Banking Blues

The well has run dry. Or better yet, the American government has finally come to its senses and realises that while it must do all it can to not let major players within the financial systems, that does not automatically mean it must prop up investment banks like Lehman Brothers using taxpayer funds.
Now don’t get me wrong, I do not want to see the bank fail and I really do hope that a deal can be hammered out privately to rescue the bank as not all of the 24,000+ employees are rich investment bankers.
That said, I strongly believe that the government should not continue making the sort of financial guarantees that it did in the Bear Stearns case. There isn’t a bottomless bit of money. Furthermore, government intervention so far has not helped to contain the financial crisis. In fact, it has only gotten worse. Confidence has not been restored as we have not really reached the bottom. Thus as painful as it is to see house prices go south and unemployment increase with the trickle down effects of bank failures and the tighter rules around lending, the government needs to allow the market to correct itself. Harsh, but this needs to be the new reality.

Bank of America Said to Walk Away From Lehman Talks
By Margaret Popper and Yalman Onaran
Sept. 14 (Bloomberg) — Bank of America Corp. abandoned talks to buy Lehman Brothers Holdings Inc., according to a person with knowledge of the matter, less than three hours after Barclays Plc said it wouldn’t buy the faltering investment bank.
Bank of America, the biggest U.S. consumer bank, and Barclays, the U.K.’s third-largest lender, had been among the leading candidates to acquire all or parts of New York-based Lehman. The Wall Street Journal reported that Bank of America had entered into merger talks with Merrill Lynch & Co., citing unidentified people.
The two potential bidders pulled out amid a third day of emergency negotiations led by the U.S. Treasury and Federal Reserve. Leigh Bruce, a spokesman for London-based Barclays, confirmed in a phone interview today that his firm had withdrawn. Spokespeople for Bank of America didn’t immediately return calls seeking comment.
The U.S. government is racing to find a solution for Lehman before markets open tomorrow, two people familiar with the situation said. Barclays walked away because it couldn’t get guarantees from the government or agree on a private-sector deal to mitigate what it called Lehman’s “open-ended” trading obligations.

Led by Chief Executive Officer Richard Fuld, Lehman may be forced to liquidate unless buyers step up for all or part of the 158-year-old company, U.S. Treasury Secretary Henry Paulson and Timothy Geithner, head of the New York Federal Reserve, told the chiefs of Wall Street’s biggest firms at a meeting Sept. 12.
Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.
“The purpose of this session is to reduce risk associated with a potential Lehman Brothers Inc. bankruptcy filing,” the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.
The step indicates that Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Paulson, who has led the talks with Geithner, was adamant two days ago against using taxpayer funds in a resolution.
The fourth-largest securities firm until the past week, Lehman has thousands of such trades in credit, equity, commodity, interest rates and currency derivatives.
To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net.
Last Updated: September 14, 2008 16:18 EDT

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