Little hope for Lehman
CNN
Transcript
The pending Lehman Brothers sale, it is sparking merger talks between Bank of America and Merrill Lynch. A lot to get to. And joining us now to sort it all out is Paul LaMonica. He's a writer for CNNMoney.com. He joins us live from New York. Paul, good to see you. And first, let's talk about Lehman Brothers. Barclays walked away from a bid. What are the survival options left for Lehman Brothers? Unfortunately, it's starting to look like it might be bankruptcy as the only option for Lehman. We have yet to confirm that that is definitely the case that they are filing. But with Barclays and also Bank of America pulling out of talks to buy all or part of the firm, it does not look promising. Bank of America has pulled out of talks as well to buy a part of Lehman Brothers. It's instead talking to Merrill Lynch on a potential merger deal. What's the latest on that? Yeah, the latest we're hearing there is that... Bank of America and Merrill Lynch are reportedly in talks about combining, which would be an interesting deal for both firms. Because a lot of people have been already raising questions about whether or not Merrill Lynch would be hit with many of the same concerns and fears that Lehman has had. Because Merrill Lynch is now, after Lehman, the smallest independent investment bank left, really, on Wall Street of the major firms. Do you think Merrill Lynch is a better fit for Bank of America than Lehman Brothers? Do you think that that deal is likely to go through? At first blush, I think it does, because Merrill Lynch has more of a well-known brand name, I think, with American investors. And that is something that Bank of America probably could use in its wide-ranging brand system throughout the country. So, yeah, at first blush, it's probably a better fit. And back to Lehman Brothers. I mean, Lehman Brothers is one of the oldest, one of the largest investment banks in the United States. We've seen... It shares just nosedive in the last few weeks. And a much-needed bid from a much stronger bank is not coming through. Just what's at stake here? Really, I think a lot of people are going to, in the next day and weeks, really just wonder what the future of Wall Street is. And I think a lot of banks are going to try and get bigger and maybe take advantage of this, as we're seeing possibly with Bank of America and Merrill Lynch. And I think the lesson learned is that banks are not going to be... taking on the really insane amounts of debt tied to risky real estate probably anytime soon. I think the lesson learned is that banks are not going to be taking on the really insane amounts of debt tied to risky real estate probably anytime soon.
Possible Lehman liquidation?
CNN
Transcript
Wall Street has been shaken by news that Lehman Brothers may face liquidation. For some more analysis, we're joined by Daniel Alpert. He's Managing Director from Westwood Capital. Daniel, thank you so much for joining us. For ordinary folk watching this program all around the world, the real question regarding Lehman Brothers is what impact will it have on the real economy globally? What are your thoughts on that? Well, you know, liquidity and capital are the things that make economies work. And at this point, we're in a situation where the providers of capital are themselves running out of it. Where we've gone so far in this crisis, and we've been at this now for over a year, we've seen banks and other institutions write off a total of about $550 billion of debt in what we believe, at least at Westwood, is going to end up being somewhere on the order of $1.25 trillion of total. And that's just from the residential mortgage sector. Clearly, the commercial mortgage issue and the consumer credit issue are also going to make contributions. We've now gotten to the point where the ability of investors globally and the ability of banks themselves to cover that capital shortfall is diminishing. So does that mean that John Doe, living in the Midwest, if he wants to get a mortgage, if he wants to get credit, he's going to have a harder time doing it because the banks themselves are struggling? To get that capital, to get that credit? Well, you know, I would say that if John Doe owned a business, he'd probably have a harder time getting credit for his business. As far as the mortgage market is concerned, the prime mortgage market is and should stay in fairly good condition, especially with the Fed's takeover of Freddie and Fannie. I was sitting in the same chair last weekend at the same time talking about that, which was earth-shattering news at the time. This news about Merrill and about Lehman, of course, is certainly a watershed in the financial markets. So explain to me why the U.S. Treasury and the Fed is unwilling to put public money towards Lehman Brothers, whereas it was willing to get involved in Bear Stearns and Fannie Mae and Freddie Mac. What's the situation there, given the fact that it could have such a disastrous implication? Yeah, well, there's a fundamental difference. In Fannie and Freddie, the federal government was regarded as implicitly guaranteeing the debts of those institutions. In point of fact, the market treated it as an explicit guarantee. And had they not stepped in with $5.5 trillion of Fannie and Freddie-backed debt, we would have had an absolute disaster. It was one of the largest and most important credits in the world. With Lehman, unfortunately, we're talking about the loss of a very distinguished institution that ran at a very high level of leverage. This is a company that was running with maybe a 3% capital cushion at the peak, and has now tried to unwind desperately the assets that have gone down dramatically in value. Right now, the biggest threat to the financial system, per se, is that the assets that are owned by Lehman are involved in a fire sale. And certainly, if it files for bankruptcy, we would be in a position where, in the absence of any other cure, those assets would find their way to the market. That would force all other financial institutions to mark their assets to those institutions. What I understand is being spoken about downtown at the New York Fed at this moment is an effort to try to pull together a capital base to keep those assets off the market, at least in a disorderly process. So Daniel, just to be clear, there's talk of Henry Paulson, the US Treasury Secretary, refusing to get involved in this because it's also as much about setting a precedent, a warning to other financial institutions not to take excessive risks. Is it worth the gamble? Absolutely. Well, you know, the moral hazard issue by itself, you could argue, may or may not be worth the gamble because you can always introduce regulations to avoid that the next time around. But the fact is, it's not within the capabilities of the United States government to bail out every financial institution. It just purely isn't. It would be destructive to our both fiscal and monetary policies. I think former Chairman Greenspan was quite right today in his comments about what the Fed shouldn't be doing. And what the Treasury shouldn't be doing. At this point, what we need to do is try to avoid a complete asset meltdown by making sure that these positions that are held by Lehman and other firms are sold in an orderly manner. It's clear to me that the underlying assets that back these sort of what are known as toxic securities, these assets are continuing to fall in price. And that's people's homes and commercial real estate. That process needs to be accelerated. Thank you.