Treasury, Fed Said to Call on Wall Street Chiefs to Back Lehman

By Bradley Keoun and Jesse Westbrook

Sept. 13 (Bloomberg) -- Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner urged the heads of Wall Street's biggest firms to find a solution to the plight of Lehman Brothers Holdings Inc., signaling their reluctance to use government funds to bail out the investment bank, two people familiar with the talks said.

Chief executives who attended the meeting at the New York Fed late yesterday afternoon included Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, Merrill Lynch & Co.'s John Thain and Bank of New York Mellon Corp.'s Robert Kelly, the people said, declining to be identified because the meeting wasn't public. Christopher Cox, chairman of the U.S. Securities and Exchange Commission, also participated.

Kendrick Wilson, a former Goldman Sachs executive whom Paulson tapped last month as an adviser, helped lead the discussions, which ended without a specific plan, one of the people said. Bank of America Corp. CEO Kenneth Lewis did not attend because his firm is a potential bidder for Lehman, the person said.

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 77 percent in the past five days, according to people familiar with the situation who declined to be identified because the negotiations are confidential.

Orderly Process

Spokesmen for the New York Fed and the SEC confirmed that the meeting took place with ``senior representatives of major financial institutions,'' and declined to comment further. Treasury is ``in regular contact'' with market participants, spokeswoman Jennifer Zuccarelli said earlier today.

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 Fed 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.

At the meeting yesterday, Paulson indicated he wants to avoid putting taxpayer money behind New York-based Lehman the way the government stepped in to guarantee the debt and mortgage- backed securities of home-loan financing companies Fannie Mae and Freddie Mac, said the people, who declined to be identified because the meeting was private. The government also wants to avoid a collapse of Lehman, which might disrupt U.S. financial markets.

Echoes of LTCM

The banks and brokers called into the meeting may be asked to contribute money to back Lehman long enough to unwind its trades, the people with knowledge of the discussion said. No agreement was reached and the discussion was preliminary, one person said.

Such an arrangement would be similar to the rescue of hedge fund Long-Term Capital Management LP, which failed in 1998 as Russia defaulted on its debt, roiling global markets. Spurred by the New York Fed, Wall Street firms including Lehman contributed cash to prop up LTCM.

Chief Executive Officer Richard Fuld, who participated in the LTCM talks and 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 this week after talks about a cash infusion from Korea Development Bank ended, eroding investor confidence and the company's market value.

Government Protection

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. While just $1.6 billion of that is in 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.

Lehman said Sept. 10 it would sell 55 percent of the investment unit as part of Fuld's plan to keep the firm independent. The company received bids for the unit yesterday from private-equity firms including Bain Capital LLC and Clayton Dubilier & Rice Inc., people familiar with the situation said.

Investment-Unit Bids

The bids value the unit, which includes the Neuberger Berman fund business, private-equity funds and a brokerage firm serving wealthy individuals, at about $5 billion, said the people, who asked not to be named because the auction is private. KKR & Co. LP, which was weighing an offer, hadn't made a bid by a 5 p.m. deadline in New York yesterday, the buyout firm told people involved in the process.

Bank of America is considering a joint bid for the company with J.C. Flowers & Co. and China Investment Corp., the Financial Times reported yesterday, citing people it didn't identify.

Bankers from several firms were reviewing Lehman's books this week, 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.

Bank of America

Lehman dropped 14 percent to $3.65 at 4:15 p.m. in New York Stock Exchange composite trading yesterday. The shares have lost almost 95 percent of their value this year. Bank of America rose 68 cents, or 2 percent, to $33.74.

Ladenburg Thalmann & Co. analyst Richard Bove said in a note to clients this week 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.

``We're entering the end-game,'' said Rupert Della-Porta, the London-based chief operating officer of research firm Atlantic Equities.

When Bear Stearns collapsed in March, 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.

`Alter Precedent'

``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.

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. 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 Sept. 10.

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.''

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.