Lurking in the details of Lehman Brothers Inc.'s big yard sale is a plan to get the Federal Reserve off the hook. If Lehman was in a heap of trouble over the last few weeks, the Fed was arguably just as bad. What would it do if a run began? In the wake of the Fannie Mae/Freddie Mac bailouts, would the Fed backstop another big firm as customers and counterparties followed shareholders out the door? Could it find a buyer for Lehman? Or would it just let Lehman die, thus revealing stark limitations to its strategy since the Bear Stearns Cos. rescue and quick lateral to J.P. Morgan Chase & Co.?
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Now we get a sense of the plan: Allowing Lehman to shrink itself down to the point that its failure -- if it comes -- would not create a systemic disaster. After all, in one regard, the Fed has been lucky with Lehman -- well, it helped create its own luck through the discount window -- because unlike the Bear run, which occurred in a few days, the Lehman crisis has been unfolding in excruciating slow motion. In Bear's case, regulators had no time to unwind the many relationships the firm had with other players; in fact the only unwinding that occurred took place courtesy of the counterparties who pulled out, precipitating the collapse. Both Bear and Lehman offer a modern amendment to too-big-to-fail -- too-interrelated-to-fail. These days, you don't have to be huge, you just have to have a lot of ties. Who knew that buying a lot of credit-default swaps had the ancillary benefit of regulatory support?
The core question for the Fed is how to insure that, if it came to that ugly eventuality, Lehman could fail and make the least splash possible.
So now the firm has provided an answer: spin off the commercial real estate to shareholders; unload asset management; auction off bits and pieces that aren't tied down. Plug the hole created by another mortgage hit and stagger on, praying for better days. From the Fed's perspective, all this is swell. At a certain point, the Fed doesn't need to worry as much about a Lehman that is heading toward midtier status, particularly since the firm has been deleveraging anyway. From Lehman's perspective, this "right-sizing" will eventually make it expendable, from a regulatory perspective, though it's doubtful the central bank will put out a press release on that day. But when that point is reached, Lehman better have a way to support itself, because as soon as the markets realize the Fed may not step in, it could be all over faster than you can say Bear Stearns.
That may be a way off. Lehman has a ton of work to do over the next few months to sell off this stuff, and it desperately needs to find a way to make a steady buck. The conference call Wednesday may be sufficient to keep the markets at bay -- or it may not. But the "end game" everyone has been chattering about has finally come in sight -- for Lehman and the Fed. - Robert Teitelman
