2:23 pm - Feds, Wall Street race to try to save Lehman

NEW YORK (AP) - 0912b--lehman The field of possible buyers for Lehman Brothers narrowed Saturday, but theparties involved in the discussions over the wounded investment bank's futurewere at loggerheads over how to finance the rescue. An investment banking official said Bank of America Corp. and Britain'sBarclays Plc have emerged as the front runners for Lehman Brothers after apossible cash injection from its rival Wall Street banks and brokerages. Top officials from the Federal Reserve and the Treasury Department andexecutives from several Wall Street banks met at the New York Fed's downtownManhattan headquarters Saturday for the second day in a row try to hash out adeal to rescue Lehman Brothers. The financial world was watching. Failure could prompt skittish investors tounload shares of financial companies, a contagion that might affect stockmarkets at home and abroad when they reopen Monday. Discussions are expected to continue Sunday, said Andrew Williams, aspokesman for the New York Fed. The investment banking official, who asked not to be named because the talkswere ongoing, said the investment houses were balking at paying to polish upLehman's balance sheet so Bank of America or Barclays could buy a financiallyclean firm. He said the investment banks were angling for the government to provide somemoney, as it did when it helped JPMorgan Chase & Co. buy Bear Stearns in March,because they would get little to nothing in return for their help. The government has drawn a line in the sand over using taxpayer money tohelp rescue Lehman Brothers, however. The official said the talks were tense and neither side appeared willing toback down. Besides selling the company whole or piecemeal, Lehman could be liquidated,perhaps with financial firms agreeing to still do business with the company asit wound down. Or, a financial company or companies could buy Lehman's "good" assets. Itsshunned or devalued real-estate assets could be placed in a "bad bank" financedby other banks. Saturday's participants included Treasury Secretary Henry Paulson, TimothyGeithner, president of the New York Fed, and Securities and Exchange CommissionChairman Christopher Cox. Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, MorganStanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and MerrillLynch & Co.'s John Thain were among the chief executives at the meeting. Representatives for Lehman Brothers were not present during the discussions. They gathered on the heels of an emergency session convened Friday night byGeithner -- the Fed's point person on financial crises. Federal Reserve Chairman Ben Bernanke is actively engaged in thedeliberations but wasn't in attendance. Geithner convened the meeting Friday evening and told bankers gathered atthe New York Fed to come up with a solution or risk being the next to go under,investment banking officials with direct knowledge of the talks said. They spokeon condition of anonymity because the talks were ongoing. A spokesman for Lehman declined to comment about the meeting. Other potential buyers could include Japan's Nomura Securities, France's BNPParibas and Deutsche Bank AG. All have declined to comment. Participants in Saturday's meeting were also trying to tackle a broaderagenda that includes problems at American International Group Inc. andWashington Mutual Inc., said the investment bank officials, who were briefed onthe talks. AIG, the world's largest insurer, and WaMu, the nation's biggest savingsbank, have taken steep losses during the past year from risky investments.Investors, worried they do not have enough cash on their balance sheets towithstand further hits, unloaded their shares on Friday. AIG's shares dropped about 31 percent on Friday. WaMu's shares shed about3.5 percent. Shares of investment bank Merrill Lynch & Co. Inc. also lost 12.3percent. Lehman's stock closed at $3.65 Friday -- an all-time low and downnearly 95 percent from its 52-week high of $67.73. Lehman Brothers and AIG are the top priorities, said the investment bankingofficials. WaMu insisted Friday it has adequate capital to fund its operationseven as it announced another multibillion dollar write-down on bad mortgageloans. WaMu has 76 percent of its deposits insured by the Federal Deposit InsuranceCorp., an independent agency created by Congress to insure deposits in banks andthrifts up to at least $100,000. AIG has lost more than $18 billion over thelast three quarters due to investments tied to subprime mortgages. Global fears intensified Saturday that Lehman's collapse would staggermarkets and undercut confidence in the U.S. financial system. Germany's Finance Minister Peer Steinbrueck urged that a resolution be foundbefore Asian markets open, warning ominously, "the news that is coming out ofthe U.S. is bad." Lehman Brothers Holdings Inc. put itself on the block earlier this week. Badbets on real-estate holdings -- which have factored into bank failures and takenout other financial companies -- have thrust the 158-year-old firm in peril. Ithas been dogged by growing doubts about whether other financial institutionswould continue to do business with it. Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholdersWednesday that would spin off Lehman's soured real estate holdings into aseparately traded company. He would then raise cash by selling a majority stakein the company's unit that manages money for people and institutions. Thatdivision includes asset manager Neuberger Berman. Government officials want to avoid a Bear Stearns-like bailout; the Fed inMarch agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase &Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed todraw 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 lendingpowers since the 1930s. Fearful that other firms could be in jeopardy, the Fedtemporarily opened its emergency lending program to investment firms, aprivilege that for years was granted only to commercial banks, which are subjectto tighter regulation. Those actions -- along with the Bush administration's take over of mortgagegiants Fannie Mae and Freddie Mac just last week -- have spurred concerns thattaxpayers could be on the hook for billions of dollars and companies will beencouraged to take on extra risks because they believe the government will cometo their aid. Paulson and Bernanke, however, have said they needed to help Bear Stearnsand Fannie Mae and Freddie Mac to avert a financial calamity that woulddevastate the national economy. Lehman's Fuld is currently a member of the New York Fed's board ofdirectors. Copyright 2008 Associated Press. All rights reserved. This material may not be