Crisis on Wall Street as Lehman Totters,
Merrill Is Sold, AIG Seeks to Raise Cash

Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets;
Moves Cap a Momentous Weekend for American Finance

By CARRICK MOLLENKAMP, SUSANNE CRAIG, SERENA NG and AARON LUCCHETTI
September 15, 2008 12:15 p.m.

NEW YORK -- The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. filed for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

It was a gut-wrenching weekend for Wall Street, with Lehman Brothers headed toward possible liquidation, Merrill Lynch about to be taken over and AIG facing shareholder wrath. WSJ's Dennis Berman and Matthew Karnitschnig look at what's ahead.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn't in the best interest of shareholders.

Early Monday morning, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.

On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. (See related article.)

Bank of America Chief Executive Ken Lewis said on Monday that he felt "no pressure" from federal government regulators to sign a deal to acquire Merrill Lynch.

Merrill Chief Executive John Thain said he began to look for an acquisition partner for Merrill after exploring "the implications for a Lehman bankruptcy."

Though the Federal Reserve steered clear of a bailout, it is expected to take new steps to stabilize the broader financial system. These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral. Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman. (See related article.)

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The Lehman board authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value, the firm said. In conjunction with the filing, Lehman intends to file a variety of first-day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.

However, employees at the Lehman units that filed for insolvency in the U.K. may not be paid, said Tony Lomas, a partner at PricewaterhouseCoopers assigned to help manage the proceedings for four Lehman companies there. The four companies in administration are: Lehman Bros International Europe, Lehman Brothers Ltd, Lehman Brothers Holdings plc and Lehman Brothers UK R.E., which holds real estate assets, he said.

Not in administration and continuing to function are Lehman Brothers Europe and Lehman Brothers Asset Management, Mr. Lomas told a news briefing Monday. There are dozens of PricewaterhouseCoopers people inside the Lehman building on Canary Wharf trying to come to grips with the company's affairs, he said.

"When we were appointed this morning, quite bluntly there was no cash because of the group treasury function," Mr. Lomas said, adding that his team would tell employees as soon as possible "whether or not there are funds enough to pay." Mr. Lomas said "a couple of dozen" of Lehman employees in London have been told definitely that they no longer have jobs. The rest should know by Wednesday, he said. The Lehman insolvency will be "larger and more complex" than similar proceedings for Enron and MG Rover, Mr. Lomas said.

Lehman said it is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division. Lehman said it intends to pursue those discussions as well as a number of other strategic alternatives. Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said.

The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values. Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.

Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.

Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.

At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.

At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.

In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.

"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.

Some traders said it was difficult to find new counterparties for many of their outstanding trades with Lehman. The snags included different terms and maturity dates on derivatives contracts, and market prices changed rapidly Sunday afternoon. "People were screaming at each other over the phone, asking: How can this work?" one trader said.

William Gross, chief investment officer at bond-fund giant Pacific Investment Management Co., said very few Lehman trades were offset. "There's an immediate risk related to the unwind of these positions," he said.

Many Wall Street firms concluded that a liquidation of Lehman's assets likely would proceed in an orderly fashion, people familiar with the situation said. That means other firms could quickly buy real estate, securities and other investments, preventing the assets from flooding the market. Because of that, these people said, some participants in the New York Fed talks decided that liquidation was no worse an option than selling Lehman to a buyer such as Barclays.

"There will be an orderly wind down," said one banker involved in the matter. "This was the default option. It happens when you have no buyer."

The outside firms decided that instead of making guarantees for Barclays or some other purchaser of Lehman, they would prefer to pool their resources and buy the assets themselves, taking on the risks and carrying costs, along with the possibility of profiting down the road.

Those firms would likely then buy assets such as mortgage-backed securities, leveraged loans, private-equity positions and investments in real estate or hedge funds.

Roger Freeman, a nine-year Lehman employee who analyzes brokerage firms, spent the weekend gathering cellphone numbers and email addresses from colleagues who also are likely to lose their jobs. He plans to clean out his desk Monday morning. "We worked long hours here, we've made some of our best friends here. We're suddenly being ripped apart," he said. "It's just unbelievable."

--Jon Hilsenrath, Jeffrey McCracken, David Enrich and Jeanne Whalen contributed to this article.

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com, Susanne Craig at susanne.craig@wsj.com, Serena Ng at serena.ng@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com

Korach: The Corruption of a Judge

View from the booth, coffee more steadily held now. The following should not, obviously, be limited to Judges. This is the story of how governments come to cease to be. Differentiate if you can the notion of the State of Israel, and Am Yisroel.

Randy Shiner



Korach: The Corruption of a Judge

What makes a judge dishonest? What are the cognitive steps in the corruption of a leader? The Torah legislates support for the judges and teachers of Israel - the kohanim and Levites - through an array of tithes and gifts. This support gives them a degree of financial independence, and should make them less susceptible to bribes and moneyed interests.

