U.S. Helps Lehman Go Up for Sale

The government is looking for an agreement that would not involve public money. One scenario that is emerging includes multiple suitors acquiring different pieces of the venerable investment bank, which has suffered staggering losses from its bets on real estate and mortgages.

The situation was still fluid yesterday, and there was no guarantee what form an agreement would take or even that it would be in place by Monday, the sources said on condition of anonymity because they had not been authorized to speak.

Regulators have been in touch with Lehman on an almost hourly basis in recent days. High-ranking officials including New York Federal Reserve President Timothy F. Geithner, Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke have been discussing a broad range of possibilities for Lehman, trying to determine the risks each outcome could pose to the financial system, the sources said.

Securities and Exchange Commission Chairman Christopher Cox and Lehman chief executive Richard S. Fuld have also been speaking several times daily. Lehman declined to comment yesterday.

The effort by regulators comes just a few days after Treasury and other federal officials announced they were taking control of mortgage financiers Fannie Mae and Freddie Mac in one of the largest government interventions into the private markets in history.

A collapse of Lehman could present many of the same systemic risks that regulators sought to eliminate in March when they arranged the sale of Bear Stearns to J.P. Morgan Chase. That deal was done over the course of a weekend during which Fed and Treasury officials feared the absence of a deal could cause a global financial catastrophe.

Lehman's problems have been different. Bear Stearns was the victim of a bank run, as investors refused to continue lending it money. Lehman's problems have developed more gradually, through waves of losses on investments in real estate and securities tied to mortgages.

Lehman also has a larger cash cushion than Bear Stearns had. On Wednesday, Lehman reported about $42 billion of liquidity, compared with the $17 billion cash position Bear Stearns said it had in the days before its collapse. But beyond having cash in the bank, brokerages such as Lehman need continued access to funding to maintain confidence in the institution.

Earlier this week, Lehman reported a $3.9 billion third-quarter loss and said it would sell a majority stake in its investment-management division, cut its dividend and spin off about $30 billion of real estate assets.

The firm has access to a special lending window the Fed created in March, at the time of Bear Stearns' rescue, though it apparently has not tapped this source even as investors' confidence in its viability has been shaken in recent days. The Fed reported yesterday afternoon that there were no loans outstanding at that window as of Wednesday. However, simply having that source of cash available may be enough to keep lenders willing to extend loans to the firm.

Fed leaders do not want to provide financial backing for an acquisition of Lehman, as the Fed did for Bear Stearns. The government's plans also stop far short of the full takeover that occurred with Fannie Mae and Freddie Mac. The Fed, which has faced criticism for its efforts to rescue large financial firms, does not want the markets to view it as an endless source of bailouts. But even helping engineer a buyout amounts to a form of government intervention.

Sen. Richard C. Shelby (R-Ala.), said the Fed should think twice before rescuing Lehman. "I hope they will not use all their powers or all their rabbits in doing this," Shelby said yesterday in an interview on C-SPAN's "Newsmakers."

"There's a list of troubled institutions that may require assistance, and the question is, is the list very short, and have we dealt with the majority of the problems, or are we just beginning?" said Brian Sack, Washington-based senior economist at Macroeconomic Advisers. "The Fed can only do so much."

Moody's on Wednesday warned it would lower its credit ratings on Lehman if the firm failed to complete a "strategic transaction with a stronger financial partner."

Lehman's announcement this week did little to calm investors' concerns about the firm, the smallest of the four major Wall Street investment banks. Its share price fell 42 percent yesterday, to $4.22, in heavy trading with more than 472 million shares exchanging hands, continuing a precipitous fall from more than $60 a share in February.

James Paulsen, chief investment strategist at Wells Capital Management, said the plunge was emblematic of a market gripped by fear.

"I don't see where the economy is falling off the cliff. I don't see where there's big evidence of massively escalating credit default. And I don't see where anything has really changed in the last few days to make Lehman a $4 stock versus a $20 stock. So what we're dealing with, I think, is less fundamentals than fear," Paulsen said. "It's spooky because I'm not sure anyone has an answer as to how you'd end it."