Barclays ends talks to buy Lehman Brothers

ByKathy Chu, Usa Today
September 14, 2008, 5:53 PM

WASHINGTON -- Barclays, one of Britain's largest banks, dropped out of talks Saturday to buy investment bank Lehman Brothers because it could not get a guarantee from the U.S. government to cover losses for Lehman's problem assets, according to a source close to the matter.

Barclays was approached by the U.S. Treasury Department last week about Lehman Brothers, according to the source, who declined to be named because he was not authorized to speak on the record. Barclays explored an acquisition of Lehman, the person said, because a deal would enhance the bank's investment banking franchise as well as add diversity to its operations and geographic presence.

The deal discussed this weekend would have required the acquirer to guarantee the trading obligations of Lehman Brothers, this source said, which Barclays ultimately was not willing to assume.

Talks continued Sunday at the Federal Reserve's New York headquarters among federal banking regulators and representatives of many leading banks aimed at reaching a deal to sell Lehman. The objective is to avoid a fire sale of assets that could worsen a year-old credit crisis crippling the U.S. economy.

A major impetus toward reaching a deal Sunday were concerns that no action might drag down foreign financial markets and U.S. credit markets Monday.

Lehman's financial outlook soured in large part over defaults in the mortgage market. Its shares fell more than 90% in the past week amid worries that the investment bank was having difficulty raising fresh capital and Lehman's disclosure of a larger-than-expected third quarter loss of $3.9 billion.

Other major banks are also strained by the credit crunch and are therefore reluctant to make large financial outlays to help Lehman.

The government has been trying to encourage other banks to resolve Lehman's fate without federal financial assistance, a different approach from its other recent interventions in troubled financial service companies. Last week, the government took over mortgage-finance giants Fannie Mae and Freddie Mac and the Federal Reserve provided a $29 billion loan to assist JPMorgan Chase's takeover of investment bank Bear Stearns earlier this year.

Former Federal Reserve Chairman Alan Greenspan said Sunday the government faces tough choices as it tries to help arrange a rescue of Lehman Brothers without using public money. Interviewed on ABC's "This Week," he cautioned that more major U.S. financial institutions may fail in the future, but the government should not protect them all.

Greenspan said the housing and credit crisis, which has caused global banks to write down more than $300 billion in risky investments and loans, "is in the process of outstripping anything I've seen" and has yet to run its course. It will continue to be a corrosive force until the price of homes in the United States stabilizes," perhaps next year, he said.

Lehman put itself up for sale last week. Bad bets on real-estate holdings — which have factored into bank failures and caused other financial companies to founder — have thrust the firm in peril. It has been dogged by market concerns about whether other financial institutions would continue to do business with it.

Richard Fuld, Lehman's chief executive, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.

Government officials want to avoid a Bear Stearns-like bailout. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.

Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other companies could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.

Those actions — along with the Bush administration's takeover of mortgage giants Fannie Mae and Freddie Mac last week — have spurred concerns that taxpayers could be on the hook for billions of dollars and companies will be encouraged to take on extra risks because they believe the government will come to their aid.

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