Lehman Brothers Holdings Inc., Wall Street's latest damsel in distress, could be looking to Bank of America Corp. for succor.
The New York investment bank, struggling with soured real estate holdings and concerns about its capital, has approached major financial institutions, including the Charlotte bank, about a possible sale or an investment, according to reports Thursday.
Such a purchase would be a major about-face for Bank of America chief executive Ken Lewis, who last fall famously said he had had all the fun he could stand in investment banking and proceeded to downsize operations. He also quipped this summer that he wouldn't use his bank's “petty cash” to buy an investment bank, as Wall Street firms struggled in the credit crunch.
In addition, Bank of America is grappling with the purchase of another troubled institution – mortgage lender Countrywide Financial Corp. Still, Lewis has a reputation as an aggressive dealmaker, sometimes targeting damaged companies, which can come with a lower price tag.
The Wall Street Journal, citing people familiar with the situation, said Bank of America was in “preliminary discussions about a transaction.” The Journal said Bank of America could be Lehman's best hope of a sale, but it may only do a deal if it is encouraged by the federal government. The Journal said a deal could be reached by the Monday opening of Asian markets, but that a transaction was not guaranteed.
Bank of America spokesman Scott Silvestri said the bank doesn't comment on “market rumor and speculation.”
Along with Bank of America, France's BNP Paribas, Deutsche Bank AG and Britain's Barclay's Plc have been cited this week as potential buyers of Lehman. In March, New York-based JPMorgan Chase & Co. agreed to buy another wounded investment bank, Bear Stearns Cos., after prodding from the federal government.
Gary Townsend of Hill-Townsend Capital, a Maryland-based investment firm, wondered why Bank of America would want to add another battered institution to its crowded plate. Lehman Brothers would also add duplicative businesses and a building in New York, even as Bank of America completes its own Manhattan skyscraper.
Still, Townsend said such a takeover wasn't unthinkable. “Ken Lewis has always struck me as someone incapable of passing by a deal,” he said.
Reports of talks surfaced a day after Lehman, the No. 4 investment bank, said it expected to lose $3.9 billion in the third quarter and sketched out plans to stabilize the company, including selling a stake in its investment management arm. Lehman CEO Richard Fuld, 62, the longest serving leader on Wall Street, also said the firm would examine all other options – including a sale of the company he joined right out of college.
Investors were not impressed, sending Lehman's shares down more than 40 percent Thursday to $4.22. The stock is down 93 percent this year.
Still, some analysts said Bank of America could gain by buying Lehman, likely at a steep discount compared with its value only a few months ago.
Thomas Brown, chief executive of the Second Curve Capital investment firm in New York, said a takeover would give Bank of America some needed muscle in investment banking, where it's considered “mediocre.” “It's not a niche player, and it's not one of the major investment banks,” Brown said. “That's not a position Ken Lewis likes to be in.”
Brown said Lehman was still a good company and hoped that Bank of America would keep the Lehman management team in place. “Their (Lehman's) problems are more psychological than real right now,” he said. “They have a funding problem, which Bank of America could solve overnight for them.”
James Early, an analyst at The Motley Fool, said Lehman would probably be a good deal, given its tanking share price, though Bank of America would probably want to get rid of some of the real-estate related assets that have handed the firm huge losses. “Those have been an albatross that Lehman was already thinking about selling,” Early said.
The deal makes sense because Bank of America can't substantially grow deposits, he added. Federal regulations prohibit any bank from obtaining more than 10 percent of the nation's deposits through an acquisition.
However, there could be some cultural clashes. “A retail bank to an investment bank can be like oil and water,” Early said. Combining a Charlotte bank with a New York bank can also be a challenge, he noted.
Bank of America, in fact, has a poor track record with investment banking acquisitions. In 1997, then known as NationsBank, it paid $1.2 billion for San Francisco's Montgomery Securities, but internal bickering erupted almost immediately and Montgomery's leader, Thomas Weisel, departed in less than a year.
Bank of America also has reversed course on a $675 million investment banking expansion, launched in 2004, to hire more traders, salespeople and bankers in the U.S. and overseas. Since October, its corporate and investment bank has cut more than 3,400 jobs, or 15 percent of its positions, as it focuses on services for corporate customers, rather than churning out complex financial products for investors that have soured in the credit crunch. The bank also agreed to sell its prime brokerage unit, which serves hedge fund clients.
Bank of America's corporate and investment bank made $1.7billion in profit in the second quarter, up 3 percent from a year earlier. The unit accounted for 51 percent of the company's $3.4 billion quarterly net income. Typically consumer banking is the company's biggest profit driver, but it suffered from rising loan losses.
At an investor conference Wednesday, Brian Moynihan, the bank's president of global corporate and investment banking, said his division “performed as well as anybody else in the market” in the second quarter.
After a late-day rally, Bank of America shares finished up 2 percent at $33.06.