An unusual Friday night meeting was held at the NY Fed last night with Paulson and the SEC’s Cox in attendance. The sit-down was likened to the one held nearly a decade ago to rescue LTCM. The government was adamant that it would not take any exposure in any resolution, imploring the banks to craft a rescue “because you could be next” (that will comfort markets). Banks, in turn, were reluctant to commit to keeping Lehman afloat without a government backstop. The fear is that come Monday, Lehman will be further downgraded by the ratings agencies if a buyer is not found and a liquidation may result. The government seem to want to make any liquidation as orderly as possible.
Monday could look worse than March 18, the day Bear was swallowed by JP Morgan (with the Fed taking $29 bln of toxic mortgage paper in the deal), as Wall Street has not seen a liquidation of a big firm in nearly 20 years, since Drexel Burnham in the early 1990s.
How it will play for the dollar is anyone’s guess. Risk aversion could boost the dollar against the euro and hurt it against the yen. That would be my guess.
The UK press still has Barclays in the hunt for Lehman’s investment bank if they can dump the commercial real estate exposure.
