Fed, Wall Street race to try to save Lehman Brothers

Paul Carpenter

September 14, 2008

The field of possible buyers for Lehman Brothers narrowed Saturday, but the parties involved in the discussions over the wounded investment bank's future were at loggerheads over how to finance the rescue.

An investment banking official said Bank of America Corp. and Britain's Barclays Plc. have emerged as the front runners for Lehman Brothers after a possible cash injection from its rival Wall Street banks and brokerages.

Top officials from the Federal Reserve and the Treasury Department and executives from several Wall Street banks met at the New York Fed's downtown Manhattan headquarters Saturday for the second day in a row try to hash out a deal to rescue Lehman Brothers.

The financial world was watching. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday.

Paul Carpenter E-mail | Recent columns

Discussions are expected to continue today, said Andrew Williams, a spokesman for the New York Fed.

The investment banking official, who asked not to be named because the talks were ongoing, said the investment houses were balking at paying to polish up Lehman's balance sheet so Bank of America or Barclays could buy a financially clean firm.

He said the investment banks were angling for the government to provide some money, as it did when it helped JPMorgan Chase & Co. buy Bear Stearns in March, because they would get little to nothing in return for their help.

The government has drawn a line in the sand over using taxpayer money to help rescue Lehman Brothers, however.

The official said the talks were tense and neither side appeared willing to back down.

Besides selling the company whole or piecemeal, Lehman could be liquidated, perhaps with financial firms agreeing to still do business with the company as it wound down.

Or, a financial company or companies could buy Lehman's ''good'' assets. Its shunned or devalued real-estate assets could be placed in a ''bad bank'' financed by other banks.

Saturday's participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the New York Fed, and Securities and Exchange Commission Chairman Christopher Cox.

Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and Merrill Lynch & Co.'s John Thain were among the chief executives at the meeting.

Representatives for Lehman Brothers were not present during the discussions.

They gathered on the heels of an emergency session convened Friday night by Geithner -- the Fed's point person on financial crises.

Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.

Geithner convened the meeting Friday evening and told bankers gathered at the New York Fed to come up with a solution or risk being the next to go under, investment banking officials with direct knowledge of the talks said. They spoke on condition of anonymity because the talks were ongoing.

A spokesman for Lehman declined to comment about the meeting.

Other potential buyers could include Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG.

Participants in Saturday's meeting were also trying to tackle a broader agenda that includes problems at American International Group Inc. and Washington Mutual Inc., said the investment bank officials, who were briefed on the talks.

AIG, the world's largest insurer, and WaMu, the nation's biggest savings bank, have taken steep losses the past year from risky investments. Investors, worried they do not have enough cash on their balance sheets to withstand further hits, unloaded their shares on Friday.

AIG's shares dropped about 31 percent on Friday. WaMu's shares shed about 3.5 percent. Shares of Merrill Lynch & Co. Inc. also lost 12.3 percent. Lehman's stock closed at $3.65 -- an all-time low and down nearly 95 percent from a 52-week high of $67.73.

E-mail

Reprint

Fed, Wall Street race to try to save Lehman Brothers

The Valley Blogosphere

Popular stories

War Stories: In Their Own Words

Gas Prices: What's At The Pump?