Lehman Brothers: More Than an Ox in the Pit

Churches that empahsise Sunday legalism get this verse recited frequently:

And Jesus answering spake unto the lawyers and Pharisees, saying, Is it lawful to heal on the sabbath day? And they held their peace. And he took him, and healed him, and let him go; And answered them, saying, Which of you shall have an ass or an ox fallen into a pit, and will not straightway pull him out on the sabbath day? And they could not answer him again to these things. (Luke 14:3-6)

New York’s extraordinary Sunday session is indicative that the whole herd is stuck in a major way:

Wall Street readied for a potential Lehman Brothers Holdings Inc. bankruptcy after Bank of America Corp. and Barclays Plc pulled out of talks to buy it and the government indicated it wouldn’t provide funds to prevent a collapse.

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight.

“The purpose of this session is to reduce risk associated with a potential Lehman” bankruptcy, the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Treasury Secretary Henry Paulson, who has led the talks with New York Fed President Timothy Geithner, was adamant two days ago against using taxpayer funds to help a purchaser take Lehman over.

U.S. regulators are betting that the financial system will be able to withstand the failure of a large institution without severe disruptions to an already weak economy.

As the Chinese would say, I hope they’re right.  The biggest danger in the whole derivatives business is that no one really knows where the “buck” stops.  The reselling of debt has created a condition which is so convoluted that the collaterisation of loans is unknown in some cases.  So the pain has been spread worldwide, with failures coming everywhere.

Message: don’t be in a hurry to see this crisis stop.

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