Is Lehman Brothers the Armadillo?

On September 8, 2008, we posted about the speculation as to which company would be the next one bailed out by the United States Government. Would it be an airline or would it be a Detroit automaker? After watching the stock market drop today, many may be wondering why Lehman Brothers did not get the same treatment as Fannie Mae or Freddie Mac. And what about Bear Stearns in March? They got a bailout, didn’t they? Why didn’t Lehman Brothers get the same treatment?

In the September 8 post, we referenced the children’s book “But Not the Hippopotamus.” Throughout the book, the Hippopotamus is routinely excluded from the other animals’ fun and frivolity until almost the very end. The book then goes on to end with the phrase “but not the aardvark.”

Is Lehman Brothers the Armadillo?

We believe so. First of all, as written about in both the September 8 and 10 posts, we explained why the government’s bailout of Fannie Mae and Freddie Mac were necessary to maintain stability – and liquidity – in the financial markets. Secondly, Lehman Brothers is different. As expected, the politicians are going to chastise the federal government for stepping in to “help Wall Street, but neglect Main Street.” We can almost hear the argument… “why help Bear Stearns back in March but not Lehman today? Has the government decided to finally let someone fail?”

Not exactly. Before an explanation, let us provide you some background information . . . the Federal Reserve opened a special “window” to allow large financial firms access to special funds that may be needed in case of an emergency (the issues surrounding financial firms in 2008 appears to be an emergency). They opened this “window” to JP Morgan Chase (and others) who, after seeing the assets that Bear Stearns had, decided it would be a good business decision to “buy out” Bear Stearns…with the government’s money, of course. (Money, ultimately, that must be paid back.)

So here is why the Lehman Brothers situation is different. The Federal Reserve once again opened the “window” to allow another firm, or firms, the opportunity to “buy out” Lehman Brothers. But, this time there were no buyers. Lehman Brothers, like many companies, had decided to try and hide its true assets and liabilities. So, once the full balance sheets were poured over, there were no takers, and the reason is simple: too much debt; too many liabilities. While there will be parts of the business that will be sold, they will be sold at deep discounts.

Is Lehman Brothers the Armadillo in our story referenced last week? It’s hard to say; but what is now easy to say is that Lehman Brothers was an entirely different animal than Bear Stearns.

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