Bank of America, the biggest U.S. consumer bank, is among the firms weighing an acquisition of some or all of the 158- year-old investment bank after it reported its worst quarterly loss this week and the shares plummeted, according to people familiar with the situation who declined to be identified because the negotiations are confidential.
Treasury Secretary Henry Paulson doesn't want to put up money to help fund any Lehman acquisition, a person familiar with his thinking said today. Unlike when the Federal Reserve committed $29 billion to help JPMorgan Chase & Co. take over Bear Stearns in March, Lehman now has access to a lending facility for brokers that would permit an orderly process for unwinding the firm, the person said.
``Lehman's sale is likely to take a different form because there was serious political fallout from the JPMorgan-Bear deal,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``It could be a consortium that buys Lehman, with the Fed's help.''
Chief Executive Officer Richard Fuld, who built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the investment bank, was pushed toward a forced sale after talks about a cash infusion from Korea Development Bank ended, sparking 77 percent drop in the firm's market value in the past five days.
Joint Bid
Bank of America, led by CEO Kenneth Lewis, is considering a joint bid for the company with J.C. Flowers & Co. and China Investment Corp., the Financial Times reported, citing unidentified people.
Bankers from other firms were reviewing Lehman's books yesterday, according to people with knowledge of the situation, and a deal may be announced before Asian markets open Sept. 15, one of the people said. The New York-based investment bank announced the biggest loss in its 158-year history on Sept. 10, as devalued real estate assets led to $5.6 billion of writedowns in the third quarter.
Lehman dropped 14 percent to $3.65 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have lost almost 95 percent of their value this year. Bank of America rose 68 cents, or 2 percent, to $33.74.
Barclays Speculation
Lehman bonds also plunged for a fourth day. The firm's 7.5 percent notes due in 2038 dropped 12.75 cents to 64.25 cents on the dollar for a yield of 11.9 percent, according to Trace, the Financial Industry Regulatory Authority's bond-pricing service.
Ladenburg Thalmann & Co. analyst Richard Bove said in a note to clients today that Bank of America is the most likely buyer for Lehman. The Charlotte, North Carolina-based bank would gain ``one of the best'' fixed-income desks in the U.S. and boost its research and capital markets businesses, Bove said.
Bank of America may team up with Barclays Plc and private equity firms to make an offer for Lehman, analysts at MF Global Securities Ltd. said. Barclays would acquire Lehman's asset management unit to gain actively managed mutual funds and hedge funds, Mamoun Tazi, a London-based analyst at MF Global, said in a telephone interview today.
Private equity firms continued to weigh making bids for Lehman's asset management business, people familiar with the talks said yesterday. KKR & Co., Bain Capital LLC, Hellman & Friedman LLC and Clayton, Dubilier & Rice Inc. may make bids valuing the unit at about $5 billion, the people said. Officials at the firms declined to comment.
Rating Concern
``We're entering the end-game,'' said Rupert Della-Porta, the London-based chief operating officer of research firm Atlantic Equities.
Some Lehman employees have been reaching out to recruiting firms in recent days, executives at companies including Heidrick & Struggles Inc. said.
Philippe Cerf, a 15-year Lehman veteran who advises clients in the technology and aerospace industries, is close to joining Credit Suisse Group AG, three people with knowledge of his move said.
Without a ``strategic arrangement'' in the ``near term,'' Lehman's credit ratings may be downgraded, Moody's Investors Service said after Lehman reported its third-quarter loss. A downgrade could ratchet up Lehman's borrowing costs and deter others from trading with the firm.
Spokesmen for Bank of America, Lehman and the Fed declined to comment. Treasury is ``in regular contact'' with market participants, spokeswoman Jennifer Zuccarelli said.
Moral Hazard
When Bear Stearns collapsed in March after customers and lenders deserted the firm on concern it was running out of cash, the Fed agreed to take on $29 billion of hard-to-sell assets from the company to induce JPMorgan to buy it. At the same time, the central bank opened a lending facility for brokerages, including Lehman.
