Fallout from Lehman Brothers collapse still spreading

[FarCenter]

Christine Seib in New York http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5332752.ece

When Dick Fuld left Lehman Brothers' headquarters at 745 Seventh Avenue for the last time on September 15, the broker-dealer he ran may have been defunct, but there were three like it still left. Three months after Lehman went bust, they are all gone and the reverberations of Lehman's collapse are still being felt across America. All that remains of Lehman is bare bones. Two days after the bank declared itself bankrupt, Barclays bought Lehman's US investment banking business, its headquarters and two processing centres for $1.7 billion. Just over a week later, Nomura snapped up the European, Asian and Middle Eastern businesses. Last week, a management team gained control of the majority share of Lehman's coveted asset management arm.

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Lehman's surprise collapse - the market had expected the US Government to rescue the stricken bank just as it had organised the sale of Bear Stearns to JPMorgan six months earlier - set off a chain reaction around the world. The bank's default on $165 billion in unsecured debt hit investors with an estimated $120 billion in losses. The credit default swap (CDS) market, of which Lehman had been a major player, dried up. The commercial paper market, where investors had bought Lehman's debt, froze. Companies began eating up unused portions of credit lines and stashing the money away in fear that their lenders would pull their funding. As a result, banks quickly ran out of liquidity.

However, Lehman was not just Wall Street's problem. AIG teetered on the brink of collapse as investors and counterparties panicked about the insurance giant's own exposure to the estimated $60 trillion global CDS market. As a result the Federal Reserve was forced to abandon the moral-hazard high ground and hand over $85 billion in emergency money to AIG.

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Three months after Lehman, the market for some assets remains dead. Figures compiled by Thompson Financial show that there have been only two issues of high-risk, high-yield debt since the bank went bust. Mortgage-backed debt has continued to sell in the past three months, although with far fewer issues per week. The market for sub-prime and Alt-A mortgage-backed securities, however, is gone. No one is buying collateralised loan obligations (CLOs) and the CDS market remains in tatters. Issuance of asset-backed securities is patchy, with at least three weeks since September 15 in which there were no sales. Yet investment grade debt has continued to sell at relatively normal levels.

Commercial paper, an important source of short-term funding for many companies, has picked up in the past six weeks, largely because of a Federal Reserve funding facility that has bought $300billion worth of the assets over the past seven weeks. For non-financial companies, the cost of borrowing using commercial paper is at a ten-year low. US bank lending, including commercial and consumer credit, is at record highs, indicating that households and companies are not struggling across the board to get loans. Local governments are issuing municipal bonds at the same level as before the credit crunch. And real estate lending hit a record high in October.

[SoCalDem]

1. "...rescue the stricken bank ...".. Oh, Puhleeeeze

Lehman's did not "catch something" .. The people in charge KILLED it, AFTER they protected their own assets..