THE fate of Lehman Brothers, the beleaguered investment bank, hung in the balance as US Federal Reserve officials and the leaders of major financial institutions met over the weekend with no agreement on a plan to rescue the stricken bank.
Several possible plans emerged from the talks, held at the Federal Reserve Bank of New York and led by Timothy Geithner, the president of the New York Fed, and Treasury Secretary Henry Paulson.
The leading proposal would divide Lehman into two entities - a "good bank" and a "bad bank." Barclays of Britain would buy the parts of Lehman that have been performing well while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank's troubled assets, according to two people briefed on the proposal. Such a deal would not involve taxpayer money.
Under that plan, the Wall Street banks would agree to provide up to $US30 billion ($A36.4 billion) of support to absorb the losses of the bad bank. That is about the same amount of money that the Government agreed to commit to support JPMorgan Chase's emergency takeover of Bear Stearns in March.
None of the banks involved, however, have committed to any rescue plan, and talks could still fall apart. They could pursue other options. One that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months.
That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.
The overarching goal was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world.
Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, notably Merrill Lynch and the American International Group, both of which have come under mounting pressure in the markets.
AIG, one of the world's largest insurers, may need to raise $US30 billion to $US40 billion to avoid a severe downgrade to its credit rating.
Both Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the Government provide financial support.
But federal officials were adamant that no public money be used - this is a major point of contention because many of the top Wall Street executives believe that their banks, which have each written down tens of billions of dollars in assets, do not have the capacity to lead the rescue on their own or without federal support.
AP
