Lehman’s liquidation process won’t work as well as planned
Failing banks have all used the same system of dumping debt. Form a substitute bank simply planned to fail to dump the bad debt it holds. Simply, Lehman hopes to transfer its billions of bad loans to a company that it hopes will do well, but is miserably doomed from the start. The new company will likely fail in its first few months as writeoffs will be larger than what the company will make.
Under the plan, a new bank will be formed with billions of dollars of debt. The goal is to pass this debt off to speculators who will hope to make a mint on a housing turnaround. By pushing this bad debt off to a new company, Lehman will owe nothing when the problems start. Under Lehman, the debt would have to stay on the balance sheet which further devalues the company.
It’s all a part of the dirty business of banking. If you can push your assets on unsuspecting investors to shore up a balance sheet, more power to Lehman. The trouble comes with Lehman starts taking responsibility for its debt. Selling this newfound company will be harder than executives are planning. Lehman is hoping that speculators are willing to gamble on the debt by buying on pennies on the dollar. But the fact remains, if there was any equity in this debt, Lehman would not be selling it, instead they would be holding it to shore up their balance sheets.
Lehman is just as bad as any other investment bank out there. It took heavy bets on an expanding real estate market that is quickly retracting. For any money to be made out of this market, Lehman has to liquidate quickly or hope for a complete turnaround in real estate. Since either is unlikely to happen soon, expect Lehman to drop off the map in just a few short months. Why invest in a company that has bad debt, when you can invest in a new load of debt with better credentials. Lehman is garbage and garbage goes to the trash heap. In no way, shape or form should you be holding Lehman.
