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Lehman Brothers facing liquidation -

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ELEANOR HALL: It is one of the biggest banks on Wall Street and has survived for more than a
century and a half. But by the end of the day Lehman Brothers could be in liquidation.

The bank has been in frantic negotiations this weekend trying to find a solution to its massive
sub-prime related debt problems but it has failed to find a buyer.

And the US Federal Reserve is refusing to step into to underwrite Lehman's survival, despite
helping out another Wall Street institution, Bear Stearns, and the mortgage lenders Fannie May and
Freddie Mac.

Many market watchers are now predicting that it is heading for bankruptcy. One of those is Dr
Stephen Kirchner.

He is an economist with the Centre for Independent Studies and he spoke to me earlier today. I
began by asking him why the US central bank is refusing to intervene in the Lehman case.

STEPHEN KIRCHNER: They really want to put the onus back onto the leading financial institutions in
Wall Street to resolve this amongst themselves without involving the US taxpayer.

ELEANOR HALL: That looks unlikely to happen though, doesn't it?

STEPHEN KIRCHNER: Well, I still think there is scope for an 11th hour deal. There is speculation
that 15 banks will get together and put up $100-billion to purchase Lehman's assets.

If that doesn't go ahead then Lehman will go into Chapter 7 liquidation and in the context of that
liquidation I think there is scope for an orderly work-out of its positions.

ELEANOR HALL: Some people say though that the fall out if Lehman's fails is that the credit market
will shut down completely and inter-bank lending will cease.

STEPHEN KIRCHNER: Well, I think conditions in those markets are going to get quite severe but I
think that is more a question of the price at which the trades take place. I am not sure that the
market will shut down completely. It is just that the trades will take place at prices that a lot
of the counter-parties will probably rather not pay.

But as I said, there is scope for an orderly liquidation of those positions and that is essentially
what people have been working on this weekend.

ELEANOR HALL: If there isn't an orderly liquidation though?

STEPHEN KIRCHNER: Well, it starts to get messy.

ELEANOR HALL: And how bad could it get?

STEPHEN KIRCHNER: Oh well, conditions in credit markets are a lot better than they were at the time
of the Bear Stearns rescue. So, and that is one of the reasons why I think the US authorities are a
bit less, um, less willing to step in at this time.

I think they take the view that the onus should really be on the market and the institutions that
are counter-parties to Lehman to work this out amongst themselves.

ELEANOR HALL: If a bank like Lehman's though could end up in this position, how many other banks
could also be close to collapse?

STEPHEN KIRCHNER: Uh, well unfortunately a lot of the world's financial institutions have billions
of dollars in impaired assets on their books and a lot of those assets are being held at phoney
marks and if they are forced to mark those things to market then their capitalisation is at risk.

But I think the likely outcome here is basically a consolidation of the financial sector so you are
going to see a lot of acquisitions taking place as a result of this process.

ELEANOR HALL: But you are sounding like you're saying that Lehman's won't survive as it is?

STEPHEN KIRCHNER: Not unless there is a 11th hour rescue then Lehman will go into liquidation.

ELEANOR HALL: And do you think that is the most likely scenario?

STEPHEN KIRCHNER: At this stage, yes.

ELEANOR HALL: That is economist with the Centre for Independent studies, Dr Stephen Kirchner.