9/11T9:09 News & Notes

LEH Lehman Brothers' biggest problem -- its high exposure to commercial real-estate holdings -- hasn't been solved - WSJ (7.25 ) -Update-
WSJ reports the co's biggest problem -- its high exposure to commercial real-estate holdings -- hasn't been solved. Investors would have cheered Lehman's restructuring plans, announced Wednesday, if the bank had reported a sharp drop in its commercial real-estate holdings. But the decline was a modest $7.2 billion, leaving $32.6 billion on its balance sheet at the close of its fiscal third quarter ended Aug. 31. The commercial real-estate holdings unnerve investors because they dominate Lehman's balance sheet. They still are 1.7 times as big as the bank's common equity of $19.5 billion. In addition, there is uncertainty about the value Lehman has placed on these assets. That uncertainty could intensify in light of what Lehman intends to do with its commercial real estate. The firm plans to spin off these assets into a separate company owned by Lehman shareholders in its fiscal first quarter of 2009. Notably, the new entity won't use market values for the assets it holds.

Israel asks U.S. for arms, air corridor to attack Iran - Haaretz.com
Haaretz.com reports the security aid package the United States has refused to give Israel for the past few months out of concern that Israel would use it to attack nuclear facilities in Iran included a large number of "bunker-buster" bombs, permission to use an air corridor to Iran, an advanced technological system and refueling planes. Officials from both countries have been discussing the Israeli requests over the past few months. Their rejection would make it very difficult for Israel to attack Iran, if such a decision is made.

Insurers and banks face huge CDS losses - FT
FT reports the default of up to $500 bln of Fannie Mae and Freddie Mac credit derivatives contracts triggered by the US government's seizure of the mortgage groups could result in billions of dollars of losses for insurance companies and banks who offered credit insurance in recent months. The potential losses, as well as uncertainty about exactly how the derivatives contracts will be settled and unwound, is putting strains on the unregulated $62,000 bln credit derivatives market, which has been a target of regulators worried about the hidden risks it could hold for the financial system. The exact number of credit default swaps -- a kind of insurance against debt default -- outstanding on Fannie Mae and Freddie Mac are not known, reflecting the private nature of the sector. However, according to the latest estimates from dealers and analysts, there could up to $500 bln of contracts outstanding. Michael Hampden-Turner, credit strategist at Citigroup in London, estimates there are $200-$500 bln of outstanding CDS and other credit derivatives referencing Fannie and Freddie. This would make their default the biggest the market has encountered. The previous record was held by Delphi, the US carparts maker that went bankrupt in 2005 and which had about $25 bln of CDS.

Fed may expand funding aid to banks in a 'mother of year-ends' - Bloomberg.com
Bloomberg.com reports the Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year. Six bank failures in the past two months and rising concern about Lehman Brothers Holdings (LEH)'s capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end. "This could be the mother of year-ends,'' said Brian Sack, vice president of Macroeconomic Advisers, who used to serve as head of monetary and financial market analysis at the Fed. "The markets will need extraordinary actions to get through it.'' One option is for banks and brokers to increase the loans they take out directly with the Fed; the central bank reports on the figures today. Officials could also offer options on its biweekly loan auctions or introduce special repurchase agreements to straddle the end of the year, economists said.

SpendingPulse says U.S. ex-car retail sales growth slows - Reuters.com
Reuters.com reports U.S. retail sales excluding cars rose in August but at a slower pace, as high gasoline and food prices cut into spending on other goods and services, a private report released on Thursday showed. Consumer spending without autos rose 0.4% last month on a seasonally adjusted basis, less than the 1% increase in July, said SpendingPulse, the retail data service of MasterCard Advisors, an arm of MasterCard Worldwide (MA). "People are focusing on the essentials which are going up and up," said Kamalesh Rao, director of economic research at MasterCard Advisors. This attention to household staples had caused shoppers to pare back on items such as clothes and consumer electronics, which typically enjoy sales bumps in late summer as students return to school. "It was probably a disappointing back-to-school season," Rao said.

King says BOE can't give banks long-term help, points to Brown - Bloomberg.com
Bloomberg.com reports Bank of England Governor Mervyn King said its planned money-market reforms won't provide long- term assistance to banks to unfreeze lending and any decision on the matter should be left to Prime Minister Gordon Brown. The central bank "will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending'' over the long term, King told lawmakers in London today. "Only private savers or taxpayers via the government can provide such funds.'' King's central bank will next week unveil proposals to revamp its money-market operations to better cope with financial- market turmoil. With Brown under pressure to ease the U.K.'s house-price slump, King is distancing the central bank from any plan to prop up the country's mortgage market with public funds.

Junk bond distress levels surge, signaling defaults - Bloomberg.com
Bloomberg.com reports more than 30% of European high-risk, high-yield bonds are trading at distressed levels, the most in five years, stoking speculation defaults will rise. Investors demand an extra yield over government debt of more than 10%age points to hold 53 of the 169 bonds in Merrill Lynch's Euro High Yield Constrained Index. That's the biggest proportion of distressed debt since March 2003, in the aftermath of the Sept. 11 terror attacks and the dot-com crisis. "Typically, those levels of distress would indicate that defaults are going to rise,'' said Karl Bergqwist, who manages the equivalent of about $500 mln in high-yield debt at Gartmore Investment Management in London. "We think there's much worse to come. Spreads could go a lot wider and defaults are undoubtedly going to go up.'' Defaults on European speculative-grade corporate bonds will climb to 2.3% in a year, from 0.7% now, near a record low, Moody's Investors Service said. Worldwide defaults will surge to 7.4%, from 2.7%. Spreads on high-yield debt have widened as investors, fleeing the fallout from the collapse of the U.S. subprime-mortgage market, shun all but the safest bonds and as banks tighten lending standards.