Friday, September 12, 2008

Here We Go Again!!! The Bell Is Tolling For Lehman and AIG

I hate to use this platform that is supposed to be used to discuss the commercial mortgage and real estate markets to discuss specific companies and the stock market, but as a former trader and avid stock market observer, the two are in some way intertwined. Maybe in a large way.

What's Going On?

We have had the recent federal takeover of Fannie Mae and Freddie Mac, and now we have the imminent potential demise or takeover of Lehman Brothers, the apparent serious need for a capital infusion at AIG, and the next potential shoe to drop for our institutions in the Alt-A and commercial real estate markets.

We have the Federal Reserve seeming to draw a line in the sand and say that they are not going to back any more transactions.

What is all of this going to do to the capital markets, to banks ability to lend, to individuals ability to borrow? Stay tuned because it is said that Lehman and perhaps AIG want or need to get something done before the Asian markets open on Monday. It could be a very interesting day.

Here is some commentary on the Lehman situation:

Breaking Commentary: Lehman on the Chopping Block

By Brad Sorensen, Director of Sector Research, Schwab Center for Financial Research

In what is starting to become a far-too-regular occurrence, the market is waiting to hear how the expected sale of Lehman Brothers (LEH) turns out this weekend. There are reports that the
Treasury Department and the Federal Reserve are trying to help bring the appropriate parties
together but are likely resistant to backing any deal with government money or guarantees.

However, a precedent of sorts has been set with the backing of $29 billion in debt by the
government in the deal between JP Morgan and Bear Stearns. Therefore, any potential buyer of
Lehman may balk at proceeding without at least some assistance from Federal authorities.
This could prove to be an important weekend in the development and resolution of the financial
crisis as we could see if the Feds are willing to draw a line in the sand or if they determine they
have no choice but to step in again. If they were to allow the various private-market parties work this out on their own, it could indicate some increased confidence that the financial markets are stabilized to the point that they can handle at least some disruption in the way they do business.

However, if the Feds feel they have no choice but to step in and their hand is forced, it could set
up further expectations of government bailouts going forward. We tend to believe it’s important
for private market to take care of these matters and would likely feel better about the ending of
the current crisis if we are able to get through this Lehman mess without substantial government intervention.

The Lehman situation differs from both of the previous recent instances of government
intervention in relatively substantial ways. First, there really is no comparison between this
situation and the Fannie Mae (FNM) and Freddie Mac (FRE) takeovers. They were government
sponsored and controlled such a large share of the mortgage market that a collapse of either firm
was unthinkable and, we believe, would have undoubtedly caused catastrophic harm to global
financial markets.

As for the Bear Stearns situation, there are some important differences, although it’s not quite as
clear as the GSE situation. That Lehman situation deteriorated in an almost unbelievably rapid
way, surprising the markets both here and around the globe as the financial tentacles of Bear
reportedly spread throughout the financial system to a greater extent than does Lehman.
Additionally, at that time, Bear had no ability to tap the Fed window for loans, limiting their ability to gain additional liquidity, an option now available to Lehman.

Finally, the deterioration of Lehman has been in process for a relatively extended period, taking
away the shock factor that was prevalent during the Bear Stearns crisis. As a result, we think
now is the time for authorities to move such situations back into the private market and act, at
most, as a facilitator rather than an active participant.

Also, it must be noted that, while it appears Lehman is desperate to get a deal finished before the Asian markets open on Sunday evening, there are no assurances that any deal will be able to be completed, especially if the government involvement, as currently expected, is minimal. We will continue to watch this situation carefully as the details of any completed deal—or no deal at all— could be crucial in determining the path of the current financial crisis.

Stay tuned.

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