July 03, 2008
Will Lehman Go The Way of Bear Stearns?
Posted by David Zaring

Jonathan Weil expresses some confusion about Lehman's latest survival strategy; I'm keeping my eye on how the Fed and the SEC are going to divvy up the oversight responsibilities if this thing goes south, and meanwhile Henry Paulson has told the British that he's trying to figure out how to allow big financial firms to fail.  Here's Weil:

So let's say you're a big shot at Lehman Brothers Holdings Inc., trying to keep your firm from becoming the next Bear Stearns Cos. The stock has tanked. The market has doubts about your balance sheet. What do you do?    

One step to avoid would be any action that might create needless public uncertainty about your company's finances, because investors' greatest fear is of the unknown.    

So what does Lehman do? It sells billions of dollars of assets to a newly formed hedge fund that:    

1) counts Lehman as a significant investor;    

2) is run by seven recently departed Lehman executives;    

3) is operating out of Lehman's office space, three floors down from the office of Lehman's corporate secretary.    

Hat Tip: Brad DeLong.

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