Lehman to file for bankruptcy
Lehman Brothers will file for bankruptcy protection tonight or tomorrow morning according to the New York Times. This marks the uncerimonious end of the 158 year-old Wall Street institution. A much different end result than the government-brokered Bear Stearns bailout to be sure. Because of the bankruptcy law around financial services firms the company must liquidate, and cannot reorganize and continue operating.
From the New York Times:
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.
Lehman just wasn’t able to get out of its own way. After making huge bets on subprime and Alt-A mortgages with the purchase of BNC Mortgage and Aurora Services, they were unable to unwind their exposure before the bottom fell totally out.
You can read more about the Lehman bankruptcy here and here.