With No Rescue Plan, Lehman Shares Fall Again

Lehman Brothers shares are down amid reports the Treasury Department won't come to its rescue. Treasury and Fed officials are reportedly helping Lehman find a white knight, but it's not clear yet whether Lehman will be kept intact or sold in pieces.

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ROBERT SIEGEL, host:

Shares in the New York Investment bank Lehman Brothers tumbled again today as confidence in the company evaporated. Lehman shares have fallen 95 percent in the past year and that's due to the credit crisis that has intensified, and those are real estate investments that have gone sour. The Treasury and the Federal Reserve are reportedly helping to broker a deal to sell Lehman, the country's fourth largest investment bank.

NPR's John Ydstie has been looking into how the sale could take shape. And he joins us now. Hi, John.

JOHN YDSTIE: Hi, Robert.

SIEGEL: One big development today, word that secretary of the Treasury Henry Paulson has out his foot down saying no government money for sale or bailout of the firm.

YDSTIE: That's right. This morning, people who wanted to be described as sources familiar with Secretary Paulson's thinking said he adamantly was opposed to any government funds being used to resolve the situation. The implication here is that the potential buyers of Lehman were asking for some government backing similar to the $29 billion the Fed put on the line to rescue Barry Stearns back in March.

SIEGEL: Well, what's the big difference between Barry Stearns and Lehman Brothers? Why was it necessary to put up government money to bail out Barry Stearns, in Secretary Paulson's view, but not necessary for Lehman?

YDSTIE: Well, the sources say that Paulson believes there are two major differences. First is that Barry Stearns' failure happened quite rapidly - it was like a bank run-up, a panic. But in the case of Lehman, Paulson believes the firms have had six months to prepare for this possible event. It's certainly true that right after Barry Stearns' episode, concern about Lehman began to mount.

So, if firms were overexposed financially to Lehman, they've had plenty of time to adjust. The second thing is that Paulson thinks there should be no taxpayer funds committed because Lehman has access to a whole line of credit at the Federal Reserve that was created after Barry Stearns' failure just to help firms in distress and provide a more orderly resolution. It's called the primary dealer credit facility. Primary dealers are the Wall Street firms like Lehman who are securities dealers who make the market for U.S. stocks and bonds.

SIEGEL: Well, doesn't that, in fact, amount to taxpayer money being put at risk for Lehman even though Secretary Paulson says there isn't going to be any?

YDSTIE: Well, the terms of the loans make it unlikely the taxpayers would get stuck. First, they're one-day loans that have to be renewed on a daily basis and they require a collateral. That collateral could any number of assets from U.S. government treasury bonds to mortgage-back securities.

SIEGEL: That doesn't sound very encouraging…

YDSTIE: It doesn't.

SIEGEL: …or confidence building. Mortgage-back securities are at the heart of the whole financial mess.

YDSTIE: Yes, they are. But the securities pledged for these loans would be independently valued at the current market price every day. So, I think there are some taxpayer exposure here, but not particularly large.

SIEGEL: Well, back to the plight of Lehman Brothers, is it likely to find a buyer if the U.S. government declines to put any money on the table?

YDSTIE: Well, that's the big question. But according to news reports, there are a number of significant suitors, among them, Bank of America and Barclays, the British bank. In fact, the Financial Times is reporting that the Bank of America, the investment bank J.C. Flowers and China Investment Company are considering a possible joint bid for Lehman Brothers. Now, China Investment Company is China's sovereign wealth fund and it would be spending the Chinese government's money. So, the U.S. government is declining to bail out one of the bastions of capitalism, but if this report is true, it could be that Lehman Brothers ends up being saved by the communists in Beijing.

SIEGEL: And we'd expect that they want to resolve all this over the weekend, I assume.

YDSTIE: Well, there's a lot of speculation it could happen this weekend, much like Fannie and Freddie bailout. But it could take longer. We'll see.

SIEGEL: Okay. Thank you, John.

SIEGEL: NPR's Economics correspondent, John Ydstie.

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Lehman Brothers Scrambles To Find A Buyer

A day after telling investors it had a plan to shore up its finances, the investment bank Lehman Brothers is looking for a buyer. The Treasury Department and the Federal Reserve are working with the Wall Street securities firm as it talks to potential buyers, including Bank of America, and a deal could be announced as early as this weekend.

Lehman Brothers lost a lot of money in the subprime mortgage crisis, having gotten involved with really complex mortgage-backed securities, and critics say it waited too long to address the problems, NPR's Jim Zarroli tells Steve Inskeep.

People lost confidence in the company and its stock price fell. Then, on Wednesday, the company announced a plan to try to shore up its finances, saying it was going to sell its investment management division, but the stock kept falling anyway.

"Now the only real option for Lehman's management is to put the entire company up for sale," Zarroli says.

But there are not a lot of companies that are able or willing to invest, "Mainly because Lehman's financial system is still quite murky," Zarroli says. The Korean Development Bank, a state-run institution, was considering investing in Lehman, but it pulled out, he says. "Goldman Sachs was supposed to be thinking about a deal, but then it came out and said 'No, not us.' "

There have been published reports that the most likely buyer is Bank of America, and Barclays Bank also was mentioned. But a lot of options are still on the table, Zarolli says.

"At the worst, Lehman Brothers could end up like Bear Stearns, subsumed into another big company," he says. "The shareholders have already lost a lot of money; shares of Lehman are down more than 90 percent in a year. In the case of Bear Stearns, shareholders ended up getting very little money, and that could certainly happen again."

The Treasury Department and the Federal Reserve engineered the deal for Bear Stearns, guaranteeing some of its debt as a way to induce JP Morgan Chase to buy the company. This time, Zarroli says, the government is assisting, monitoring the talks. But it isn't expected to put any federal money into the pot, he says, partly because since the Bear Stearns deal, there are now other ways for investment banks like Lehman to get money — they can borrow from the Federal Reserve's discount lending window.

"So the Federal Government itself doesn't have to play the same direct role it played before, and it won't," he says.

Zarroli says Lehman Brothers won't be the last firm to get in this much trouble over the mortgage mess.

"There are ongoing questions about all financial companies right now. It seems like one gets taken care of and then we move on to address problems somewhere else. It's like wildfires."

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