Lehman's 158-year run on Wall Street set to come to abrupt end

Executives at Lehman Brothers, the 158-year-old Wall Street bank that has been brought to the brink of collapse, are set for a long weekend of negotiation as potential acquirers pored over its books and regulators agitated for a deal to restore confidence to battered financial markets.

Officials from the United States Treasury and the Federal Reserve were still insisting last night that no federal money should be used to bail out Lehman or to tempt buyers into doing a deal, but all the signs suggested they were hoping to tie up a resolution before Asian markets reopen for trading at the end of the weekend.

Lehman shares suffered a double-digit percentage plunge for the fifth straight day, as Dick Fuld, the chief executive, fought to manage an orderly end to the independence of the company he has run since 1993. His plan, revealed earlier in the week, to shed assets and raise new cash to restore Lehman's capital position appeared dead in the water yesterday.

It was believed that Bank of America, one of the country's largest banks, was in pole position to lead a takeover at a knock-down price, potentially in partnership with other financial institutions with an interest in acquiring particular parts of Lehman. B of A would be interested in the core investment banking franchise, and it was believed to be examining a joint bid with the private equity group JC Flowers, which has been trying to buy Lehman's cash-generative asset management business.

China Investment Co, an investment arm of the Chinese government, would join the consortium to gain control of Lehman's extensive portfolio of commercial real estate, it was reported. Meanwhile, the UK's Barclays Bank, whose Barclays Capital business has become one of the most influential investment banks in recent years, was also following the likely carve-up and could make an opportunistic bid. However, insiders there were mindful that Bob Diamond, Barclays Capital's chief executive, has previously said he prefers to win business rather than buy it, and poach staff rather than see them join reluctantly via a takeover.

It remained uncertain whether a deal could really be knitted together over the weekend, given the uncertain value of the commercial and residential mortgages on Lehman's balance sheet.

The speed with which the company's fortunes have deteriorated over the past week has come as a harsh blow to its 25,000-strong staff around the world, including at its European headquarters in Canary Wharf, where it employs about 4,500 people. Lehman laid off more than 1,000 people this week in a desperate bid to save money – its fourth such purge in a year – but thousands more face losing their jobs if the company is carved up.

Dick Bove, the respected banking sector analyst at Ladenburg Thalmann, said a takeover of Lehman would be a big plus for Bank of America, whose foray into investment banking has so far been only a mixed success. A month ago, Mr Bove chastised Mr Fuld for not accepting the inevitable and accepting bids for the company or its assets at prevailing market prices. By waiting, Mr Fuld has lost everything, and the value that shareholders would get from a carve-up today is now just a fraction of those prices.

"I believe that Bank of America will win the auction for Lehman," Mr Bove predicted yesterday. "There is a natural fit between the two companies."

If a deal is done, B of A would get access to one of the best fixed-income trading desks in the country, which it could link with its own retail business in credit cards, and it becomes a "first rank player" in the equity investment banking sector. He added: "It gains five years in its pursuit to be the nation's number one underwriter."

There was no suggestion yesterday that Lehman was having trouble financing its remaining trading obligations, and therefore no immediate threat of losses by its trading partners and the wider financial system. It was that threat that prompted the Fed to offer a $29bn loan to JPMorgan Chase to persuade it to acquire Bear Stearns, when it came to the brink of collapse in March. Since then, investment banks have been given access to the Fed's so-called discount window, where they can borrow to finance their day-to-day trading needs.

Next in the firing line

While the problems for Lehman continued to mount, many on Wall Street were speculating on which institution might come under attack next from anxious investors.

*WASHINGTON MUTUAL

JP Morgan was reported yesterday to be in advanced talks for a "white knight" bid for the country's largest savings and loan business, which has been on Wall Street's list of dangerously underfunded institutions for many months.

Its failure would be the biggest ever in US banking. WaMu shares have lost 80 per cent of their value this year and regulators, belatedly, want to know what the Seattle-based group is doing about the toxic commercial and residential mortgages on its books.

It ousted Kerry Killinger, its chief executive of 18 years, on Monday, and on Thursday, Moody's downgraded some of WaMu debt to junk status, saying the company has limited financial flexibility and is suffering from a lack of confidence in the debt market. The company said it had access to $50bn (£28bn) of liquidity.

*American International Group

AIG is one of the world's largest insurers and financial services companies. It was lured from its tried and trusted business into more exotic areas of financial markets, and its losses this year – more than $13bn and counting – have left its reputation for prudence in tatters.

The company is under investigation over claims it inappropriately accounted for all the derivatives on its books. A new chief executive, Robert Willumstad, has promised a review of the business by 25 September.

The shares were down 20 per cent just yesterday morning on concerns that it needs to raise more capital – something that is tough to do when there is so much uncertainty. Bill Bergman, an analyst at Morningstar, warned clients to stay away this week. "AIG has been hit squarely between the eyes by the housing finance meltdown," he said. "It originated mortgage loans, insured mortgages, wrote credit default swaps backing securities based on mortgage debt, and invested in mortgage and other asset-backed securities. It did so in a big way, and it lost."

*MERRILL LYNCH

As soon as Bear Stearns went under in March, investors turned their attention to Lehman Brothers, the standalone investment bank with the next-weakest balance sheet. If Lehman could succumb to the crisis of confidence in the industry, then attention naturally turns to the next one up the chain: Merrill Lynch. The No 3 investment bank was quick to act when the credit crisis struck, ousting the chief executive who had pioneered its headlong rush into mortgage derivatives, Stan O'Neal, last November, and his successor, John Thain, sold off some of the derivatives at firesale prices, just to be shot of the risks.

None of this will be enough to save the company, however, if the market decides that the investment banking model is fundamentally broken, and that such institutions are just too risky and volatile to survive, unless bolted on to a more traditional bank.

PROMOTED VIDEO
Arts and Entertainment
One of the installations in the Reiner Ruthenbeck exhibition at the Serpentine Gallery
artCritics rally to defend Reiner Ruthenbeck's 'Overturned Furniture'
News
John Cleese is promoting his new book
people
News
A-list actresses such as Deepika Padukone get paid a tenth of what their male counterparts make per film
news
News
The Black Friday Vines that will destroy your faith in humanity
i100

Arts and Entertainment
The cast of Downton Abbey in the 2014 Christmas special
TV
News
Robbie Rogers: US former Leeds United footballer, 25, announced he was gay in February 2013, shortly after he left Elland Road. Rogers 'retired' after writing on his blog: 'I'm a soccer player, I'm Christian, and I'm gay.' Has since signed with Los Angeles Galaxy.
peopleUS footballer said he had hoped Michael Sam and Jason Collins coming out might have helped
News
ebooksNow available in paperback
Arts and Entertainment
Johnny Depp no longer cares if people criticise his movie flops
films
Arts and Entertainment
All in a day's work: the players in the forthcoming 'Posh People: Inside Tatler'
TVGrace Dent thinks we should learn to 'hug a Hooray Henry', because poshness is an accident of birth
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
art

Presents unwrapped, turkey gobbled... it's time to relax

Arts and Entertainment
Convicted art fraudster John Myatt
art

News
The two-year-old said she cut off her fringe because it was getting in her eyes
news
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Austen Lloyd: Company Secretary

Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

Citifocus Ltd: German Speaking Client Specialist

£Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

Citifocus Ltd: Performance & Risk Oversight

£Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

£90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game