Lehman and 'Club Fed'

Well it's the last week of summer, traditionally a time when you could hear a pin drop in the markets but with the way things are at the moment leaving the desk, for some, is not an option. Especially at Lehman Brothers, where the phones must be on fire with the activity of looking for a buyer.

The question on everybody's lips at the moment is 'When will Lehman Brothers finally give up the ghost?

You would think from all the chatter in the markets that the troubled bank would be heaving its last breath around about now, but is there a reason to suggest that we haven't seen the last of Lehmans?

The take on all this in some quarters is that Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.

Asking people to believe that being a member of 'Club Fed' is an affective guarantee for your bank may be a little stretch, but look at the history. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.

Given the access that Mr Fulds has to the Fed one would assume that he will be chatting to his buddies about keeping the Fed's loan window open until around about the time that Lehmans are out of hot water.

If they are forced to sell there are problems with Lehman assets, however. Buying the Neuberger Berman money managemnet unit for example has thrown up problems. The New York Times suggests that anyone looking at the unit would end up paying twice, once for the firm and a second time to keep all the brokers from leaving.

We have seen issues like this occur with UBS, although they were not selling off the UK wealth management unit, a number of employees (enough to 'devestate' the business according to UBS) were to leave to join Vestra Wealth a start up backed by Goldman Sachs. Vestra were intending to bring on UBS wealth managers and with it, one would expect, their clients, this was at least until UBS took them to court. Anyone buying an investment firm at the moment will have this part of the deal to consider and prospective purchasers looking at Lehman will be thinking no differently.

We all know that things are a little jumpy on certain stocks, Freddie and Fanny, for example, but Lehman investors are also suffering the news roller coaster. The New York Times reports

"Last Friday, a spokesman for Korea Development Bank was quoted by Reuters as saying: “We are studying a number of options and are open to all possibilities, which could include [buying] Lehman.” The brackets and the word “buying” were included in the Reuters report.

Lehman’s stock jumped almost 15 percent that day as investors rushed into the stock on the basis of the word in brackets before it settled down to about a 5 percent gain.

The same spokesman told The New York Times and a half dozen other media outlets that he had been misquoted in the Reuters article. “Such reports are erroneous,” he said. Lehman’s stock has since fallen back to where it was before the article was published.

Nuance can often get lost in translation, and who knows what was really supposed to be in those brackets."

With all the problems we see in the banking world at the moment it is great to see that there are some firms out there willing to give solid advice on cost cutting.

McKinsey & Company, the managemnet consultants, published a helpful report last week on how investment banks can cut up to $2 billion in noncompensation costs.

“Initiatives to curb expenditures need not be extremely demoralizing to frontline employees,” McKinsey says, trying to find ways to save money without affecting the worker bees. So what does it recommend? Getting rid of the consultants.

Yep, you read that right.