Lehman Brothers, Wall Street’s favorite punching bag, took another beating on Thursday as jittery investors fretted over problems at home-loan giants Fannie Mae and Freddie Mac and absorbed regulators’ statements that they would not bail out all financial institutions.
The world of Platts
 By Luke Pachymuthu and Felicia Loo - Analysis SINGAPORE (Reuters) - Oil price agency Platts' move to temporarily bar Lehman Brothers (LEH.N: Quote, Profile, Research) from its trading window has highlighted its delicate dual role as the de facto regulator of the world's physical energy markets. Platts, whose physical price assessments are the cornerstone for most of the world's energy markets, has put Lehman "under review," which means it will not take the Wall Street bank's bids, offers or deals into account when it assesses end-of-day cash market prices, industry sources told Reuters on Monday. Such reviews, which are not uncommon, are normally reserved for companies that breach Platts' rules of engagement during its daily half-hour trading "window," failing to deliver on a contract, for instance. But market sources said they saw nothing to suggest that this was the case for Lehman Brothers. Instead, they said, it appeared that Platts was acting in response to counterparty concerns about the No. 4 Wall Street bank's credit condition after multibillion-dollar write-downs and ongoing fears about the fall-out of the subprime debacle. But for some, Platts' action itself was as great a concern. "It's a bit worrying," said Gerard Rigby, a former Singapore-based oil trader who now runs Fuel First Consultancy in Sydney. "Are they (Platts) a reporting agency or a pricing platform? They can determine who can trade on their own system. This is unusually powerful," he added. Platts, a unit of U.S. McGraw-Hill Cos Inc (MHP.N: Quote, Profile, Research), has neither the remit nor resources to gauge the credit-worthiness of companies whose deals it uses to set its benchmark, but it has intervened in the past when credit issues became an impediment to free trade, potentially distorting the market. Platts was unable to comment immediately for this story and has declined to confirm or provide details about the review. In statement on Monday it said its "routine" reviews take in a number of issues, including counterparty acceptance, and are meant to "ensure the integrity of the assessments" it publishes. Lehman Brothers has also declined to comment on the review. The oil industry has always been sensitive to any signs of Platts overstepping its primary function as a provider of price transparency in illiquid or opaque markets, from U.S. West Coast gasoline differentials to fuel oil cargoes in Singapore. Traders said Platts has worked to make the assessment process as clear and objective as possible, as pressure mounted on both it and on regulators to improve oversight of unregulated markets in the wake of U.S. gas and power trading scandals. But they also say it sometimes strays close to the gray line separating an independent price assessor from a regulator. "Regulators are elected and chosen, not interviewed, hired and paid for their work like Platts, a Singapore-based trader said. "Their incentives are not lined up to their functions if they are to serve as regulators." Traders said the "review" would be unlikely to significantly affect Lehman's oil trading operations, which are small compared to leaders in the sector like Goldman Sachs (GS.N: Quote, Profile, Research). OPAQUE WORLD While developed futures exchanges like the New York Mercantile Exchange (NYMEX) (NMX.N: Quote, Profile, Research) fall under the authority of regulators like the Commodity Futures Trading Commission (CFTC), most of the world's physical markets are unregulated. To provide a benchmark price that can be used to settle long-term deals or derivatives trades, Platts gathers bids and offers on cash physical and over-the-counter derivative contracts during a half-hour daily trading period meant to concentrate market activity and provide a window of clarity. Being excluded from posting bids or offers in that window -- a practice known as "boxing" -- does not prevent Lehman from trading with counterparties, but would mean its trades will not influence the benchmark end-of-day price set by Platts. The review could at any given time be lifted, allowing Lehman to participate in the price assessment process again, and companies ranging from oil major Royal Dutch Shell (RDSa.L: Quote, Profile, Research) to trader Gunvor have all resumed trade after being "boxed." And while traders often grumble about the Platts pricing system and its quasi-regulatory powers, some regular participants say the system works well enough, given the lack of alternatives. "Traders have a choice not to participate in the Platts assessment, no one is arm twisting anyone to stick to Platts," a senior China-based trader said. "We are all seasoned players, and we know the referee and understand the rules, so let's just play the game and move on." (Additional reporting by Dena Aubin in New York) (Editing by Jonathan Leff and Ramthan Hussain)
