Lehman Goes to the Fed's Discount Window


Lehman Brothers Holdings is unlikely to face the kind of liquidity crisis that brought down Bear Stearns over the weekend because of the Federal Reserve's decision to let Wall Street brokerage firms borrow directly from the central bank, CFO Erin Callan told CNBC.

"It certainly takes the question of liquidity off the table," Callan said in a live interview. "I think [the Fed's decision is] the great news that happened over the weekend."

Lehman Weathers the Storm

Callan said Tuesday that Lehman , which reported better-than-expected earnings on Tuesday but has faced persistent rumors of a Bear Stearns-type liquidity crisis, plans to borrow from the Fed through the discount window.

Lehman followed up on Callan's announcement by borrowing from the window within minutes of her appearance. At 5 p.m. New York time, Lehman borrowed $2 billion, sources said -- a small amount relative to the bank's $375 billion balance sheet.

Goldman Sachs also used the discount window late Tuesday, sources said, but it wasn't clear how much money the investment bank asked for.

"It’s going to be actively used" by many brokerages, Callan said. “We’ll be a participant. It’s a great opportunity."

Lehman's at the Discount Window

The Fed announced the new lending facility for Wall Street firms on Sunday night, shortly after it helped facilitate the sale of Bear Stearns to JP Morgan Chase.

Under the plan, primary dealers -- big Wall Street firms that deal directly with the Fed in financial markets -- would be allowed to borrow directly from the Fed for at least the next six months.

The Fed, which normally lends through its discount window only to banks that take deposits, can lend to nondepository institutions under special circumstances. It last did so in the 1930s.
In the CNBC interview, Callan acknowledged that Lehman has had a difficult time recently amid all the rumors that it's in financial trouble.

"We know we're always the next name on the list," she said. “There isn’t a great appreciation for the fact that we’ve evolved our franchise dramatically over the last decade. In fact, we’ve structured our liquidity exactly for this kind of situation. So, we feel like we’re in a good spot."

However, Callan said Lehman's difficulties aren't over. “Expect to see more [writedowns] in the second quarter," she said. "Later in the year things will start to stabilize more in asset prices.”

“It feels like, at this point, the greater part of the calendar year will be rough sledding and I wouldn’t expect it to feel pretty stable until 2009.”