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U.S. may broker rescue of Lehman

If the venerable Wall Street firm fails, others could follow.

September 12, 2008|Peter G. Gosselin and Walter Hamilton | Times Staff Writers

Fearing that a failure of Lehman Bros. could topple other financial firms, senior officials of the Federal Reserve and Treasury Department were talking with the struggling company and potential buyers Thursday to try to smooth the way for a sale of the venerable investment bank, people familiar with the situation said.

The 158-year-old Wall Street institution has seen its shares fall 70% in the last three days. A sale of Lehman Bros. Holdings Inc. -- at what would be a bargain price -- would make it the second major Wall Street firm to succumb to the nearly 2-year-old mortgage crisis.

Word that Lehman had apparently given up its quest to remain independent came after investors reacted unkindly to the investment bank's plan, unveiled Wednesday, to cope with billions of dollars in mortgage-related losses that have depleted its capital.

Lehman's shares plunged $3.03, or 42%, to $4.22 on Thursday, pushing the company's total stock market value below $3 billion and making an acquisition feasible for a range of potential suitors, particularly if the federal government provides financial backing to grease a sale, as it did with JPMorgan Chase & Co.'s absorption of Bear Stearns Cos. in March.

"It's a great play for somebody at this price," said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.

But the Fed and the Treasury are thought to be highly reluctant to get involved in another government rescue similar to those of Bear Stearns or mortgage giants Fannie Mae and Freddie Mac last weekend.

The argument for federal aid is that a collapse of Lehman could cause a painful chain reaction in the financial system, given the extent of its financial obligations to banks, brokerages, hedge funds and other players.

But a government-assisted sale of Lehman could spark a political firestorm just days after Treasury seized Fannie and Freddie while committing to invest as much as $100 billion of taxpayers' money in each firm to keep them solvent.

The leading contenders to buy Lehman were believed to be Bank of America Corp. and British banks HSBC Holdings and Barclays. But other European, Japanese and Middle Eastern banks aren't out of the question, analysts said.

At a price of about $3 billion, Lehman could also be in the cross-hairs of a private equity firm such as Blackstone Group or money-management giant BlackRock Inc., said Richard X. Bove, an analyst at Ladenburg Thalmann.

"They've got to sell the company, and they're definitely going to sell it," Bove said. "My guess is within two weeks we will have a buyer."

Neither Lehman nor any potential buyers would comment.

The major risk for a suitor is that Lehman could suffer further losses on its giant real estate-related portfolio -- the root of its troubles. So to get a deal done, buyers might demand that the government guarantee some of Lehman's troubled assets, as the Fed did in the Bear Stearns transaction.

Last month, Fed Chairman Ben S. Bernanke said regulators would have to be more disciplined in doling out assistance to deal with future financial crises, so that markets would not routinely expect the government to come to the rescue.

What's more, Lehman doesn't appear to be in the same dire straits that Bear Stearns was in in March. Other investment banks say they continue to trade with Lehman. And the major Wall Street firms now can take short-term loans from the Fed, a concession the central bank granted after Bear's near-collapse.

But that might not be enough to keep Lehman independent.

"Perception matters, and in this environment of extreme uncertainty and illiquidity, perception has overtaken fundamentals," Prashant Bhatia, a Citigroup Inc. analyst, said in a report to clients.

Lehman has searched unsuccessfully for a deep-pocketed partner to pump capital into the firm in a transaction that would avert a full takeover.

On Wednesday, Lehman said it planned to sell a majority stake in its prized money-management unit, spin off commercial real estate assets to shareholders and conserve cash by chopping its dividend 93%.

But the plan "fell short of what was necessary" to make investors turn optimistic on the stock, William Tanona, a Goldman, Sachs & Co. analyst, wrote in a commentary on Lehman.

Analysts at Citigroup, Goldman and Merrill Lynch & Co. lowered their ratings on Lehman's stock early Thursday.

There is growing concern that credit-rating firms could downgrade Lehman's debt. That would increase the investment bank's funding costs and put even more pressure on it to raise capital.

Moody's Investors Service warned Wednesday that it would probably cut Lehman's rating unless the company arranged a "strategic transaction with a stronger financial partner."



Gosselin reported from Washington, Hamilton from New York.

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