UNPREPARED FOR ARMAGEDDON.

UNPREPARED FOR ARMAGEDDON. I have posted a number of times on the Lehman bankruptcy with the general theme being my amazement at how long it was taking to locate Lehman’s assets and the amounts it owed counterparties because of the complexity of Lehman’s transactions. (Here is my first post on Lehman, less than two weeks after the bankruptcy.) This article from the Wall Street Journal three weeks after the Lehman bankruptcy gives a dramatic summary of what the article calls “The Weekend that Wall Street Died.” (Here is a different link to the article.) Note that while the dramatic events involving the failure of Lehman rescue and the ending of Merrill Lynch’s separate existence are taking place in the foreground of the article, the practical problems that were to emerge are surfacing in the background. No efforts had made to prepare for the largest bankruptcy in history until Thursday night, September 11. On Sunday the 13th, Harvey Miller, the dean of the bankruptcy bar in the United States, met with some 25 officials of the Federal Reserve, the Treasury, and the SEC. A senior official of the Fed asked if Lehman was ready to file for bankruptcy. “‘No,’ Mr. Miller answered. ‘You need more of a plan to prepare to do this,’ Mr. Miller continued. Lehman had tens of billions of dollars in derivative positions with countless parties. Unless these trades were unwound in an orderly way, it could shock all corners of the financial market. ‘This will cause financial Armageddon,’ he said.” This article describes the kind of preliminary questions that were being asked on the day before (Saturday). The bankruptcy lawyers —two days after they were retained—were “asking midlevel Lehman executives a steady stream of questions. What were Lehman’s assets? Who were its creditors? What did its insurance policies look like? How did the bank manage its cash? The executives hadn’t prepared for the interviews, and couldn’t answer many of the most basic business questions.” The next day the decision was made to file for bankruptcy.