Lehman may be hard to resist

Bank of America Corp. chief executive Ken Lewis has long expressed three big concerns about buying an investment bank: the high price, cultural differences and the riskiness of the business.

If Lewis forges a deal to buy battered Lehman Brothers Holdings Inc., the price tag likely will be attractive, but his other worries will be harder to assuage, people familiar with the bank and the industry said. He'd also have to eat some crow after making disdainful comments about the business over the years.

Still, the bank's CEO since 2001 has grown up in Bank of America's ambitious culture and has long professed a desire to be No. 1 in the markets the bank competes in, they said. Landing Lehman would make the bank a much more credible player on Wall Street, adding to its dominance in mortgages, credit cards and bank deposits.

Such a deal would also continue the bank's tradition of opportunistic acquisitions. In 1988, the bank nabbed Texas' biggest bank from the Federal Deposit Insurance Corp. by exploiting a tax loophole, and this year it picked up mortgage lender Countrywide Financial Corp. as it struggled for survival.

“This deal would be a major plus if the bank wins it,” analyst Dick Bove of Ladenburg Thalmann & Co. Inc. wrote in a note Friday.

As the U.S. financial system reels from the U.S. housing crisis, Bank of America and New York-based JPMorgan Chase have emerged as two of the strongest institutions. Lewis would enjoy the acclaim that would come with saving Lehman, those who know Lewis say, but only if it contributed to the bank's bottom line.

Word surfaced Thursday that Bank of America was in preliminary talks with Lehman, which is bogged down by deteriorating real estate holdings and thirsting for more capital. The Financial Times reported Friday that the bank could team with investment firm JC Flowers & Co. and Chinese sovereign wealth fund, China Investment Co., in its bid.

Other banks, including British financial titans HSBC PLC and Barclays PLC, also could be interested in a takeover, according to reports Friday. The federal government is involved in the process, but officials are unlikely to provide the kind of assistance offered in the rescues of investment bank Bear Stearns Cos. and mortgage giants Freddie Mac and Fannie Mae, reports said.

Talks were still in flux Friday, but if a deal is reached it could come by Sunday night in the U.S., before markets open Monday morning in Asia, reports said. Bank of America spokesman Scott Silvestri declined comment.

A Lehman transaction could be headed to the bargain bin. The firm's shares are down more than 94 percent this year, falling another 13 percent on Friday to $3.65. Lehman's total market value on Friday dropped to $2.5 billion, not much more than the $1.2 billion JPMorgan paid for Bear Stearns.

Over the years, Lewis has repeatedly faced questions about his interest in buying an investment bank, from Morgan Stanley & Co. to Merrill Lynch & Co. At a 2004 investor conference, he said it was difficult to make the “arithmetic” work in such deals because he would have to pay for risky trading operations that he would later have to downsize. He also expressed concern about “cultural issues.”

“I think all of those combined make it a very, very low probability,” he said.

Culture clashes are notorious when conservative commercial banks buy more aggressive investment banks. Lehman bankers could bolt if Bank of America tries to absorb them into its ranks, said one former Bank of America trader, although he noted job options are getting thinner on Wall Street.

“Lehman has been a much bigger risk taker in the last couple of years,” the trader said. “That would all get throttled back if Bank of America buys them.”

Lewis also could be wary of taking on Lehman's bad real-estate bets. The 158-year-old firm, once part of credit card giant American Express Co., said this week it expects to take a $3.9 billion loss in the third quarter. One former Bank of America investment banker suspected Lewis would find a way to stow any of Lehman's problem holdings in a separate entity, if he did a deal.

Buying Lehman could be hard to resist, analysts said Friday. Bank of America would get a top bond trading business and a bigger presence in areas such as stock offerings. A takeover also would produce an even more dominant player in mortgages, from the origination of the loans to their packaging into securities, CreditSights analysts wrote in a report.

When the credit crunch starting whacking corporate and investment banking earnings in October, Lewis cracked that he had had all the fun he could stand in investment banking and began to scale back operations. But over the years, he's also been careful to never fully paint himself into a corner. “I'm old enough,” he said at an investor conference in 2005, “to never say never.”