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Sunday, September 14, 2008

Lehman Trades Netting

Everyone expected an announcement by now on Lehman, and it hasn't come. See Calculated Risk which has been providing superb coverage on the topic all weekend. The possibility of bankruptcy filing is real.

My take on this is very simple - I don't believe that these firms have the capital to support all this themselves. The day of reckoning is nigh. My guess is that Lehman will end up filing and parts of it will be sold as part of bankruptcy proceedings, but we'll see.

I don't think the Fed will cut rates soon, but many disagree. I think the Fed will do everything but cut rates, because they know they need to conserve some ammunition for later in the downturn. I also don't think the Fed is going to guarantee assets for buyers.

Were I the Feds, I'd be more worried about Washington Mutual than Lehman. Ordinary folk don't deal day-to-day with investment banks. But if their neighbor is lined up at WaMu as part of a bank run, everyone will notice, and in ways that FDIC, the Fed, and the Treasury would rather they didn't.

FDIC reserves (post-IndyMac) are about $45 billion, if I recall correctly. A WaMu seizure would wipe most of that out.
Oh, they are worried. They're talking about raising deposit insurance rates. Congress would have to advance the money to take care of current needs.

I don't think WaMu can hold on. It will have to sell itself piecemeal to try to pull in capital, but once your flagship business line (mortgages) is gone, what do you sell? Retail branches, which has been discussed. But that is cutting off the way you access new capital.

It's got to merge.
I agree with that. Word is that there are negotiations with JP Morgan. One wonders what the bottom line will be?

A thought also occurred to me tonight: We've never seen a debit-card bank run, and if things go to a full-blown panic, we will. The process of a bank run may be a lot faster than we expect. The FDIC had best be prepared to move very quickly indeed.
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