As Lehman Brothers raced to find a buyer Saturday, federal officials and Wall Street chieftains mapped out options to prevent a collapse...
As Lehman Brothers raced to find a buyer Saturday, federal officials and Wall Street chieftains mapped out options to prevent a collapse of the bank and arrest the downward spiral threatening other financial companies.
Several possibilities began to emerge as top Wall Street executives met under the guidance of the Federal Reserve and Treasury Department. One would involve major banks and securities firms providing a financial backstop to facilitate a sale of Lehman. Another would involve an agreement among Wall Street players to keep trading with Lehman as the bank seeks an orderly liquidation.
Adding urgency to the discussions were growing concerns that other big financial institutions such as the insurance giant American International Group (AIG) and Merrill Lynch might face a similar crisis and need billions of dollars to strengthen their businesses.
The spreading troubles were the latest sign that even the government’s extraordinary interventions into private enterprise in the past year have not been enough to halt the unraveling of the financial system.
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As the trading week ended, top officials from the Federal Reserve and the Treasury Department called an emergency meeting late Friday in Manhattan with the heads of major Wall Street firms to insist that they find a way to rescue Lehman because their own companies might be next.
The meetings, which involved top executives from Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup and other financial companies, continued on Saturday.
The group was working on two main contingency plans in case Lehman is unable to sell itself to one of several suitors: Bank of America or two British firms, Barclays and HSBC.
Under one possibility, major financial firms would jointly inject new capital into Lehman, allowing it to spin off its portfolio of troubled securities into a separate company.
Under another option, Lehman would start an orderly liquidation of assets Monday. Its major competitors would agree to keep doing business and trading with Lehman as it unwound its business and portfolio.
For months, Lehman and other companies assured investors they had a handle on troubled assets tied to real estate. But those assets turned out to be worth less than the firms’ employees thought.
As a result, many investors are no longer sure what such financial companies are worth, and they do not want to invest in them until they do.
Companies that took the biggest risks and used debt aggressively to build their businesses stumbled first, and now healthier companies are coming under pressure. Loans once considered far better than the subprime mortgages that kicked off the panic turned out to be only marginally safer.
“You have to think of this like there is an epidemic going on, an epidemic of capital destruction,” said James Melcher, president of the hedge fund Balestra Capital, who has been bearish on the stock market.
This spring, the Federal Reserve arranged a hasty rescue for Bear Stearns, the wobbly investment bank.
Last week, federal regulators took over the country’s two largest mortgage-finance companies, Fannie Mae and Freddie Mac.
At every turn, officials hoped they had done what was needed to restore confidence in the markets, only to be greeted with another crisis.
Policymakers have signaled they are not willing to provide financial support for a takeover of Lehman, as they did with Bear Stearns.
There is a growing consensus on Wall Street that the government may not be able to save every big firm whose failure would pose a risk to the system.
“The too-big-to-fail mantra or concept or government policy is in my opinion off the table and we have to deal with that,” said David Ellison, president and chief investment officer at the FBR Funds.