NEW YORK – Senior federal officials met Friday night with leading Wall Street executives to discuss the potential sale of ailing investment bank Lehman Brothers and review how an acquisition could affect those doing business with the firm, according to sources familiar with the discussions.
Attending the emergency session at the Federal Reserve Bank of New York were Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and New York Fed President Timothy Geithner, federal officials confirmed. Sources said they were joined by chief executives including John Thain, of Merrill Lynch; John Mack, of Morgan Stanley; Lloyd Blankfein, of Goldman Sachs; Jamie Dimon, of J.P. Morgan Chase; and Vikram Pandit, of Citigroup.
An official of the New York Fed said the meeting had been called “to discuss recent market conditions,” but declined to offer details. Other sources said the discussions centered on a wide range of issues that would arise for Lehman’s trading partners and other business associates if a rescue were launched. The sources spoke on condition of anonymity because of the sensitivity of the negotiations.
Financial problems at the nation’s fourth-largest investment bank have eroded shareholder confidence, sending Lehman scrambling to find a buyer. One major stumbling block has been the role the government might play in such a deal.
Federal Reserve and Treasury Department officials have pressed for a privately funded solution, while suitors for Lehman have insisted on a government guarantee that they would be protected against losses arising from toxic assets on the bank’s books, according to sources.
Federal officials would like a deal this weekend, although it was unclear whether that would happen.
As Lehman’s stock fell below $4, some analysts said the lower price tag on the firm might persuade a buyer to acquire the company without the type of government guarantees extended to J.P. Morgan Chase when it rescued failing Bear Stearns in March. “What’s going on now is a game of chicken, and it appears to me that Treasury is not prepared to blink right now,” said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods.
But other analysts disagreed. David Hendler, a banking analyst at independent research firm CreditSights, said a suitor still might press for a government backstop – essentially a guarantee that would provide reimbursements for losses – to help mitigate the risk that Lehman’s real estate assets deteriorate further.
“We would not rule out some type of government protections for some of Lehman’s riskier balance sheet assets if that is what it takes to get a deal done in the next few days,” Hendler wrote in a note to clients.
In the wake of last weekend’s bailouts of mortgage-finance companies Fannie Mae and Freddie Mac, regulators have been under pressure to keep Lehman in private hands.
Bank of America has emerged as a candidate to take over Lehman, according to sources familiar with the discussions. Banking analyst Richard Bove at Ladenburg Thalmann called the combination of those two firms a “natural fit.”
Buying Lehman, Bove said, would give Bank of America a top-tier bond-trading business, an expanded presence in investment banking, a healthy retail sales operation, strong investment research and the crown jewel of the Lehman franchise, the Neuberger Berman investment-management business.
A spokesman for Bank of America declined to comment, as did a spokeswoman for British bank Barclays, which sources said also has expressed interest in Lehman.
If Lehman fails to find a single buyer, government officials have said another solution would be for a group of companies to acquire pieces of the troubled Wall Street firm.