Amid growing angst about the U.S. financial system, Wall Street chieftains and top federal regulators met Saturday in New York in an attempt to decide the fate of battered investment bank Lehman Brothers and to prevent the unraveling of more institutions.
Tense high-level talks ended Saturday evening, but staffers were working into the night ahead of renewed discussions today. Participants face pressure to craft a resolution by tonight, before financial markets open Monday in Asia. If Lehman's fall isn't softened, investors could send already downtrodden financial stocks diving deeper.
Charlotte-based Bank of America remained a possible buyer of all or parts of Lehman, but could be cooling on the idea, The Wall Street Journal reported. Another main contender appears to be British bank Barclays.
Two main options appeared to emerge at the talks held at the Federal Reserve Bank of New York. Wall Street firms could agree to prop up Lehman – and its troubled real-estate assets – to enable a sale, or they could agree to continue trading with the firm as it is liquidated in an orderly fashion, according to the Journal and The New York Times.
The big hang-up is what to do with about $85 billion in deteriorating investments held by Lehman. One possibility is to stow those holdings in a separate entity, but that solution is complex and likely requires cooperation by fierce competitors.
Bank of America spokesman Scott Silvestri declined comment.
The talks come as worries about the financial system are spreading from Lehman to other institutions dogged by the U.S. housing crisis, including Seattle-based thrift Washington Mutual and New York-based insurer American International Group.
Participants in the meetings included Treasury Secretary Henry Paulson, New York Fed President Timothy Geithner and Securities and Exchange Commission Chairman Christopher Cox, as well as leaders from major Wall Street firms.
Bank of America chief executive Ken Lewis did not attend because his bank is a possible contender to buy Lehman, Bloomberg News reported. Lehman representatives also were not present, The Associated Press reported.
Federal officials have balked at putting taxpayers on the hook to rescue Lehman, according to reports. That is a major hurdle for possible acquirers such as Bank of America or Barclays, which don't want to assume Lehman's souring investments.
The government has faced criticism for its role in rescuing investment bank Bear Stearns Cos. as well as mortgage giants Fannie Mae and Freddie Mac.
Bank of America has long desired to become a major player on Wall Street, but has struggled to achieve that goal. Just last fall, the bank reversed course on a $675 million expansion effort after its corporate and investment bank suffered losses in the credit crunch. Since October, the unit has cut 3,400 jobs, or 15 percent of its positions.
Lewis, chief executive since 2001, has long expressed trepidation about the investment banking business, which is known for volatile earnings and high-paid bankers. However, he has also stressed the goal of being No. 1 in the markets in which his bank competes, and he is known for buying distressed companies at reduced prices. He purchased struggling mortgage lender Countrywide Financial Corp. in July for $2.5 billion.
“He's a very opportunistic guy,” a person who knows Lewis said Saturday, adding: “He is a really, really, fierce competitor.”
One question, however, may be whether Lewis wants to wait to buy a bigger, less risky investment bank such as Morgan Stanley or Merrill Lynch, should they come up for sale in the ongoing credit crunch, the person said.
Lehman, which expects to report a $3.9 billion third-quarter loss, is a risky acquisition target, but a buyer is likely to get an attractive price. Its stock is down more than 94 percent this year, leaving its total market value at about $2.5 billion.
“If the price is right, it may be a good deal,” Virginia-based banking consultant Bert Ely said Saturday. If the purchase price is far below the liquidation value of the company's assets, there is room to absorb further writedowns, he added.
Picking up Lehman, which had 25,000 employees at the end of August, would give Bank of America a top-notch bond trading desk and a bigger presence in stock offerings and merger advice. It also has a respected investment management arm, Neuberger Berman.
The meeting Saturday at the Fed was reminiscent of a confab in 1998, in which Wall Street investment firms agreed to support tottering hedge fund Long-Term Capital Management. At the time, Lehman was part of that rescue.