In case of bankruptcy

According to Moneymill, which we just discovered but seems like a reasonable commentary, Bloomberg is reporting that ISDA (International Swaps and Derivatives Ass'n) is conducting a "netting transaction" in anticipation of LEH bankruptcy filing.

To wit:

“ISDA confirms a netting trading session will take place between 2 pm and 4 pm New York time for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and return to ISDA.”

Note that this is a preemptive administrative operation and will have no meaning whatsoever if LEH reaches a deal to be acquired or recapitalized, or otherwise manages to avoid a bankruptcy filing before the 11:59 pm transaction deadline.

We could find no odds of such an event happening on Intrade, curiously. However, given that Barclays has walked away from the table, according to Bloomberg, the odds have certainly risen. However, it has been observed that Barclays, like your average flea-market browser, has been on the potential aquirers list for a few banks but has yet to pony up for anything.

It is often repeated the Lehman is a solid franchise, a leader in their niches, and is not facing the liquity starvation that Bear did (LEH hasn't been downgraded by bond rating agencies yet). One analyst put it this way, in a Bloomberg story:

A Lehman sale may be possible without government backing, an analysis of Lehman's distressed mortgage assets shows. In a worst-case scenario -- with the assets discounted more deeply than in recent distressed sales -- a buyer could write off almost half of Lehman's mortgage holdings and still have $7 billion of equity left in company, based on figures the investment bank disclosed when it reported third-quarter financial results last week.

The wolves are surely circling, but it doesn't sound like a bankrupt operation. However, if the wolves do nothing but circle (read: prance and pose and whine for government backing of risk), then a ratings downgrade, said to be imminent, could change the picture drastically, causing cascading demands for additional capital by counterparties, and making a bankruptcy necessary.

Let's hope the wolves can pull themselves together and price the booty reasonably.