Barclays gets “core Lehman” assets

It’s done. Core Lehman is sold. Now the rest of the company can be liquidated. Barclays will buy the core assets for a measly $2 billion. For Lehman staff in the US, this has to be a relief. However, staff in London are probably left out in the cold as Barclays sees this operation as redundant.

This is precisely the outcome that Hank Paulson was looking for. The question now is at what cost. While “Core Lehman” has been sold, the rest of Lehman Brothers will likely be liquidated except for the Investment Management Division, which is still quite valuable.

Nevertheless, systemic risk has definitely increased. AIG conservatorship is rumored to be next — an interesting conclusion to the AIG problem. I have now covered this solution (see my post).

Barclays appeared tonight to have secured a deal to buy large parts of Lehman Brothers, the investment bank that filed for bankruptcy on Monday amid one of the worst financial crises that Wall Street has suffered.

Barclays’ president, Bob Diamond, was reported to have addressed staff at Lehman in New York today, telling them: “You have a new partner.”

In a brief statement earlier today, Barclays said it was in negotiations about the “possible acquisition” of “certain Lehman Brothers assets on terms that would be attractive to Barclays shareholders”.

The talks centred on Barclays buying the U.S. investment banking and trading divisions of Lehman, including equities and fixed income, leaving the toxic property-related assets with the bankrupt firm. It is also looking for a buyer for its asset management arm.

Full details of the deal were still not clear but the price was believed to be in the order of $2bn (£1.1bn). It is thought that a deal could save thousands of jobs, mainly in the US. The news came less than 48 hours after Barclays had walked away from talks orchestrated by U.S. officials to prevent Lehman falling into bankruptcy.

The failure of Lehman, the fourth-largest investment bank on Wall Street, together with the sale of Merrill Lynch to Bank of America, triggered a worldwide sell-off in the financial markets and shook faith in Wall Street.

Figures out today showed that hedge funds and other investors that had been shorting Lehman’s stock since March had made $29bn from the firm’s demise. Short-sellers bet on shares falling.

Diamond, who led the failed weekend negotiations to take control of Lehman, had remained in the U.S. and worked through Monday night to hammer out an agreement.

Lehman is said to have renewed contact with Barclays on Monday afternoon to see if it would still be interested in some of its assets.

But it is far from clear that Barclays shareholders are ready to back further expansion of the bank’s investment division, which has grown rapidly under Diamond’s 10-year tenure. He was involved in disbanding the bank’s last disastrous foray into global financial markets, BZW, and there are fears that he may now be preparing to recreate the business.

Diamond knows that if a deal requires Barclays to raise fresh funds from shareholders, the transaction will be subjected to even greater scrutiny. He has insisted that Barclays has the opportunity to become a top-four bank on Wall Street as ailing players fall by the wayside.

Barclays has sounded out shareholders about a possible cash call although only 13% of them backed its last funding when it raised £4bn, as well as £500m from new investors in Japan.

Frustration at Lehman was growing today, particularly over its chief executive, Richard Fuld, who had still to address workers directly. “We don’t know what is going on,” one Lehman banker said outside the firm’s offices in midtown Manhattan. “Fuld hasn’t said anything to us yet; we’re all uncertain whether we have got jobs or not.”

Lehman was racing to sell off the investment bank before staff and clients began to leave in large numbers, eroding any residual value it might have. Staff have been clearing their desks and walking out with bags or cardboard boxes full of possessions since it became apparent on Sunday evening that the firm was finished.

Lehman listed assets of $639bn, making it the biggest bankruptcy filing ever, 10 times the size of the energy firm Enron when it went bust in late 2001.

The bank filed for Chapter 11 bankruptcy, which provides protection from creditors while it liquidates its business. The operations in the UK were put into administration and staff reacted with shock and anger as they turned up for work on Monday and were in most cases told to go back home again.

Creditors from JP Morgan Chase and Credit Suisse to smaller investors such as Arapahoe County in Colorado rushed to file claims in the bankruptcy court. The business owed $613bn to creditors around the world. The unravelling of the business is expected to take months or possibly years.

One large asset owned by Lehman is its corporate headquarters on Seventh Avenue in New York, which the bank paid $650m for after it was forced out of downtown New York by the attacks of September 11, 2001.

Fears began to grow for Lehman in March, after the near failure of Bear Stearns. But the business rapidly imploded just a week ago when it became clear that talks to secure capital from the Korea Development Bank had broken down.
–The Guardian

UPDATE 1045PM EDT: Barclays Plc agreed to buy bankrupt Lehman Brothers Holdings Inc’s North American investment banking and capital markets businesses, its New York headquarters and two data centers for a total of about $1.75 billion.

The deal, announced late on Tuesday, would unite two big debt trading houses and could stanch the flow of customers fleeing Lehman in the wake of the largest bankruptcy in U.S. history. – Reuters