Filed under: JPMorgan Chase (JPM), Lehman Br Holdings (LEH), Bear Stearns Cos (BSC)
What happened this week could be the start of something bad. As the Fed — using JPMorgan Chase & Co. (NYSE: JPM) as its conduit — bailed out The Bear Stearns Companies (NYSE: BSC), I was watching which banks were falling the most in sympathy. Next on the list? Lehman Brothers Holdings Inc. (NYSE: LEH) whose shares lost 14.6% yesterday — a huge drop but nothing compared to Bear Stearns’s 47% decline.
What exactly is going on here? The Wall Street banks hold the cash and securities of corporations, hedge funds and other investors. If a Wall Street bank files for bankruptcy, the bankruptcy process freezes those assets so that the customers can’t get access to them. Thanks to bankruptcy law, the courts get to decide which creditors will get their hands on those assets. The reason Bear Stearns failed is that its customers withdrew their funds so they would not be frozen by bankruptcy.
The Fed stepped in because — as I suggested Thursday — it was faced with a choice of the lesser of two evils. It chose to create a “moral hazard” by bailing out Bear Stearns over letting it fail because it thought the cost of moral hazard was less than the cost of wiping out Bear Stearns shareholders and customers and all the collateral damage (pun intended) that would ensue. So why is Lehman Brothers the next one at risk?
Continue reading Is Lehman Brothers next?
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