FYI | Mar 18 2008
By Greg Peel
It would not be uncommon for a military field doctor to have to make a rational decision to allow one badly wounded and dying soldier to perish so that sufficient attention can be given to another wounded soldier who may survive.
So it was that in the wake of the US$2 sell-off of 85-year old venerable Wall Street firm Bear Stearns, the Fed was urging the US investment community to assist in saving another one of its own in Lehman Bros. As the fourth biggest US investment bank to Bear Stearns’ fifth, and with a business model most similar to Bear’s of all of the majors, Lehman is the next candidate in what could yet prove a deeper rout.
The London Daily Telegraph reports The New York Fed contacted bank executives from the likes of Goldman Sachs, Morgan Stanley and Citigroup on the weekend, urging them to insist their staff to not make disparaging remarks about Lehman when dealing with their own hedge fund clients, or worse still to contact Lehman’s clients and solicit business by casting doubt. It was last week’s rapidly growing demand from hedge funds to close out their positions and reclaim cash that sent Bear Stearns into a tailspin.
Bear Stearn’s share price closed down 47% on Friday, ahead of a rescue package from JP Morgan backed by the Fed. Ominously, the Lehman Bros share price collapsed 48% in early trade last night but recovered during the day to be down only 20% on the close. As to whether the recovery was due to desperate PR from Lehman’s colleagues is unclear. While the Fed’s supposed bail-out of Bear has provided more confidence the Fed is standing behind the investment banking fraternity, the reality is that Bear Stearns shareholders have been allowed to be blown away.
Was the same thing about to happen to Lehman?
The large investment banks know full well the fall of Lehman would likely be simply the second in a cascade of ever larger dominos. There is no schadenfreude in watching the competition go to the wall. The entire US banking community is connected at the waist by a rope as they cross a thin ice-bridge across a mountain precipice. If more than one of their number slips through, the remaining group may not have the strength to prevent being dragged over as well.
In what will without any doubt create more negative news flow for Lehman Brothers in Australia, some councils are reportedly about to launch legal action in an attempt to recoup some of their investment losses stemming from exposure to CDOs while believing they participated in relatively low risk investment products.
