event that Lehman Brothers files for bankruptcy.

"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.

Also in a statement, the Commodity Futures Trading Commission Acting Chairman Walter Lukken said his organization is working "to ensure that customers of Lehman’s CFTC-regulated futures commission merchant are protected, and to take steps to maintain the stability and orderliness of the commodity futures and options markets."

As the chief executives of the major Wall Street firms met through the weekend at the New York Federal Reserve building in downtown Manhattan, it became apparent that Lehman was either going to find a suitor or end of in bankruptcy court before Asian markets opened Sunday night.

According to reports,Barclays, the U.K.'s third-biggest bank, pulled out of talks to buy all or parts of Lehman because it could not secure guarantees from the U.S. government or agree on terms on how to mitigate potential losses in the firm's investment banking division. Barclays had emerged as the primary prospect to make a bid for the beleaguered investment bank, with Bank of America coming in second.

The primary plan was to split Lehman Brothers into "good" and "bad" banks began to take shape, The Wall Street Journal and other outlets reported.

Lehman's uglier-looking holdings would be pared off into a "bad" bank containing about $85 billion in assets. The proposal involves having other Wall Street banks inject some capital into the bad bank to keep it afloat long enough that bad assets don't flood the market, thus hurting the value of similar holdings at other institutions, the Journal said.


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