Lehman Preferred Series "J" Preferred (fka LEHJQ)

[DOLLARLAND]

March 12, 2010, 5:25 PM ET.

CSI Lehman-Barclays: Who Really Killed the September 2008 Deal?
By Deal Journal
By Alistair MacDonald and Sara Schaefer Muñoz

http://blogs.wsj.com/deals/2010/03/12/csi-lehman-barclays-who-really-killed-the-september-2008-deal/?mod=yahoo_hs

The U.S. bankruptcy-court examiner’s report into the collapse of Lehman Brothers Holdings may have kicked off a Transatlantic kerfuffle over whether an attempt to buy Lehman Brothers by Britain’s Barclays was torpedoed by U.K. regulators.

Buried within the report is a submission from the Financial Services Authority that contradicts the account of the September weekend when Lehman went down given in former Treasury Secretary Hank Paulson’s new book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.”

According to Paulson’s book, on Sunday, Sept. 13, 2008, the FSA and the U.K. Treasury unexpectedly rejected a proposed Barclays deal that would have saved Lehman’s from bankruptcy. “‘The British screwed us,’ I blurted out,” Paulson recounts having told assembled bank CEOs.

In the book, Paulson says that Sunday was the first he heard that the FSA wouldn’t support a Barclays deal. In a detailed account of the back and forth between itself, U.S. and U.K. authorities and Barclays, the FSA repeatedly states that Barclays didn’t put a deal before it to torpedo.

The FSA says it merely put conditions on Barclays–in particular that its core Tier 1 ratio of regulatory capital couldn’t drop–as early as Sept. 10. It also says it made clear its reservations to the U.S. Two days later, the FSA told then-President of the Federal Reserve Bank of New York Tim Geithner that “approval of any proposed transaction would depend on the funding and capital,” according to the FSA submission.

That same day, U.K. Treasury Chief Alistair Darling told Paulson that no transaction with Barclays would be possible if the level of risk for Barclays was inappropriate. “Paulson accepted this,” the document reports Darling as saying.

That risk soon became apparent as the New York Fed asked Barclays to guarantee Lehman’s obligations up to any acquisition, which would continue regardless of whether the deal went through. Given this would likely require approval from its shareholders, highly unlikely given the time frame, Barclay’s CEO John Varley told the FSA a deal was now unlikely, a view that was conveyed by the FSA to Geithner in several telephone calls. All talks ceased soon after.

The FSA even suggests, in its submission, that it was the Fed that actually scuppered the deal because the Fed refused to guarantee Lehman liabilities until the transaction was wrapped up. If the Fed had done so, “Barclays need for shareholder approval would have been less of an obstacle,” the FSA says.

The FSA’s view that regulators didn’t kill a deal for Lehman chimes with recollections at the U.K. Treasury, according to a person familiar with the matter.

Also in the book, Paulson says he was informed of the FSA’s sinking of the deal by Bob Diamond, Barclays President. “I could hear frustration, bordering on anger, in Diamond’s voice,” Mr. Paulson recounts.

A spokesman for Diamond declined to comment on the FSA’s account released today. In the past, Diamond has agreed with the FSA’s version of events and contradicted Paulson’s.

A spokeswoman for Paulson couldn’t be reached for comment.