Biblical Scandal

Not every leader, however, succeeds in maintaining the standards of integrity called for by their public office. The Torah notes that Samuel's sons did not follow in their father's path, but "went after gain, took bribes and perverted justice" [I Sam. 8:3]. What brought about this judicial scandal? The Talmud offers several interpretations for the failings of Samuel's sons.

At first glance, this appears to be simply a litany of types of graft and abuse of power. Rav Kook however noted that there is a pattern to these statements. A careful reading indicates that they describe a succession of increasingly serious offenses.

The Sages were not so much disagreeing about the facts in the case of Samuel's sons, but rather mapped out the moral descent of a leader, step by step, into the morass of deceit and corruption. Here are the various opinions, as quoted in Shabbat 56a: According to Rabbi Yonatan, Samuel's sons did not truly sin. Rather, they failed to follow the righteous ways of their father. Samuel would travel all around the country to judge the people. His sons, on the other hand, stayed in their own place, "to increase the fees of their clerks and scribes." "Rabbi Meir said: they would openly demand their salaries. Rabbi Yehudah said: they compelled private individuals to conduct their business affairs. Rabbi Akiva said: they would forcibly take an extra measure of tithes. And Rabbi Yossi said: they took gifts by force."

What is the significance of all these opinions? Let us follow the descent of the crooked politician, as he slides into the cesspool of graft and corruption. Down-to-Earth Leadership We can learn a lot about public service from Samuel. The text praises him for traveling around the country and judging the people in their towns [I Sam. 7:16]. Why was this so significant? A true leader will consider himself to be literally a servant of the public. His dedication to the community is reflected in his sensitivity and understanding of their problems. He governs and advises them, not according to his own views, but as if he has descended to their place. This is the significance of Samuel's custom of judging the people in their towns. Samuel was able to identify with their needs so that his rulings were appropriate and his guidance effective. This type of leader governs by connecting with the people directly. He does not need the trappings of officialdom, nor must he surround himself with layers of bureaucrats and government officials. Samuel's sons, however, failed to attain this level of leadership. They judged the people without leaving their location and state of mind. In their eyes, they adjudicated justly. And they required the assistance of a system of salaried clerks and scribes. As Rabbi Yonatan noted, this was not really a sin, but it certainly falls short of the exemplary leadership of Samuel.

1. Just a Job

The other scholars felt that Samuel's sons were in fact guilty of graft, and they described the various steps down the path of political corruption. Like all moral failings, abuse of authority comes in stages. Its danger and severity is magnified, however, according to the power and influence of the position. The first failing may appear to be insignificant, but it is indicative of a problematic attitude that is the root cause of more serious abuse. A community leader, and especially a spiritual leader, should recognize that public service is a great privilege. This recognition should be powerful enough to make one willing to forgo financial remuneration. A true leader may be so honored with his mission that he even feels that it is improper to accept payment for this work. Rabbi Meir thus discerned the fault of Samuel's sons as "openly demanding their salaries." They failed to sense the importance of their public service. By demanding payment, they showed that they viewed their work as a job like any other, not a sacred calling that is its own reward.

2. Using Others

From this point it is but a small step to actual abuse of power. Once a leader fails to see the idealism in his position, he will begin to look upon it as a burden. He will then have no scruples about burdening others with his own personal needs and affairs. Since I take care of their needs, he reasons, they should take care of mine. This is the stage identified by Rabbi Yehudah: "They compelled private individuals to conduct their business affairs."

3. Grabbing For More

From here it is another small step to the next level of corruption - both in quality and quantity. It is axiomatic, Rav Kook noted, that a person who fails to live up to the moral demands of his position will end up sinking even lower than the common level of ethical behavior. Leading and judging should be an inspiring vocation. A leader should feel that he is helping build a better world; in the words of the Talmud [Shabbat 10a], he becomes 'God's partner in creation.' But defective character traits together with a failure to feel privileged in his public work will cloud his sense of propriety and justice. Instead of values based on an inner sense of justice, his value system becomes relegated to superficial honors. His lack of integrity is expressed quantitatively - he will "take an extra portion of tithes" - as well as qualitatively - he will obtain it by force.

4. Legal in Name Alone

As long as he retains some semblance of morality, such a leader will not try to seize that which he has no claim over. But his dishonesty may lead to the lowest level, a state where justice and propriety are merely empty shells, high-minded words without any inner content. He views the justice system as simply a means of ensuring social order, completely detached from any heartfelt demands for ethical behavior. This is the level described by Rabbi Yossi: "They took gifts by force." If they were taken by force, how can they be called 'gifts'? This is a form of legal manipulation that is legal in name only. He may call them 'gifts' or 'contributions,' but in fact they were taken forcibly. The name only serves to silence what little is left of his inner integrity, crying out against his deeds of theft and graft, so that he may justify his crimes to himself. These are the steps in the fall of a judge corrupted by the lure of financial gain - a leader who should have been organizing society according to the foundations of justice and morality. "Righteousness and justice are the foundation of His throne" [Psalms 97:2]. [Adapted from Ein Ayah vol. IV pp. 52-54]