Lehman Bros. May Need Miracle To Survive

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The Wall Street firm that started the U.S. cotton trade before the Civil War and financed the railroads that built a nation might soon fade into history.

Just days after Lehman Brothers Chief Executive Richard S. Fuld tried to pitch Wall Street on a plan to save the firm by shrinking it, he's in complicated negotiations with potential buyers that may see the company sold piecemeal as soon as Sunday night, analysts said.

"Nothing short of a miracle can save Lehman as is," said Anthony Sabino, professor of law and business at St. John's University. "It is highly unlikely Lehman will be in existence on Monday morning."

Late Friday, the Federal Reserve Bank of New York held an emergency meeting with top Washington policymakers and major financial institutions to discuss Lehman's future.

Attendees included Treasury Secretary Henry Paulson; Christopher Cox, chairman of the Securities and Exchange Commission; and Timothy Geithner, president of the Federal Reserve Bank of New York.

Fed spokeswoman Michelle Smith declined to disclose what financial institutions participated or whether the group had reached any conclusion. The Wall Street Journal reported on its Web site that the group included Morgan Stanley chief executive John Mack and Merrill Lynch chief executive John Thain, among others.

Paulson is against any use of government money to bail out Lehman Brothers Holdings Inc., a person familiar with his thinking said Friday.

Other financial firms may swallow portions of Lehman's investment banking or bond trading business, analysts said. Considering the firm's deep financial problems, riskier assets like its mortgage and real-estate portfolios could be sold for just pennies on the dollar.

Potential buyers could include Bank of America Corp., Britain's Barclay's Plc, Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.

Randy Whitestone, a spokesman for Lehman Brothers, declined to comment on the firm's situation Friday.

On Friday, Lehman's stock closed at $3.65 - an all-time low and down nearly 95 percent from its 52-week high of $67.73 as investors grew more convinced that Lehman may be auctioned at fire-sale prices.

The stock's plunge was a humiliating beating for the 158-year-old investment bank, one of Wall Street's oldest firms, and for Fuld, 62, who has run the bank through internal squabbles, the technology bust, and the 9/11 attacks that destroyed its headquarters.

The company's roots began in 1844 when Henry Lehman immigrated from Rimpar, Germany to Alabama, where he established a dry goods store that catered to local cotton farmers in Montgomery. Lehman Brothers evolved from merchandising to a commodities broker, and then later into underwriting where the firm helped finance construction of the Pennsylvania Railroad, among others.

Lehman built its reputation trading government and corporate bonds. Over his 15 years at the helm, Fuld expanded the firm's repertoire to investment banking and money management for wealthy clients. He also stretched its overseas reach to better compete with big rivals like Goldman Sachs Group Inc. About half of the firm's profit comes from outside the U.S.

As it grew, it also took on greater risk, including the kind of real estate investments that have forced global banks and brokerages to write down more than $300 billion since the subprime mortgage crisis undermined the credit markets.

On Wednesday, Lehman reported it lost almost $4 billion because of the sales and write-downs on its residential and commercial real estate assets. Its total losses for the year added up to $6.9 billion.

To shore up confidence among investors and its customers, Lehman presented a plan that called for selling its money management unit and spinning off most of its real estate investments into a separate publicly traded company.

The attempt failed, forcing Fuld to consider selling the firm he has worked at since 1969.

In March, the government helped engineer Bear Stearns' sale to JPMorgan Chase & Co. with a deal backed by a $29 billion loan from the Federal Reserve .

The difference this time is the government is not likely to provide any financial backing.

Paulson is against any use of government money in whatever deal comes together for Lehman, a person close to his thinking said Friday.

Unlike Bear Stearns, which happened swiftly and with little warning, financial markets have been aware of Lehman's troubles for a long time and have had time to prepare.

The government may also be less willing to bail out Lehman because the firm has been able to borrow money directly from the Fed through a program the central bank began after Bear Stearns imploded.

Finally, the government might not want to give investors the impression that it is the financial savior of troubled banks, analysts said.

Lehman Brothers - despite its tarnished image - has been one of Wall Street's most respected franchises.

The company's investment banking and trading operations routinely rank among the highest in the industry. For instance, Lehman Brothers is ranked eighth in the global mergers and acquisitions so far this year, advising on deals with a total value of $105 billion, according to financial data provider Dealogic.

Fuld said during a conference call Wednesday that the firm's core businesses remains healthy.

Banks such as Bank of America may be interested in Lehman's investment banking division.

With Bank of America, for example, a deal with Lehman Brothers would instantly catapult it to the top ranks of investment banking. For Barclays, buying Lehman would instantly boost its presence in the U.S. and give it a stronger position in stock and bond markets.

Whoever buys Lehman or its individual assets will have their own knot of problems to untangle, however.

"The damage is done," Sabino said. "The house has been burned to the ground, now you're just picking through the ashes."
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