Concern that Lehman Brothers Holdings Inc. may fail to find a buyer because the U.S. government is reluctant to provide financial backing sent the investment bank’s shares tumbling to a nearly 14-year low last week.
Bank of America Corp. was widely seen as a leading contender for the role of white knight, with British bank Barclays Plc also named as a possibility.
The Financial Times reported that BofA, the No. 2 U.S. bank by assets, was considering a joint bid for Lehman along with private equity investor JC Flowers and sovereign wealth fund China Investment Co.
Lehman shares fell as much as 16% in early trading on Friday, though they trimmed those losses by about half following the FT report. Lehman declined to comment.
“Until there’s definitive news, you’re going to see volatile trading in Lehman, and it would continue to go on a roller-coaster ride based on rumors,” said Robert Lutts, president and chief investment officer of Cabot Money Management.
The credit maelstrom is threatening other financial companies, including Washington Mutual Inc., the largest U.S. savings and loan, leading brokerage Merrill Lynch & Co Inc. and American International Group Inc., once the world’s largest insurer by market capitalization. As of the end of trading on Friday, Wamu shares were down 4.6%, AIG plunged 20% and Merrill slid 8.5 percent.
Adding new doubts about the possibility of a quick rescue for Lehman, a source familiar with U.S. Treasury Secretary Henry Paulson’s thinking said he was “adamant” that no government money be used in any deal.
The investment bank is struggling to find a solution to the worst crisis of its 158-year history. Lehman wrote down its assets by $5.6 billion in the third quarter, triggering a second straight quarterly loss of $3.9 billion.
Lehman has so far failed to attract investors to shore up its capital position, weakened this year by its out-sized exposure to commercial real estate and residential mortgage assets hard hit by the continuing credit crunch.
The bank, until recently the fourth largest nationwide, is the latest casualty of the mortgage crisis that has roiled Wall Street over the last year, leading to billions of dollars in write-downs for major banks, a credit crunch and the loss of thousands of jobs in the banking industry.
MOST LIKELY SUITOR
BofA, the largest U.S. bank by market value, emerged as the most likely suitor for Lehman, according to various reports and analysts.
Lehman and U.S. officials were in discussions about a number of options, including a sale of the whole company, sources with direct knowledge of the talks said late Thursday.
The Treasury and Federal Reserve were engaged in the talks, which could be completed this weekend, a second source said.
But with government officials seeking to avoid another expensive bailout a week after the U.S. takeover of mortgage finance companies Fannie Mae and Freddie Mac, it was far from certain that any large bank would be willing to assume the risk implicit in buying Lehman.
“I think it’s going to be again one of those busy weekends with Lehman and also concern about Washington Mutual looking for a buyer,” said Rose Grant, managing director of Eastern Investment Advisors in Boston.
“I think they’re going to have to draw a line at some point,” she said of Washington regulators. “This could be the point.”
BofA declined to comment, but some analysts said a deal would make sense.
“I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies,” veteran Ladenburg Thalmann analyst Richard Bove said in a note.
HSBC Plc has also been linked with Lehman, but in recent weeks executives at the London-based bank have distanced themselves from a possible deal.
In buying Lehman, BofA would get access to one of the best fixed income trading desks, Bove said. “It immediately becomes a first-rank player in the equity investment banking sector … it gains access to customers around the world in the capital markets arena,” he said.
But a takeover by BofA, which already took on a huge restructuring burden in the form of troubled mortgage giant Countrywide earlier this year, was far from a sure thing.
Lehman CEO Richard Fuld, who long vowed never to sell the firm in his lifetime, has been trying to sell just a part of the company rather than the whole thing, sources familiar with the situation said.
But investors gave a thumbs-down to revival plans unveiled by Lehman last week, saying they lacked real progress. It prompted fears that clients and trading partners might take their business to more stable firms. Major Wall Street firms have said they continue to do business with Lehman.
Its troubles have shown how confidence remains key for investment banks.
“The ups and downs that followed the Bear Stearns bailout should be still fresh in the mind of investors, and the economic backdrop has deteriorated since,” Deutsche Bank analysts said Friday. A takeover of Lehman could spark a relief rally, they said, but warned of a worsening global economic picture.
Bear was acquired by JPMorgan Chase & Co. for a fire-sale price of $10 a share as part of a government-backed bailout in March.
By Christian Plumb and David Lawder. Additional reporting by Joseph A. Giannone and Juan Lagorio in New York and Jamie McGeever in London; writing by Steve Slater, Lincoln Feast and Ian Geoghegan; editing by Louise Ireland/Jeffrey Benkoe)