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Lehman: insolvency looms

• Robert Peston
• 14 Sep 08, 08:07 PM

Preparations have been made for Lehman Brothers, the substantial US investment bank, to obtain protection from its creditors under US Chapter 11 insolvency procedures.

I have also learned that PWC, the leading accountancy firm, has been lined up to run the UK operations of Lehman in the event that it is put into administration under our insolvency arrangements.

The preparations for insolvency protection have been made because the US authorities have become gloomy that Lehman can be rescued.

"The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers' money" said a banker close to the rescue negotiation. "Hank Paulson [the US Treasury Secretary] has made it clear he doesn't want to do that."

If Lehman is put into Chapter 11 tonight, the impact on global markets tomorrow could be very significant.

The withdrawal of Barclays from negotiations to buy most of Lehman - which I reported earlier - left only Bank of America as a potential rescuer.

And Bank of America is - according to bankers - not persuaded that acquiring Lehman is in the iterests of its owners.

The stumbling block is that no bank or other financial institution wishes to take on Lehman's massive liabilities without some kind of protection or guarantees from the US government.

But the US Treasury is reluctant to commit taxpayers' cash to a bailout of Lehman.

It believes that the markets can cope with the shock of Lehman's collapse - though this is disputed by senior bankers.

If Lehman collapses, this would mark a dramatic change in approach to coping with the credit crunch by the US government and the US central bank, the Federal Reserve.

They committed taxpayers' cash to rescuing Fannie Mae, Freddie Mac and Bear Stearns when they ran into serious difficulties. But Hank Paulson has apparently decided that enough is enough, and that taxpayers' cash should not be committed on this occasion.

However, whether he will continue to hold his nerve and will continue to sit on his hands as the deadline for Lehman to be put into Chapter 11 approaches, we shall see.

UPDATE 10.45PM: Sometime before midnight US time, Lehman is expected to file for Chapter 11 and go into administration over here.

I have been told that its executives are seeing the New York Fed right now to investigate whether it can borrow several billion dollars so that it can go into an orderly liquidation as an alternative to formal insolvency.

But Lehman executives do not expect the Fed to give them the funding that would be required, so they assume their business will formally collapse.

The implications will be huge. If the new controllers of the business in insolvency feel obliged to sell assets, that could do severe damage to other banks, because there would be a sharp fall in the market value of those assets.

In the round, the collapse of Lehman would knock bankers' already enfeebled confidence. They will become even more reluctant to lend to most of us. The credit crunch would take a turn for the worse.

Even in terms of the impact on unemployment, the damage will be considerable - in that Lehman employs around 25,000 worldwide, including 5000 in the UK.

I am hearing that the US Treasury and the Fed hope however that the contagion to other banks shouldn't be too appalling - in that Bank of America appears to be close to buying the next most vulnerable investment bank, Merrill Lynch

In respect of shocks to Wall Street, there hasn't been a weekend like it for something like 80 years.

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Lehman: Barclays walks

• Robert Peston
• 14 Sep 08, 06:11 PM

I have learned that Barclays has pulled out of negotiations to buy most of the troubled investment bank, Lehman Brothers.

It's decision, which was described by an executive close to the negotiations as "pretty definitive and unlikely to change", is a setback for attempts to rescue Lehman, which are being coordinated by the US Treasury and the New York Federal Reserve.

Barclays has walked away because it was unable to obtain guarantees - from either the Treasury/Fed or other commercial organisations involved in the rescue attempt - in relation to financial commitments faced by Lehman when markets open tomorow.

"It was impossible to find a solution to the problem of Lehman's immediate financial obligations in the time available," said the executive.

These obligations, on outstanding transactions by Lehman, run to billions of dollars and would be difficult to finance at the best of times, But in the light of the credit crunch and the parlous state of financial markets, Barclays feels it would be running a crazy risk if it took these on without any protect right now.

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