Lehman Brothers HQ in New York
Global investment bank Lehman Brothers is teetering on the verge of collapse after Barclays pulled out of an 11th-hour rescue.
The departure of Barclays left US Treasury Secretary Hank Paulson and Tim Geithner, the head of the Federal Reserve Bank of New York, spearheading desperate last-ditch attempts to put in place some form of a workable rescue package.
Traders fear that the collapse of Lehman would send shockwaves around the world and spark a global sell-off of shares.
Lehman which employs 4,000 staff in London and 24,00 around the world, could be placed into liquidation as soon as Monday. The bank would be the single largest casualty of the current credit crisis and its collapse one of the biggest failures in Wall Street history.
In one of the most traumatic days in the history of Wall Street, Bank of America is reported to be on the verge of buying Merrill Lynch for $38bn.
Lehman is understood to have appointed Wall Street law firm Weil Gotshal & Manges to work on preparing a potential bankruptcy filing in the event that a solution can not be found.
If bankruptcy is the only viable option, the firm’s brokerage units will enter into what is known as a “Chapter Seven” liquidation, which involves a trustee, who is appointed by the court, liquidating the firm’s assets and attempting to give customers some of their money back.
Banks and brokers – led by the International Swaps and Derivatives Association – began preparing the ground for a bankruptcy filing by settling trades that Lehman has outstanding across the credit, stock, currency and fixed-income markets in an extraordinary special trading session.
If the bank does collapse, it will only heighten fears about the prospects for other financial institutions, not least American International Group (AIG), the world’s biggest insurer which was last night racing to raise up to $20bn with the help of bankers from JP Morgan Chase amid concerns over its own capital adequacy.
Other banks, including Washington Mutual and Merrill Lynch, have also come under intense scrutiny in recent days as Lehman moved closer to collapse.
Former Federal Reserve chairman Alan Greenspan warned that the current financial crisis was “by far” the worst he’d ever seen, and added that he believed Lehman would not be the last.
“We will see other major firms fail,” he said.
However Mr Geithner and Mr Paulson – in tandem with the heads of all the major investment banks including Citigroup chief executive Vikram Pandit and JP Morgan Chase chairman Jamie Dimon – were last night frantically working on plans to ensure that if Lehman does have to be liquidated, it can be done so in such a way that it does not severly impact other institutions.
One possibility being discussed was for all institutions to agree to continue to trade with Lehman as the process of the bank being wound-up took place over the next few months.
The race to save Lehman took a turn for the worse this evening after Barclays told Mr Geithner and US Treasury Secretary Hank Paulson that it was unwilling to proceed with a deal.
Barclays Capital chief executive Bob Diamond, who had been leading the discussions on behalf of the British bank, took the decision after it became clear that time was running out to do a deal.
Without an open-ended guarantee from the US authorities to cover Lehman’s trading obligations, under UK Listing Authority rules, Barclays would have had to guarantee those obligations itself
Even if it had wanted to do so, which remains uncertain, it would have had to have put the move to a full shareholder vote, something which could not have been done within the tight timeframe available.
Mr Diamond’s decision was taken with the full knowledge of Barclays group chief executive John Varley and the rest of the board, and followed intense conversations with Deutsche Bank and Credit Suisse, who were advising Barclays on the potential move.
One source suggested that the withdrawal could be merely a negotiating tactic by Barclays to force Mr Paulson into offering a guarantee, but it is thought that such a situation is unlikely given Mr Paulson’s insistance that the US taxpayer could not be seen as a continual haven of last resort.
It was Mr Paulson who called on Barclays to put together an offer for Lehman at the end of last week, urging Mr Varley to see if a deal could be done for the sake of the wider markets.
If Barclays had have been able to agree to a workable takeover structure, it would have seen the bank take on Lehman’s investment bank and investment management arm, with the remaining “toxic” property assets to be placed in a “lifeboat” to be funded in part by other Wall Street banks.
A similar structure was being discussed by a consortium led by Bank of America which by Saturday evening appeared to be increasingly less interested in doing a deal.
However even the prospects for the funding of the “lifeboat” seemed in question, with a number of major banks unwilling to have to allocate capital to such a venture while Barclays or Bank of America simply walked away with the “good bank” at a discount price.
A Lehman spokesman declined to comment.
By James Quinn, Wall Street Correspondent
Last Updated: 10:36pm BST 14/09/2008