Wall Street huddles - Lehman's fate on the line

Key financial players meet with regulators to discuss ways to resolve crisis. 'Good bank/bad bank' option under consideration.

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By David Ellis, CNNMoney.com staff writer

Lehman is seeking bidders, according to numerous news reports that started to surface late Thursday.
Lehman Brothers' stock, which fell another 13.5% Friday, is down 94% so far this year.

NEW YORK (CNNMoney.com) -- With the fate of beleaguered Lehman Brothers in the balance, some of Wall Street's most powerful executives and regulators huddled on Saturday to try to resolve the crisis facing Lehman and rocking the financial markets.

The Wall Street Journal reported that hopes of a deal being worked out by Saturday faded but that talks between banking executives and government officials would continue Sunday.

One solution under discussion was a so-called good bank/bad bank option that would divide Lehman into separate entities, according to the Journal report.

A spokesman for the Federal Reserve Bank of New York told Fortune that no announcement would be made on Saturday.

A source had earlier confirmed to CNN that "senior representatives of major financial institutions" met at the New York Fed on Saturday to "discuss recent market conditions."

The New York Fed held an emergency meeting on Friday night to discuss the firm's future after shares of Lehman fell sharply during trading.

A source with knowledge of the meetings told CNN that representatives of several major financial institutions met for two hours Friday night with Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and New York Federal Reserve Bank President Timothy Geithner to discuss the Lehman situation and the volatile state of the financial markets.

That meeting came as reports centered on the possibility of Bank of America, the nation's largest commercial bank, stepping in to buy Lehman.

There were also continued questions about what role, if any, the government would play in a bailout of Lehman. A source close to the situation told CNN Friday that the Treasury Department did not plan to use any government money to help finance a takeover.

But just a day after the company's stock plummeted 42%, Lehman (LEH, Fortune 500) shares fell another 13.5% in heavy trading Friday.

This week has marked one of the most difficult periods in the Lehman Brothers' storied 158-year history. The stock plunged 77% this week and has fallen 94% so far this year.

Amid rabid speculation about the firm's health and possible asset sales, the company delivered its results more than a week in advance on Wednesday, owning up to a nearly $4 billion quarterly loss - its biggest ever since the company went public in 1994.

Hoping to silence its critics, the company also revealed a sweeping restructuring plan aimed at cleaning up the company's balance sheet, which included spinning off some of the vast majority of its commercial real estate assets, plans to sell a majority stake in its investment management division, and cutting in the company dividend.

Those efforts, however, did not do enough to convince either investors or analysts that top executives, including Chairman and CEO Richard Fuld Jr., were doing enough to help right the ship.

Growing urgency

Following a string of downgrades, Lehman shares went into another free fall Thursday.

The continued slide, as well as the looming threat of downgrades by the credit rating agencies and general nervousness among long-time customers, appears to have led to an increased level of urgency for the bank to do something.

Numerous reports surfaced late Thursday suggesting that the investment bank was actively seeking a buyer for the whole firm.

The company reportedly reached out to a number of suitors including Bank of America (BAC, Fortune 500) and the British bank Barclays (BCS), which had been rumored earlier this year as a possible bidder. Spokespeople for Bank of America and Barclays both said they had no comment on the report.

Dick Bove, an equity analyst with Ladenburg Thalmann who covers the banking industry, said he believed that Bank of America could emerge as the victor were Lehman to strike a deal.

"There is a natural fit between the two companies," Bove wrote in a research note.

Speculation also surfaced that private equity firms may somehow be involved in the bid for Lehman. Current regulatory restrictions prevent buyout firms from owning a bank outright, although the Federal Reserve has eyed loosening those restrictions as bank failures pile up.

Government's role

While federal regulators have remained tight-lipped so far, it seems pretty certain that they are keeping a close eye on Lehman's fate, and may even be directly involved in those discussions.

The Washington Post reported late Thursday afternoon that both the Treasury Department and Federal Reserve were helping to engineer a sale of the investment bank. The Fed was not immediately available for comment.

The Treasury Department told CNN late Thursday that it "is monitoring markets and remains in contact with market participants."

Still, it seems doubtful that regulators would help bail out Lehman Brothers as they did when Bear Stearns nearly collapsed before being acquired by JPMorgan Chase (JPM, Fortune 500) in mid-March.

Top banking regulators, including the Federal Reserve, faced heavy criticism from lawmakers following the deal for putting taxpayer funds at risk by essentially agreeing to back $29 billion worth of losses on Bear Stearns' portfolio.

On Friday, a source told CNN that Treasury Secretary Paulson is adamant that no government money be involved in any resolution of the Lehman situation. The source added that Lehman has the option to borrow money from the Federal Reserve's discount window. That option was not available to Bear Stearns and other investment banks in March.

CNN Wires and Fortune contributed to this report To top of page

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