It was no ordinary Friday at Lehman Brothers. “You Shook Me All Night Long” by AC/DC blared from speakers inside the bank’s Midtown headquarters. Employees polished résumés. And, by midafternoon, the word came from the 31st floor: the fate of the stricken bank would be decided by Sunday.
As rank-and-file employees confronted an uncertain future — many of them expect to be laid off if a deal is struck — top executives huddled in all-day meetings and braced for takeover bids, expected by Saturday afternoon.
Leading contenders include Bank of America and Barclays, the large British bank, but a significant possibility remained that no deal would be reached over the weekend. If Lehman fails to find a buyer, the bank will be left in the difficult position of trying to survive on its own or will file for bankruptcy.
It remained unlikely that the federal government would move to support any sale of Lehman, as it did when JPMorgan Chase rescued Bear Stearns from the brink of bankruptcy in a fire sale in March. Rather than offer any financial support, the government has simply urged Lehman to conclude a deal by Sunday evening and has helped push potential suitors to the bargaining table.
Meanwhile, however, the Federal Reserve of New York summoned government officials to its offices in New York for an emergency meeting with Wall Street executives to discuss a possible solution for the Lehman crisis.
As a possible sale loomed and Lehman’s share price continued to decline, executives at the firm told employees to keep working. But some bankers and traders left early to watering holes like Bobby Van’s Steakhouse and Tonic, a bar near Lehman’s neon-soaked headquarters.
Lehman, which has lost nearly $7 billion in the last two quarters, mainly because of declines in the value of its vast real estate holdings, made no public comments. The silence, in addition to concern that no deal may emerge, sent shares in the bank down 14 percent, to $3.65, on Friday. The shares have fallen 94 percent this year as investors lost confidence in Lehman’s ability to survive on its own.
In one twist, Lehman employees, who own large chunks of the bank’s stock, received the usual blackout notice on Friday, saying they could not sell shares in the weeks surrounding the bank’s earnings announcement.
Lehman said Wednesday that it expected to lose $3.9 billion in the third quarter. The numbers are not final until they are submitted to the Securities and Exchange Commission later this month. With the shares trading near the penny-stock level, few inside Lehman are likely to be eager to sell.
Also on Friday, Lehman received bids for a majority stake in its investment management division. A sale of the stake was part of the plan Lehman announced Wednesday in its effort to convince investors it could survive on its own.
Bidders are thought to include the private equity groups Kohlberg Kravis Roberts, Bain Capital, Clayton Dubilier & Rice and Hellman & Friedman. Lehman is thought to be seeking around $5 billion for the stake.
Should no buyer emerge for the whole bank, Lehman would have to return to its original plan of selling the stake and spinning off about $30 billion in troubled commercial real estate assets into a separate “bad bank” structure to be owned by Lehman shareholders.
Investors and analysts largely dismissed that plan on Wednesday as inadequate, leading to the talks to sell the whole bank.
As the auction process plays out over the weekend, people close to the matter said one tactic Barclays might employ would be to prepare a bid that did not require any government support. That would be based on the theory that Bank of America, which is still absorbing Countrywide, the large home mortgage lender it acquired, will want some kind of government backing of Lehman’s toxic real estate assets.
Lehman, Bank of America and Barclays declined to comment.
It also remained possible that some kind of consortium group could emerge to bid for Lehman and break it into parts.
One person close to the matter said J. C. Flowers & Company, the private equity group, might try to take part in a consortium effort. The group, led by J. Christopher Flowers, also looked at investing in Bear Stearns before it was sold to JPMorgan Chase. Officials from J. C. Flowers could not be reached for comment.
While some analysts suggested Bank of America might not be able to absorb both Lehman and Countrywide, others said it was the most natural owner.
“Lehman needs Bank of America to lower its borrowing costs. It also needs the bank to portfolio its commercial real estate loans,” Richard X. Bove, an analyst at Ladenburg Thalmann & Company, said in a note to clients.
“Most important, Lehman can gain access to Bank of America’s 68,000 commercial customers to sell capital markets products,” he said. “Further, Lehman would meaningfully increase its fixed-income business if it was linked to the country’s largest credit card and mortgage company.”
Bank of America, meanwhile, “gets access to one of the best fixed-income trading desks in the country,” Mr. Bove said. “It immediately becomes a first-rank player in the equity investment banking sector.”
