The noose is tightening, with the powers that be facing the unattractive choices of a politically unpopular bailout (and egg on their face) versus an unwind of Lehman with potentially disastrous consequences. Will Paulson blink? So far, the word is no. From the New York Times (Hat tip reader DaddyMac):
Unable to find a savior, Lehman Brothers appeared headed toward bankruptcy on Sunday, in what would be one of the biggest failures in Wall Street history…
But Barclays, considered the leading contender to buy all or part of Lehman, said on Sunday that it could not reach a deal without financial support from the federal government or other banks, making a bankruptcy filing more likely.
The leading proposal had been to divide Lehman into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.
But that plan fell apart on Sunday, making it likely that Lehman would be forced to file for bankruptcy protection.
What remained unclear was how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.
The overarching goal of the weekend talks was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world….
Some considered the weekend talks as high-stakes brinksmanship..
On our preceding post, there is a lengthy discussion in the text and more in comments, that there are reasons to doubt that regulated parties will be able to continue to trade with Lehman if it files for bankruptcy.
Update 1:30 PM Further commentary from Bloomberg (hat tip reader Jim B):
Barclays dropped out of discussions to buy all or parts of New York-based Lehman because it could not secure guarantees from the U.S. government or agree on terms to mitigate potential losses in the firm’s investment banking division, a London-based spokesman for Barclays said in a telephone interview today.
Reader Saboor sent a Wall Street Journal update that Barclays could return to negotiations. I cannot find it on the website yet. However, this is no surprise. They have made it abundantly clear what their walk away issue is and if the authorities relent, they would come back to the table. From the text of his message quoting the update:
Barclays claims to be walking away from a Lehman deal but could return, sources familiar with the situation say. The current deal structure would require a Barclays shareholder vote. Government reluctance to provide funding remains a deal hurdle. More details to come.