Barclays Abandons Talks to Buy Lehman, Citing Potential Losses

Da Bloomberg
By Ben Livesey and Yalman Onaran

Sept. 14 (Bloomberg) -- Barclays Plc, the U.K.'s third- biggest bank, said it abandoned talks to buy Lehman Brothers Holdings Inc., contending it couldn't obtain guarantees to protect against potential losses at the U.S. securities firm.

Barclays, which had emerged as a leading candidate to acquire all or parts of Lehman, pulled out
amid a third day of emergency negotiations led by the U.S. Treasury and Federal Reserve, Leigh Bruce, a spokesman for the London-based bank said in a phone interview today.
The U.S. government is racing to find a solution for the faltering investment bank before markets open tomorrow, two people familiar with the situation said. Barclays walked away because it couldn't get guarantees from the government or agree on a private-sector deal to mitigate Lehman's potential losses, Bruce said.

Wall Street executives arrived at the New York Federal Reserve building in lower Manhattan this morning to discuss a rescue plan, including Citigroup Inc. Chief Executive Officer Vikram Pandit and Robert Wolf, chairman for the Americas at UBS AG. JPMorgan Chase & Co. sent CEO Jamie Dimon, Investment Bank Co-CEO Steven Black and General Counsel Stephen Cutler.

Barclays's takeover approach depended sealing off losses from Lehman's mortgage-related holdings, according to people familiar with the talks. Bank of America Corp., the biggest U.S. consumer bank, also is among the potential bidders for New York- based Lehman, which has lost 94 percent of its market value this year after record losses from investments tied to mortgages.
Barclays Writedowns

``The solution is to force the merger of Lehman now, this weekend, with a big commercial bank,'' said Richard Bove, a Lutz, Florida-based analyst at Ladenburg Thalmann & Co.
Barclays, which has taken $7.6 billion of writedowns on its mortgage positions in the last four quarters, raised 4.5 billion pounds ($6.4 billion) in a share sale in July. The bank's 5 billion pounds of buyout loans and 12 billion pounds of commercial mortgages may spur further markdowns, Collins Stewart analyst Alex Potter said last week.
``Acquisitions are difficult for Barclays because of capital constraints,'' said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London, who has a ``reduce'' rating on the London-based bank.

New York Fed President Timothy Geithner, 47, and U.S. Treasury Secretary Henry Paulson, 62, are pushing Wall Street to contribute money to a so-called bad bank that would assume at least some of Lehman's $50 billion of devalued real estate assets. That would make it easier for a buyer to take over the rest of the company while the assets are sold off.
Long-Term Capital

The approach is similar to one Lehman presented to investors last week, which the company said would cost $5 billion to $7 billion. The firm's mortgage-related assets have a face-value of about $74 billion before writedowns, based on figures the firm has reported. About another $10 billion of high-yield leveraged loans have been marked down to $7 billion during the past year, as market prices for the debt sank.

An arrangement involving the collaboration of Wall Street banks would be reminiscent of the rescue of hedge fund Long-Term Capital Management LP, which failed in 1998 as Russia defaulted on its debt, roiling global markets. Spurred by the New York Fed, securities firms including Lehman contributed cash to prop up LTCM.
Led by Chief Executive Officer Richard Fuld, Lehman may be forced to liquidate unless buyers step up for all or part of the 158-year-old company, Paulson and Geithner told the heads of Wall Street's biggest firms at a meeting Sept. 12. Paulson has said he's reluctant to use government money to rescue Lehman. Talks with the banks continued yesterday without producing an agreement.

