Fed, Treasury brokering deal to rescue Lehman Brothers

Lehman Races to Find a Buyer

Bank of America Is Said
To Be in Preliminary Talks;
U.S. Plays Matchmaking Role

By Matthew Karnitschnig, Carrick Mollenkampf,
Susanne Craig, and Annelena Lobb
The Wall Street Journal
Friday, September 12, 2008

http://online.wsj.com/article/SB122116292232524671.html?mod=hpp_us_whats...

The investment bank Lehman Brothers Holdings Inc. spent Thursday energetically shopping itself to potential buyers -- among them Bank of America Corp. -- just a day after insisting it had found a way to patch up its massive real-estate-related losses.

Given the firm's deep financial troubles, a deal of any sort is far from certain, according to people familiar with the situation. In addition, prospective buyers would likely want the U.S. government to help shield them from future losses from any such transaction, these people said, as happened in March, when Bear Stearns Cos. was forced into a deal to be acquired by J.P. Morgan Chase & Co. In that deal, the federal government agreed to absorb as much as $29 billion in potential losses.

The Federal Reserve and Treasury Department have been working with Lehman to help resolve the bank's troubles, including talking to potential buyers, according to people familiar with the matter. Federal officials are not expected to structure a bailout along the lines of the Bear transaction or this past weekend's rescue of mortgage giants Fannie Mae and Freddie Mac.

Resolving the mess at Lehman could help stem a wave of pessimism that the U.S. financial system faces the prospect of much deeper turmoil because of bad loans and the weak economy. Late Thursday, Washington Mutual Inc. rushed out some details about its third-quarter results in hopes of ending a 34% slide in its stock price so far this week.

In better times, Lehman's chief executive officer, Richard Fuld Jr., routinely vowed he would never sell the company, which he has run for nearly 15 years and which ranks as the oldest major firm on Wall Street. Now, however, he is under pressure to act quickly to restore confidence before nervous clients pull back from trading with the firm or its lenders cut back on their credit lines.

In a matter of just days, Lehman's fate has spun out of the firm's control. On Wednesday, it announced a turnaround plan aimed at making it possible for the beleaguered firm to survive as a smaller organization freed from the toxic real-estate assets that led to $6.7 billion in losses in the past two fiscal quarters.

After the close of trading on Wednesday, the rating agency Moody's Investors Service put Lehman's credit rating on review, saying it would be lowered from its current A2 level unless Lehman can negotiate "a strategic transaction with a stronger financial partner." A downgrade by Moody's or Standard & Poor's would drive up Lehman's borrowing costs, making it tougher to operate.

On Thursday, Lehman was squeezed even more by a morning report from Merrill Lynch & Co. analyst Guy Moszkowski, who said the firm could face a potential "takeunder" offer, a scenario in which a company is sold for less than its per-share stock price.

As a result, Lehman shares fell by as much as 48% by midday Thursday, touching their lowest point since 1995. the price bounced back a bit; in 4 p.m. New York Stock Exchange composite trading, Lehman was down 42% to $4.22.

Bank of America, which is holding preliminary discussions about a transaction, appeared to be Lehman's best hope as of late Thursday. Still, people involved in the deal talks said it was too early to say what shape a sale might take, or if it would happen at all.

According to several people familiar with the matter, one goal among negotiators is to unveil any deal to shore up Lehman before Asian financial markets reopen for trading on Monday.

Any prospective buyer is almost certain to look to the U.S. government to help protect against future losses. However, it would be politically challenging for the government to formulate another Bear Stearns-like rescue for Lehman, particularly coming so soon after it agreed to take over mortgage giants Fannie Mae and Freddie Mac. The Fed has grown increasingly uncomfortable with the growing perception that it will craft bailouts for the U.S. economy.

The sense of urgency has narrowed the list of potential buyers, already wary about exposing themselves to potential losses that may be lurking in Lehman's balance sheet. For instance, Nomura Holdings Inc., the big Japanese Investment Bank, is a potential buyer but given time-zone differences and regulatory approvals needed at home, it is unlikely it could do a quick deal.

There's only a relative handful of suitors large and strong enough to absorb Lehman. Goldman Sachs was mentioned Thursday as a possible white knight, but people close to the firm say it wasn't approached and isn't interested. Other possible buyers, including France's BNP Paribas SA, the U.K.'s HSBC Holdings PLC, Germany's Deutsche Bank AG, Spain's Banco Santander SA, aren't expected to participate, according to people familiar with those banks' intentions.

One outside potential remains Barclays PLC, the UK's third-largest bank. Barclays has been eager to expand its investment-banking franchise around the globe.

Another potential scenario is a consortium of bidders that divide up the pieces of Lehman among themselves.

A number of prospective buyers would likely "come out of the woodwork," if the U.S. government were to offer some form of protection against future losses, said one person monitoring the process.

Speaker of the House Nancy Pelosi (D., Calif.) said Thursday that Lehman's impact on the credit markets would have to be evaluated before the federal government moved to pull together a rescue package for the troubled investment bank.

Outside Lehman's headquarters in midtown Manhattan, employees taking lunch breaks or a few minutes for a smoke early on Thursday afternoon discussed the firm's future. Many sounded dazed. "It's over, man. ... Unless we get bought out in the next 24 hours, it's over," said a young man, in conversation with someone on his cell phone. He declined to identify himself.

At a fast-food vendor across the street, people waiting to order food discussed the dive in Lehman's share price this week, and the latest headlines from CNBC. Outside, a group of three men, wearing Lehman badges and walking back into headquarters, discussed the fallout for other firms on Wall Street. "At some point, where does it stop?" one said, as he headed back to the office.

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