Lehman bankruptcy chance spurs emergency derivatives trading session
Posted Sep 14th 2008 3:30PM by Peter Cohan
Filed under: Bank of America (BAC), Lehman Br Holdings (LEH)
Reuters reports that derivatives traders have opened an emergency trading session this afternoon to settle a variety of derivatives trades involving Lehman Brothers Holdings Inc. (NYSE: LEH). As I posted earlier today, I think the most likely option for Lehman is a bankruptcy filing by the end of the day today. And these derivatives trades are intended to minimize the losses to a bankruptcy filing. To that end, the trades conducted this afternoon will expire if Lehman has not filed for bankruptcy by midnight tonight.
The emergency trading session will last for two hours this afternoon. Reuters writes, "The session will run from 2 p.m. to 4 p.m. and will involve credit, equity, rates, foreign exchange and commodity derivatives. The aim is to reduce risk associated with a potential bankruptcy filing by Lehman. Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time Sunday. If there is no filing, the trades cease to exist."
I endorse this idea because it looks to me like a prudent move that would minimize the damage of a Lehman bankruptcy filing. I wish I knew how much such a filing would cost Lehman's stakeholders or how much this emergency session will limit its damage. Unfortunately, I don't know. Even if Lehman does not file for bankruptcy, this emergency session looks worthwhile because it won't cost much to conduct and if there is no need for it, the trades will expire worthless.
And if Lehman does file for bankruptcy, this session might limit the collateral damage on other players in the industry.
Update. Reuters reports that Bank of America (NYSE: BAC), which had been considered the prime bidder for Lehman, has withdrawn its bid. "I've just heard from a person familiar with the negotiations that Bank of America is no longer in the bidding for Lehman Brothers," a Bloomberg TV reporter said, according to Reuters. I think this makes a Lehman bankruptcy filing more likely unless the Treasury decides to finance a Lehman takeover as it did with Bear Stearns, Fannie and Freddie.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned |
