Japanese markets are closed on September 15, 2008 for a holiday, but global financial markets are bracing for the failure of Lehman Brothers.
U.S. futures prices sank as Sunday talks to sell Lehman Brothers in whole or in pieces to one or a consortium of peer group investment banks fell through, sending traders in US stock market futures and the US dollar sinking. Traders are steeling for a Lehman bankruptcy filing and the risk of an immediate tsunami of unwinding derivative and swap-related positions worldwide.
On Sunday, an extremely rare emergency trading session was opened in New York to allow dealers in the $455 trillion derivatives market to reduce their exposure to a potential Lehman bankruptcy filing. Trading involved credit, equity, rates, foreign exchange and commodity derivatives. Trades are contingent on a bankruptcy filing at or before 11:59 p.m. Sunday (0359 GMT), if there is no filing, the trades cease to exist. Lehman's failure would mark the first significant test of the $62 trillion gobal credit derivatives market, and in the $455 trillion global derivatives market, which has not yet had a major counterparty default. Lehman ranked as the seventh-largest credit derivative counterparty by Fitch Ratings in a survey released last year.
Unlike Bear Stearns, the U.S. Treasury and the Fed have apparently refused to using government money in a rescue of Lehman. The shock to financial markets around the world could be immense and severe falls in banking and financial shares in Asia, London and New York can be expected when the markets re-open this morning.
The parent company Lehman Brothers Holdings, could go into Chapter 11, while keeping its subsidiaries solvent. The move would allow it to avoid forced liquidation of its brokerage unit, since Chapter 11 reorganization is not available to brokers under U.S. bankruptcy laws. The last time a major U.S. investment bank failed was in 1990, when Drexel Burnham Lambert filed for bankruptcy protection amid a collapse in the junk bond market.
The benchmark U.S. investment grade credit derivative index jumped 23 percent late on Sunday. According to Bernstein Research analyst Brad Hintz, a former Lehman CFO, "The credit events the market has lived through since 1980 ... appear like ripples in a pond compared to the plunge we are currently experiencing." Former Fed chairman Alan Greenspan, "I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring." "The United States is mired in a "once-in-a century" financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday. Greenspan told the ABC that the crisis was the worst he had seen in his career, still had a long way to go and would continue to effect home prices in the United States. "First of all, let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event,"
Australian shares fell 1.5 % in early trade on Monday, with uncertainty over the fate of U.S. investment bank Lehman Brothers dragging down banks, while gains in miners saved the market from steeper falls. The Australian dollar held firm against the U.S. currency on Monday, while bond futures surged on safe-haven inflows and expectations that problems in the U.S. financial sector
could prompt the Federal Reserve to lower rates.
The Tokyo markets will feel the absence of Lehman's local presence. In addition to real estate-related operations, Lehman Brothers Japan also has a strong stock brokerage for foreign investors, including hedge funds. The firm topped a fiscal 2007 ranking of Tokyo Stock Exchange licensed securities houses with a stock trading value of 106 trillion yen. It remains a top player this fiscal year as well.
According to the Bloomberg report, "The best case is that the Fed offers a 48-hour standstill by backing Lehman's liquidity directly to win time for other bidders to come forth or the previously interested parties to reconsider,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``The worst case is bankruptcy, and Lehman goes down the tube.''
