The Final Days

From the Summer of 2008 onwards, Lehman could do very little to contest their slide into bankruptcy. A public offering launched on June 12^th could only garner $6billion, which was some way short of the aid Lehman needed. By the end of the week on Friday 12^th September, it had become clear to the public that this gradual decline had quickly developed into an overwhelming debt burden that Lehman could no longer handle themselves. At this point, the US Government called a meeting of the major Wall Street firms in an attempt to negotiate some sort of deal between all of the firms to save Lehman from collapse.

 

Lehman Brothers share price, taken from The Financial Times using Thomson Datastream. The stock price can be used to indicate firm performance.

It was always a possibility that the government themselves would come to the rescue themselves with a Federal Reserve bail-out if no agreement could be reached between Lehman and any other possible buyers. However, in this series of meetings across the 12^th to 14^th September, Henry Paulson, the US Secretary of the Treasury, stated and reiterated that a government loan would not be forthcoming. Valukas (2010) indicates that there were substantial moral objections within the Federal Reserve System and government as to the consequences of funding Lehman and it was also thought that the reported reserves within Lehman were too low to avoid collapse. Their perception was that any loan proposal would just stave off the inevitable.

 

The official Treasury photograph of Henry Paulson.

 

Initially there was interest in providing funds. Aidikoff, Uhl & Bakhtiari, have quoted the two main suitors on that weekend as Bank of America, who had bought Merill Lynch only months before, and Barclays Bank, UK. Andrew Clark reported a story for The Guardian newspaper that Bob Diamond, president of Barclays, had tried to get business tycoon Warren Buffett involved with the deal. Buffett had previously injected a $5billion cash boost into Goldman Sachs to ease them through the financial crisis. However, neither that deal nor Bank of America could finalise a take-over. Barclays buyout was dead in the water as it was blocked by the UK’s Financial Services Authority. In all reality, it was unlikely that any suitor would have took on the burden of Lehman as their problems were more far reaching than they disclosed.

As it was Lehman Brothers filed bankruptcy papers in the early hours of Monday, September 15^th 2008. The Wall Street Journal indicated in their issue the next day that liquidation was perhaps a no worse scenario than being bought and gutted by another bank. Once liquidation had begun, the bank was segregated into good and bad parts and put up for sale. The Guardian newspaper reported a week later that Barclays had purchased the North American division of Lehman’s business whilst Japanese brokers Nomura agreed a deal to take on Lehman’s equities across Europe, the Middle East and Pacific Asia.