Sunday, September 14, 2008

two key question for the Lehman Case

Why does a deal have to be done today? Moody's warned last Wednesday that they will downgrade Lehman if they don’t either merge of raise capital immediately.http://www.reuters.com/article/fundsFundsNews/idUSN1047904220080910 Why is a downgrade important? “A downgrade would likely force Lehman to post additional collateral, increase short-term and long-term funding costs, and limit its ability to transact with partners which demand certain credit ratings,” Goldman Sachs Group Inc. analyst William Tanona wrote in a note today. http://www.bloomberg.com/apps/news?pid=20601087&sid=alIffXk3Sb2I&refer=home If Lehman does file, Moody’s has to downgrade their counter-party rating to junk. This forces everyone to stop doing business with Lehman. If you do business with a junk counter-party, you risk your rating falling to junk as well (you are only as good as your shakiest counter-party). Most buy-side accounts have fiduciary rules that bar them from doing business with a junk rated counter-party. Recall that this was the trigger that buried bear.

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