Lehman has filed for bankruptcy


Update: 815AM EDT: Unable to find buyers in around the clock talks, Lehman Brothers has filed for bankruptcy protection. On Friday, it was learned that Lehman had hired bankruptcy attorneys. Now, the worst has come to pass: Lehman has declared Chapter 11 insolvency. In a move reminiscent of the Drexel Collapse in 1990, Dick Fuld now has the honor of running a liquidating financial company (see Bloomberg story here).

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This story, originally written before Lehman’s filing, has been edited as information became available. At the bottom are related stories that are being posted by news sources.

Deal Book, the New York Times blog by Andrew Ross Sorkin, is reporting that Lehman is expected to declare bankruptcy as early as tonight. Below is his post. Needless to say, we will be watching developments and update you when they are made public.

According to people briefed on the matter, Lehman Brothers will file for bankruptcy protection on Sunday night, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

But Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive as a going concern. It will instead liquidate its holdings.

It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation, or how big the financial backstop would be.

Lehman’s broker-deal subsidiaries would not be a part of the bankruptcy filing. Those entities must file under Chapter 7 rules, which are the procedures for liquidation, under the assumption that it is the best way to protect customers. The Securities Investor Protection Corporation would handle the liquidation of such brokerages, and bankruptcy lawyers say that customers are likely to receive their holdings back.

Moreover, changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.

Lehman has retained the law firm Weil, Gotshal & Manges to prepare its bankruptcy filing. The firm’s restructuring head, Harvey Miller, also worked on Drexel’s bankruptcy back in 1990.
Deal Book

Note: Merrill, fearing for its continued existence, is now in talks with BofA (see story)

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Too big to fail?

Related stories – to be updated
If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system – Nouriel Roubini
Derivatives session to reduce risk from Lehman bankruptcy – Market Watch
Futures plummet amid uncertainty about U.S. banks – Reuters
U.S. bank rescue fund would provide $50 bln in loans: AP – Reuters
Lehman: All Fuld’s Fault – Market Movers
U.S. Dollar Weakens on Concern Lehman to File for Bankruptcy – Bloomberg
Fed’s Sunday Statement: Eligible Collateral Broadened – Real-Time Economics
Lehman Brothers Suspended From London Commodity Trade – Bloomberg
Lehman Bankruptcy Summons Drexel Ghost 18 Years Later – Bloomberg

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