During the weekend before Lehman failed, its general counsel quietly asked outside lawyers to prepare for a filing, just in case. He obviously did it very quietly, as the sheer notion that bankruptcy was even an option being considered would have thrown the whole industry into chaos. At the time feverish negotiations with the government and competitors were taking place and most pundits were expecting a Fed led takeover, a la Bear Stearns. Unfortunately, Sunday night and Monday morning the draft filing was made formal and it was indeed filed on that fateful September, 15 2008.
In the last few days I have started receiving emails and calls about how a euro breakup would play out, from a legal standpoint…which bonds would be repaid in Drachmas or Lire, which in the surviving euro currency, etc. This kind of preparation is the equivalent to calling the bankruptcy lawyers, just in case, except that since the Euro is not controlled by one single entity but by seventeen European governments, the chance of this staying quiet is virtually nil.
The markets now know or speculate that governments, creditors, and debtors have hired top London and New York lawyers to advise them on the legal ramifications of a Euro breakup. This is both a good and a bad thing. It’s bad because the sheer speculation that things are at this point will make markets continue to bet against all non German Issuers; however, it is good as the market knows that when and if that day comes, the logistics would have been worked out before and the panic could be less severe. Is this what the Germans want?