The decisions prompted warnings from current and former regulators, who said that the Fed was creating a so-called moral hazard by encouraging firms to take on excessive risk in anticipation of government aid in the event their bets fail.
Richmond Fed President Jeffrey Lacker and his Philadelphia counterpart Charles Plosser raised concerns about moral hazard in June, urging that lines be set for any central bank intervention. U.S. regulators reluctant to backstop another investment bank may point to the fact that speculation about Lehman's potential failure hasn't generated as much concern among investors as Bear Stearns's implosion.
Long-Term Capital
Unlike the days leading up to the forced sale of Bear Stearns, volatility in the money markets remains relatively muted. The difference between what the U.S. government and banks pay to borrow in dollars for three months, the so-called TED spread, rose 11 points the past two weeks to 121 basis points, compared with an increase of 38 basis points to 160 basis points in the period leading up to Bear Stearns's collapse.
``What would be best is to alter the precedent with Bear Stearns,'' said former Fed governor Laurence Meyer, who is now vice chairman of Macroeconomic Advisers LLC, an economic forecasting firm in Washington.
Meyer said a preferable model would be the Fed's 1998 coordination of a rescue for hedge fund Long-Term Capital Management LP. In that case, officials convened bankers to forge a resolution without contributing Fed funds.
Public-Private
Potential buyers demanded some sort of government protection in the Bear Stearns case because of the mortgage- related assets the firm owned, which had plummeted in value. Since the collapse of the subprime mortgage market last year, banks have reported more than $510 billion of writedowns and credit losses on such assets.
Lehman still had a $50 billion mortgage portfolio at the end of August. Although just $1.6 billion are subprime mortgages, falling home prices and fear of a U.S. recession have brought down the prices of other mortgage-related securities in Lehman's holdings.
``It'll have to be a joint public-private solution because the buyers aren't going to take these hits on the troubled assets,'' said David Hendler, an analyst at CreditSights Inc.
Lehman's leverage -- the ratio of total assets to shareholders' equity -- was 31 last year when the mortgage market collapsed. That compares with 33 at Morgan Stanley and 32 at Merrill Lynch & Co. Only Goldman Sachs had a lower ratio, at 22.
Goldman Sachs
Lehman, Merrill and Morgan Stanley have been selling assets and raising equity, which has brought down their leverage. Lehman said earlier this week that its leverage fell to 21 times at the end of the third quarter.
Morgan Stanley's leverage was 30 at the end of the second quarter and Merrill's was 28. Those two firms haven't released third-quarter figures yet.
Lehman had advanced discussions about a deal with state- owned Korea Development Bank, which offered as much as $6 billion for a 25 percent stake in the firm, or about $26 a share, people briefed on the talks said last week. Lehman fell to $4.22 in New York Stock Exchange composite trading yesterday.
Goldman Sachs Group Inc., the biggest U.S. securities firm, has no plan to buy Lehman without financial backing from the Fed or Treasury, a person briefed on the matter said yesterday. Goldman spokesman Michael DuVally said the investment bank ``continues to do business'' with Lehman.
`Attractive Proposition'
London-based HSBC said on Sept. 10 it was ``highly unlikely'' to buy an investment bank while Josef Ackermann, the CEO of Deutsche Bank AG said he wasn't interested in ``parts or all of Lehman.''
Fuld, 62, is the longest-serving CEO on Wall Street, having been in charge of Lehman since 1993. James ``Jimmy'' Cayne, who resigned as Bear Stearns's CEO two months before the firm collapsed, was at the helm for 15 years.
``I have always said that if anybody came with an attractive proposition that made it compelling for shareholder value, that would be brought to the board, discussed with the board and evaluated, and that has not changed,'' Fuld said on a conference call with analysts on Sept. 10.