Dimon Waves
Across the street from the New York Fed's stone façade in downtown Manhattan this morning, journalists and television cameras chronicled a procession of black town cars bearing bankers to the building.
Pandit arrived at 7:50 a.m. wearing a light gray jacket and pink open-collar dress shirt. At about 9 a.m., the New York Fed police began directing the cars into a garage, where they could drop off passengers outside of the view of the press. When JPMorgan CEO Dimon's car arrived at 9:05 a.m., it was detained briefly for a security check. Dimon, visible through the tinted window, waved to reporters.
At about 11:30 a.m., five delivery-men arrived at the Fed building with carts of sandwiches, as the talks continued.
Barclays President Robert Diamond, 57, was leading a team to review Lehman's books and gauge the level of guarantees the bank would need to cover potential losses, the people said. Diamond had the backing of his board, the people said.
KDB, Goldman
Lehman CEO Fuld, who participated in the Long-Term Capital talks and built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the investment bank, was pushed toward a forced sale this past week after talks about a cash infusion from Korea Development Bank ended, eroding investor confidence and the company's market value.
In addition to Pandit and Dimon, the government met Sept. 12 with CEOs including Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, Merrill Lynch & Co.'s John Thain and Credit Suisse Group AG's Brady Dougan, according to the people, who asked not to be identified because the gathering was private.
Robert Kelly, CEO of Bank of New York Mellon Corp., UBS's Wolf, and Christopher Cox, chairman of the U.S. Securities and Exchange Commission, also participated, the people said. Bank of America CEO Kenneth Lewis didn't attend because his company is a potential bidder for Lehman, one person said.
Helping lead the discussion was Kendrick Wilson, a former Goldman executive whom Paulson tapped last month as an adviser.
Bear Stearns Legacy
HSBC Holdings Plc, Europe's largest bank by market value, is also considering a bid for Lehman, the Wall Street Journal reported yesterday, without saying where it got the information. Goldman, the largest securities firm, is interested in Lehman's real-estate portfolio, the Journal said.
HSBC spokesman Richard Lindsay said the company doesn't comment on market speculation. Goldman spokesman Lucas van Praag also declined to comment.
Paulson, the former chairman of Goldman, doesn't want to put up money to help fund any Lehman acquisition, a person familiar with his thinking said Sept. 12.
Unlike when the Fed committed $29 billion to help JPMorgan take over Bear Stearns Cos. in March, Lehman has access to a lending facility for brokers that would permit an orderly process for unwinding the firm, the person said.
Paulson stepped in last week to guarantee the debt and mortgage-backed securities of home-loan financing companies Fannie Mae and Freddie Mac.
Bankruptcy Counsel
If the government's resistance to fund the purchase lowers the price offered for Lehman, Fuld could balk as well, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.
``We might have a Mexican standoff, with two guys holding guns to each others' heads but nobody firing,'' Hintz said.
Lehman hired the New York law firm Weil, Gotshal & Manges LLP to advise the company on a potential bankruptcy filing, the Journal reported yesterday, without saying where it got the information.
The government is pushing for a quick resolution because Paulson is concerned panic may spread to other financial institutions, Ladenburg Thalmann's Bove said. American International Group Inc., the largest U.S. insurer, and Seattle- based lender Washington Mutual Inc. each plummeted in New York trading last week on speculation about their financial health.
AIG may move up plans to raise capital or sell assets after the shares plunged 46 percent, according to a person familiar with the company. WaMu, which fell 36 percent, may sell parts of its nationwide bank-branch network to raise cash, according to L. William Seidman, a former chairman of the Federal Deposit Insurance Corp.
Asset Write-Offs
A Lehman sale may be possible without government backing, an analysis of Lehman's distressed mortgage assets shows. In a worst-case scenario -- with the assets discounted more deeply than in recent distressed sales -- a buyer could write off almost half of Lehman's mortgage holdings and still have $7 billion of equity left in the company, based on figures the investment bank disclosed when it reported third-quarter financial results last week.
``The firm should be worth something even after the troubled assets are taken out at a massive discount because Lehman has a good franchise,'' said Corne Biemans, a Boston- based senior portfolio manager at Fortis Investments, which oversees about $200 billion. ``There are distressed asset buyers who should be interested in this stuff at such serious haircuts.''
Lehman's mortgage-related assets have been marked down to between 29 cents and 85 cents on the dollar. Reducing valuations further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages would result in $21 billion of further writedowns. Shareholders' equity was $28 billion at the end of firm's fiscal quarter in August.
To contact the reporters on this story: Ben Livesey in London at blivesey@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net. Last Updated: September 14, 2008 13:36 EDT