Lehman and the Fed

NEW YORK - The field of possible buyers for Lehman Brothers narrowed Saturday, but the parties involved in the discussions over the hemoraging investment bank's future were not able to nail down a solid plan over how to finance the rescue.

An investment banking big wig said Bank of America Corp. and Barclays Plc have emerged as the two more realistic suitors for Lehman Brothers. The point of contestation is the possiblity of some sort of cash injection from Lehman's rival Wall Street banks and brokerages. This is counter-intuitive. The free market is a jungle, kill or be killed, and Lehman is dying. Why help your competetor?

Top officials from the Federal Reserve and the US Treasury Department and executives from Wall Street power banks met at the New York Fed's Manhattan headquarters Saturday, after a late night meeting on Friday. All in an attempt 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. If there is no sale announced by 8:30am Monday, you should think about shorting the stock - the price will continue to fall.

Discussions were expected to continue today, said Andrew Williams, a spokesman for the New York Federal Reserve.

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.

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.

Other potential buyers could include Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.

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.

Lehman's stock closed at $3.65 Friday - an all-time low and down nearly 95 percent from its 52-week high of $67.73.

Global fears intensified Saturday that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system.

Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before Asian markets open, warning ominously, "the news that is coming out of the U.S. is bad."

Lehman Brothers Holdings Inc. put itself on the block earlier this week. Bad bets on real-estate holdings - which have factored into bank failures and taken out other financial companies - have thrust the 158-year-old firm in peril. It has been dogged by growing doubts about whether other financial institutions would continue to do business with it. This causes a self-fullfilling proficy.

Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.

Government officials want to avoid a Bear Stearns-like bailout; the Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.

Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other firms could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.