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Monday, September 15, 2008

will lehman fail: news of lehman bankuptcy (chapter 11 bankruptcy proceedings)

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will lehman fail: news of lehman bankuptcy (chapter 11 bankruptcy proceedings).

Washingtonpost is reporting Lehman's filing for bankruptcy. This is a real test for the market, particularly the financials. The bottom might be near. Did the fed leave Lehman on its own to put aside the critiques of using public funds to bail out bankrupt financial companies?

Our personal view is that there is a chance during the proceedings that buyers sitting on the side line may jump in to buy lehman, as now the price of the stock will be very low, and a good part of the risk will be put out. The main unknown is the extent of the liabilities.

We should start knowing some of this tomorrow. The market is a great filter for this.

We are not ruling out a bottom starting sometime this week, as most of the bad news is now out. We will be reading the market action of indices closely to time a bottom.

The magic level of financial is the 16.00 to 17.00 area on XLF. If it holds, it is good news for a bottom on financials.

Excerpts from Washington Post with regard to Lehman ( stock ticker LEH):

"Wall Street titan Lehman Brothers headed into bankruptcy Sunday after potential buyers Barclays Banks of Britain and Bank of America backed away, citing the Treasury's refusal to guarantee Lehman's toxic mortgage portfolio.

In weekend-long negotiations at the Federal Reserve Bank of New York, leaders of the Treasury, the Fed and the Securities and Exchange Commission sought to persuade the two banks, as well as other top Wall Street firms, to step forward and acquire all or part of Lehman to avoid a major downturn that could be triggered by a Lehman collapse when stock and credit markets reopen Monday." .........

"Securities and Exchange Commission Chairman Christopher Cox said customers of the brokerage are protected from losses on their investment accounts under a federal insurance program. He urged any investors requiring help retrieving their money to contact the SEC.

"For several days, we have worked closely with regulators around the world, including [Britain, Germany and Japan] to coordinate our actions in the interest of orderly markets," he said. "We are committed to [reducing] the potential for dislocations from recent events and to maintain the smooth functioning of the financial markets." "...........

Excerpts from New York Times with regard to Lehman ( stock ticker LEH):

"As the mortgage market crisis unfolded in the summer of 2007, investors began to fret that Lehman Brothers would stumble, and its stock began a steady fall from a peak of $82 a share. The fears were based on the fact that the firm was a major player in the market for subprime and prime mortgages; it is also the smallest of the major Wall Street firms, raising the risk that large losses could be fatal.

Still, the storied investment bank has defied expectations more than once, as in 1998, when it seemed to teeter after a worldwide currency crisis, only to rebound strongly, and it rode a rollercoaster into the summer of 2008. While it had to announce a series of writeoffs and new offerings to seek capital to bolster its finances, it managed to avoid the fate of Bear Stearns, the other of Wall Street's small fry, which was bought by JP Morgan Chase at a bargain basement price under the threat of bankruptcy.

Lehman and Bear Stearns had a number of similarities. Both had relatively small balance sheets, they were heavily dependent on the mortgage market, and they relied heavily on the “repo” or repurchase market, most often used as a short-term financing tool.

Lehman has also fought a running battle with short seller. The company accused them of spreading rumors to drive down the stock's price; Lehman's critics have responded by questioning whether the firm had come clean about the true size of its losses.

On June 9, 2008, Lehman announced a second-quarter loss of $2.8 billion, far higher than analysts had expected. The company said it would seek to raise $6 billion in fresh capital from investors. But those efforts faltered, and the situation grew more dire after the government on Sept. 8 announced a takeover of Fannie Mae and Freddie Mac. Lehman's stock plunged as the markets wondered whether the move to save those mortgage giants made it less likely that Lehman might be bailed out.

On Sept. 10, the investment bank said that it would spin off the majority of its remaining commercial real estate holdings into a new public company. And it confirmed plans to sell a majority of its investment management division in a move that it expects to generate $3 billion. It also announced its latest round of bad news -- an expected loss of $3.9 billion, or $5.92 a share, in the third quarter after $5.6 billion in write-downs.


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