WeltPlatts Weltschmerz? Shares of Lehmen Brothers Take a Beating Shares of Lehman fell 12 percent, to $17.30. This year, it has lost 70 percent of its value, while a broader index of broker-dealer stocks is down 33 percent. The cost of insuring Lehman’s senior unsecured debt, a barometer keenly watched by traders, reached its highest levels on Thursday since the Bear Stearns collapse in March. Over all, major stock indexes fell less than 1 percent, with Freddie Mac the big loser with a 22 percent decline and Fannie Mae’s shares down about 14 percent. Lehman, once a leader in the now-battered mortgage market, is struggling against a tide of rumors, none substantiated but all magnified by fears about the true value of its assets that cannot be easily sold and the bleak prospects for its business in a weak economy. “There’s not a lot of good news in the market,” said Brad Hintz, a securities analyst industry at Sanford C. Bernstein. Lehman does not appear to face any immediate financing issues and has access to an emergency loan program installed by the Federal Reserve in March. “With the Fed behind them, they will survive,” Mr. Hintz said. The program, known as the primary dealer credit facility, has expanded Fed lending beyond the commercial banks normally served and was scheduled to expire in September. This week, though, the chairman of the Federal Reserve said he was considering an extension of that program into next year, good news for Wall Street firms continuing to navigate a torrent of bad news. The financial sector is frozen, the economy is slowing and the housing market is plagued by the triple whammy of rising foreclosures, a paralyzed securitization market and escalating fears about Fannie Mae and Freddie Mac, which own or guarantee about $5 trillion in mortgages. The crisis in financial markets has been accompanied by higher gas and food prices that have put the Fed in a tough position: it must encourage lending to keep the wheels of finance turning but also be careful to temper inflation, an economic threat rising with oil and food prices. And the Fed must walk the line between comforting Wall Street — not the most popular idea among Americans struggling to stay afloat themselves — by possibly extending the emergency loan program and reassuring the markets that it will not bail out every financial institution that runs into trouble. “For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available,” Henry M. Paulson Jr., secretary of the Treasury, said before a Congressional hearing Thursday. “For market discipline to effectively constrain risk, financial institutions must be allowed to fail.” This year the Fed and the Treasury played a critical role in orchestrating JPMorgan Chase’s takeover of Bear Stearns after the investment bank came to the brink of bankruptcy. Like Bear before it, Lehman has been battered by an almost daily dose of market rumors. Thursday’s batch included speculation that Pimco, the giant California-based bond fund, and SAC Capital, a large hedge fund, had stopped doing business with Lehman. Representatives for both Pimco and SAC said the rumors were not true and that they continued to do business with Lehman. “The shorts are going after anyone who is levered and doesn’t have an exit plan,” said one senior trader who is not authorized to speak for his institution. Lehman Brothers and other Wall Street institutions have accused short sellers, those who profit on a share price falling, of feeding misinformation into the market to create a crisis of confidence. Such activity would be a violation of federal securities laws. Short sellers argue that the firms are teetering on their own bad decisions, including loading up their balance sheets with risky assets acquired with heavy borrowing and without sufficient equity. Both arguments seem to have merit: Wall Street got itself into a pickle when it piled into risky assets financed with cheap debt. And the marketplace is filled with rumors that never quite pan out, with Lehman being the latest topic. The results are unambiguous. The stock has been battered and the cost of buying protection against a Lehman default has risen. The cost of buying $10 million worth of insurance against Lehman’s senior unsecured debt spiked to $326,000, from $280,000, according to Tim Backshall, chief strategist for Credit Derivatives Research. He said the spike was caused by “rumors that a number of clients were halting trading,” he said. The spreads on Lehman’s credit default swaps widened to their March level. “It’s the widest it’s been since the Bear weekend and excluding that, it’s the widest ever,” Mr. Backshall said. “It’s not pretty.”
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