Source: No Gov't Funds For Lehman Bros.

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

Lehman Brothers was racing to find a buyer two days after it laid out a restructuring plan it said would raise badly needed money it lost on bad bets in real estate holdings.

The No. 4 U.S. investment bank has lost almost $7 billion in the last two quarters alone, primarily because of wrong-way bets on mortgage securities and other risky investments.

The person said Paulson, who played a major role in engineering the government-back Bear Stearns bailout in March, believes the Lehman situation is different in two critical aspects. The person spoke on condition of anonymity given the sensitivity of negotiations.

The person said Paulson believes that financial markets have been aware of Lehman's troubles for a long time and have had time to prepare.

A second difference is that the Federal Reserve is now allowing investment banks to borrow directly from the Fed just as commercial banks can do.

"Given those two things, he is adamant that there be no government money in the resolution of this situation," the source said.

Paulson played a major role not only in the sale of Bear Stearns to JP Morgan Chase & Co. last spring, a deal in which the Fed put up $29 billion in loans, but also in the government takeover last Sunday of mortgage giants Fannie Mae and Freddie Mac in which Treasury has pledged to provide up to $200 billion in capital to the two companies if needed.
By AP Economics Writer Martin Crutsinger