Lombard-Wall Inc., a small New York dealer in government securities, yesterday filed for bankruptcy court protection after its financial condition deteriorated to the point that Bankers Trust Co. declined to process the dealer's trades.
Lombard said it had assets of $2 billion, liabilities of roughly the same amount and capital of slightly less than $6 million.
It was the third such securities firm to fail in the last three months. Unlike the other two--Drysdale Government Securities Inc. and Comark--which went out of business, Lombard-Wall asked the federal bankruptcy court in New York to protect it from lawsuits while it tries to reorganize its debts and operations to satisfy creditors.
Analysts said that Lombard-Wall's failure was due to the unwillingness of major banks to continue to make loans to small trading firms whose balance sheets are not impeccable. Banks have become more hard-nosed in granting firms credit in the wake of the spectacular failure last May of tiny Drysdale Government.
Lombard-Wall, like Drysdale, apparently guessed wrong on the direction of interest rates and lost money when the value of its securities fell. But Wall Street sources said the magnitude of Lombard's errors appear not to approach Drysdale's.
Drysdale not only speculated badly, it compounded its losses by using the interest it held in trust on the borrowed securities to finance further speculation. General concern about the fragile economy and particular worry about small securities firms have scared banks and others that used to deal freely with smaller government securities dealers.
"Bankers Trust wasn't even willing to take the clearing processing risk which is almost non-existent," said Lawrence Fuller, who analyzes banks for a Wall Street brokerage firm, Drexel Burnham Lambert Inc. "I wouldn't be surprised to see more such failures in the coming months."
Chase Manhattan Bank, which lost $117 million when it assumed its client Drysdale's debts, was listed by Lombard-Wall as one of the firm's two biggest unsecured creditors.
Chase had issued $45 million in letters of credit, essentially performance bonds guaranteed by a bank, in connection with Lombard's investment agreements, the bankruptcy petition said. A spokesman for Chase said the bank risks losing "substantially less than $45 million," but he declined to say how much. Such letters generally guarantee that, in this case, Lombard makes interest payments or interest and principal payments it has agreed to.
The biggest unsecured creditor was the New York State Dormitory Authority. Analysts said the authority probably lent securities to Lombard-Wall.
When Drysdale failed, trading in the markets for U.S. notes and bonds was disrupted and the Federal Reserve issued a statement reminding banks and their clients that if there were any financial dificulties, the central bank stood ready to make loans as needed. Yesterday, the markets functioned without a ripple, traders said, and the Fed said nothing more than it was "aware" of the situation.
In filing for protection under federal bankruptcy laws, Lombard-Wall's chairman and president Harold Kurtz, blamed the firm's difficulties on high interest rates and the "unsettled" state of the market in the wake of the Drysdale default.
But Kurtz said that unlike Drysdale, which speculated its way to disaster in less than four months of existence, Lombard-Wall's holdings of government securities were hedged in such a way that its chances of substantial losses over the long run were minimized.
He said the company had been shrinking its size in the last few months, but with Bankers Trust's decision to stop processing its securities trades, the company was unable to continue to do business in a normal way.