Lehman: No Chapter 7, Yet

As expected, Lehman Brothers has filed for bankruptcy. But in a twist, the brokerage subsidiaries haven't:

Late Sunday night, Lehman said it intends to file for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.

Is there still hope that someone will buy the brokerage? (Goldman? Bueller?) Probably not, although talks are still going on. And it won't be long before it's downgraded and all Lehman's customers have disappeared. But at least this Monday morning the brokerage is still not in formal liquidation, and Lehman's employees -- at least for today -- still have jobs.

Many of them will be poring over the derivatives book this morning, trying to match counterparties. It's a mind-numbingly complex and detailed task, but it could be the most systemically important work that anybody is doing today. The trick is to find offsetting positions -- ones where Lehman has sold protection to one counterparty while buying it from another -- and then put those two counterparties together, get them to renegotiate the deals between themselves, and let Lehman step out of the way.

On Sunday, many banks and hedge funds tried to implement such a netting system themselves, without Lehman's direct help, but by all accounts it wasn't a huge success. Maybe Lehman's formal bankruptcy will help concentrate minds. Or maybe -- just maybe -- the brokerage will manage to be sold, unencumbered by the debt of LBHI, as a going concern. Which would clearly be the best-case scenario at this point.