WASHINGTON/NEW YORK, Sept 12 (Reuters) - The Federal Reserve Bank of New York held emergency talks with officials of major Wall Street firms on Friday night as concerns grew that Lehman Brothers Holdings Inc may fail to find a willing buyer to save the ailing institution.
Lehman executives, potential buyers and government officials struggled through Friday to craft a buyout plan as investors anticipated a weekend of last-ditch efforts to limit fallout from the latest victim of the global credit crunch.
"Senior representatives of major financial markets met at the Federal Reserve of New York Friday evening to discuss recent market developments," a Fed official told Reuters.
In attendance were government officials including New York Fed President Timothy Geithner, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
Wall Street executives in attendance included Morgan Stanley Chief Executive John Mack, Merrill Lynch & Co Chief Executive John Thain, JPMorgan Chase & Co CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp, among others, the Wall Street Journal reported.
Bank of America Corp was represented, the New York Times reported.
The bank officials reviewed their exposure to Lehman with an eye to developing contingency plans, including an orderly liquidation of the firm if no buyers were found, the Times reported, citing people briefed on the situation.
"The Fed is trying get this thing sorted out," Mark Waggoner, president of Excel Futures Inc of Huntington Beach, California, said when told of the meeting. "They are worried about a domino effect."
Fears about the health of the U.S. banking system hurt shares of Wall Street financial institutions on Friday, limiting gains in the broader stock market and pushing the U.S. dollar lower.
Lehman shares closed at a 14-year low as traders increasingly came to the belief that the U.S. government would not provide financial backing for a deal.
A source familiar with the thinking of the Treasury Secretary said earlier in the day Paulson was "adamant" that no public funds be put on the line to help facilitate a sale.
"I think they're going to have to draw a line at some point," Rose Grant, managing director of Eastern Investment Advisors in Boston, said of Washington regulators' role in bailing out financial institutions. "This could be the point."
Bank of America is widely seen as a leading contender, with British bank Barclays Plc also considered a possibility.
Time is of the essence for Lehman. Since Monday, the firm's market capitalization has lost 78 percent, to about $2.5 billion from $11.2 billion. Its shares fell 13.5 percent on Friday to close at $3.65 on the New York Stock Exchange. Its bonds also dropped.
The uncertainty surrounding Lehman underscores how the U.S. banking system as a whole does not have the capital needed to get through the current credit crunch, an influential investor said on Friday.
"Recent developments highlight the extent to which the banking system as a whole lacks sufficient capital to comfortably navigate this period of sharp deleveraging," Mohamed El-Erian, co-CEO of Pacific Investment Management Co (Pimco), said in an interview. Pimco oversees more than $812 billion in assets.
Other financial companies' shares also plunged on Friday, including leading brokerage Merrill Lynch & Co Inc and American International Group Inc, once the world's largest insurer by market capitalization. AIG lost as much as a third of its value, while Merrill slid 11 percent.
Credit protection costs also rose for AIG, Lehman and JPMorgan Chase & Co, with investors paying $715,000 to protect $10 million of Lehman debt, and $1.2 million to protect the same amount of AIG debt.
The Financial Times reported that BofA, the No. 2 U.S. bank by assets, was considering a joint bid for Lehman along with private equity investor JC Flowers and sovereign wealth fund China Investment Co. Lehman declined to comment.
Lehman's survival may hinge on the sale of a 55 percent stake in Neuberger Berman, its asset management business.
Bids for the asset, due on Friday, were put in by private equity firms including Bain Capital and Clayton, Dubilier & Rice, sources said. Buyout firms Kohlberg Kravis Roberts and Hellman & Friedman have also been pursuing the unit and were expected to bid, sources previously told Reuters.
WORKING THE DEAL
Adding doubts about the possibility of a quick rescue for Lehman, a source familiar with U.S. Treasury Secretary Henry Paulson's thinking said he was "adamant" that no government money be used in any deal.
U.S. Sen. Richard Shelby, the top Republican on the Senate Banking Committee, told CNBC that the Treasury and the Fed were trying to work a deal that involved no U.S. government money. "I'm hoping that some big firm will want them more than the Fed wants them," he said.
The investment bank is struggling to find a solution to the worst crisis of its 158-year history. Lehman wrote down its assets by $5.6 billion in the third quarter, triggering a second straight quarterly loss.
Lehman has so far failed to attract investors to shore up its capital position, weakened this year by its outsized exposure to commercial real estate and residential mortgage assets hard hit by the continuing credit crunch.
The government's reluctance to intervene has raised concern about the possibility of a Lehman bankruptcy filing.
If Lehman, which employs 25,935 people worldwide, did go under, the effects could be devastating to world markets, resulting in a fire sale of its troubled assets that could depress bond and mortgage markets, among other areas.
Standard & Poor's analyst Scott Sprinzen said on Friday he did not expect Lehman to fail and said its near-term liquidity was satisfactory. But S&P analyst Tanya Azarchs said concerns are "very, very high" because of skittish market conditions.
A Fitch analyst said the failure of Lehman to reach a deal would result in a ratings cut in the "near term." If its ratings were cut, it could be forced to post as much as $2.9 billion in collateral to counterparties, according to research from CreditSights.
MOST LIKELY SUITOR
Bank of America, the largest U.S. bank by market value, has emerged as the most likely suitor for Lehman, according to various reports and analysts. BofA declined to comment.
"I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies," banking analyst Richard Bove said in a note.
HSBC Plc has also been linked with Lehman, but in recent weeks executives at the London-based bank have distanced themselves from a possible deal.
By buying Lehman, BofA would get access to one of the best fixed-income trading desks, Bove said. "It immediately becomes a first-rank player in the equity investment banking sector."
But a takeover by BofA, which took on a huge restructuring burden in troubled mortgage company Countrywide earlier this year, was far from a sure thing.
In a sense, Charlotte, North Carolina-based BofA could snag Lehman for a bargain as its market capitalization is now less than investment banks that were once much smaller than Lehman, such as Raymond James Financial and Jefferies Group Inc JEF.N.
THUMBS DOWN
But BofA and other bidders were said to be concerned about potential losses on Lehman's $45.8 billion of mortgage and asset-backed securities.
Lehman Chief Executive Richard Fuld, who had vowed never to sell the firm in his lifetime, has been trying to unload just a part of the company rather than the whole thing, sources familiar with the situation said.
But investors gave a thumbs-down to revival plans unveiled by Lehman on Wednesday, saying they lacked real progress. It prompted fears that clients and trading partners might take their business to more stable firms. Major Wall Street firms have said they continue to do business with Lehman. (Additional reporting by Dan Wilchins, Joseph A. Giannone, Dena Aubin, Jennifer Ablan, Juan Lagorio, Megan Davies and Chris Sanders in New York, Karey Wutkowski in Washington and Jamie McGeever in London; additional writing by Steve Slater, Lincoln Feast, Ian Geoghegan and Christian Plumb; editing by Jeffrey Benkoe, John Wallace, Gary Hill) |
