According to The New York Times Dealbook blog, the word is that nobody wanted the entirety of this gangrenous carcass without a complete Federal Reserve guarantee a la Bear Stearns, so the healthy parts are being carved off, while the Fed graciously trades some of its remaining assets for the fetid pieces:
Lehman Brothers will file for bankruptcy protection on Sunday night, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.
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. …
How many billions of its remaining $400 billion in Treasuries is the Fed going to lose in this deal?
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.
Boy, if I were a Lehman brokerage client, I would hate to have to wait for the bureaucrats at SIPC to get me my securities back. And what about clients with margin accounts? Will they be wiped out?
… Moreover, changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.
As of 7:30 PM in New York, traders are anticipating a nasty open Monday morning. With a Fed meeting Tuesday and options expiration Friday, this should make for an interesting week.